Read the transcript
Welcome and discussion with Kristina Kopic
“Hello and welcome to the ICAEW Insights podcast, where we analyse the latest news from the world of accountancy, business and finance. I’m Philippa Kelly, Director of Financial Services at ICAEW, and I’m pleased to be hosting this episode where we look at issues facing charities in the UK, the increasing focus of regulators, investors and stakeholders on non-financial misconduct, and what’s new with tax.
“I’m joined by Kristina Kopic, Head of the Charity and Voluntary Sector at ICAEW, Nikesh Pandit, barrister at 4-5 Gray’s Inn Square, and Financial Services Faculty board member – and welcome back to Lindsey Wicks, Technical Editor of Tax at ICAEW.
“First, let’s look at charities. The past two years have been incredibly difficult for many charities, both in terms of being able to operate sustainably, but also in terms of their ability to support users at a time when they’ve never been more needed. The government is reviewing its guidance to the sector this month, which will be of particular interest to trustees. As well as the difficulties due to the pandemic, charities face continuing challenges in access to banking and many other issues. Kristina, what do you see as the biggest challenge for charities in 2022 and beyond?”
“First of all, a lot of the challenges that charities face are quite similar to those challenges of other sectors – for example, increased energy bills, remote service delivery, protecting themselves against fraud and cybercrime. Also, I think, particularly topical at the moment is trying to recruit and retain talent in this very competitive labour market.
“But two of the challenges I want to draw out a bit more, because I think they’re particularly relevant for charities. First, the challenge of raising enough unrestricted funds to invest into the charities’ infrastructure. This is really important for charities because it is funding for vital functions such as finance, IT and HR. And if you think about what happened during the pandemic, and the ways of working, finance was crucial in terms of cash flow forecasting and monitoring the charities’ income streams; IT and HR were important to manage the digital transformation, and also the changed ways of working. So unrestricted funds are particularly important for charities, to make sure that they can deliver on their charitable objectives.
“The other challenge I want to mention is that charities need to always reflect on how they can best meet their objectives and maximise impact. For example, you would have seen that most charities would have had increased demand as a result of the pandemic. This makes sense, because if you think about why charities are set up, it is often to address a social problem and to reduce social inequalities. So with a pandemic widening those gaps between the rich and the poor, both nationally and internationally, there is much a higher demand for charities. And they need to revisit their core purpose, look at their strategy and see whether their theory of change still make sense in this changed environment.
“Quite often, this relies on collaborations as charities cannot solve all of those problems themselves, not even in collaboration with other charities and other sectors. Quite often what is needed is a system change. This relies on charities working really effectively with government to influence policy.”
“At our charity conference, held virtually, the chief executive from Pro Bono Economics talked about the role of civil society in the UK’s post-pandemic renewal agenda – a really interesting session for all of those charities and all our members who are interested in working a little bit more with government and influencing policy.”
"A huge number of challenges then this year, and as you say, not unlike those faced by other businesses. But what do ICAEW members who either work in or with charities need to be particularly aware of at the moment?”
“I think there are a number of things and I’ll take it in two parts, first talking about our members who work in senior finance roles within charities.
“In the context of what I was just talking about, about charities having to adapt their strategy, collaborate more , adapt their working practices and the way they deliver their services, all this means finance professionals who work within charities also need to look again at the way they budget and the way they measure their own performance, particularly in the sense of collaborating with other charities and other organisations, and seeing how they perform.
“What we’ve also seen is that the pandemic had a really big impact on charities’ reserves, and they could have gone in either direction. Some charities had to use up their reserves, or use a part of their reserves just to stay alive during the pandemic, whereas others found themselves in quite a counterintuitive position of having actually more cash than before, because they were able to access emergency grants and government funding, and had to explain in their reserves policy why, suddenly, they appeared richer on paper, which was really only a short term situation. So many charities might still have quite a simplistic model for their reserves policy – for example, having three to six months’ worth of expenditure in their free reserves.
“But actually, a more sophisticated approach might be more suitable. And that approach might take into account things like income risk, working capital requirements, investing in new opportunities, or protecting themselves with a rainy day fund. All that requires a much deeper understanding of a charity’s business model, and the risk associated with the different income streams. Our members are really well placed to help trustee boards to understand that, and they can also explain the link between strategy, risk management and reserves policies.
“I also wanted to talk about our members working in practice, because I think they fulfil a crucial role in helping charities win public trust, by providing high quality audits and independent examinations. Our members who advise charities on how to write a really well-considered annual report demonstrate their impact. They also have an impact indirectly, by helping charities to access grant funding, and also restore the confidence in the charity sector, which is really important for charities that access donations from individuals.”
"So how can members from other sectors help to support charities through these challenging times?"
"That’s a really good question. Actually, I think our members are absolutely fantastic in that area, because we know that over 20,000 of our members hold a board-level voluntary role. They might be charity trustees, or even have a special office such as honorary treasurer or chair of a trustee board. This is so valuable to charity trustee boards, because they bring that expertise to the rest of the board and really help charities plan their finances and become more financially sustainable. At ICAEW, we really want to support this and encourage anyone, even at the start of their career, to consider becoming a trustee. To support our members, we’ve launched our trustee training modules – free for absolutely everyone. Our members can share this knowledge with their trustee network to raise the competence and the level of understanding of the responsibilities of trustees.
“We also have a volunteering community, which provides regular updates to our members as well as webinars and training. And finally, I also want to mention our website, ICAEW Volunteers, because this brings together finance professionals with charities that look for skilled volunteers. It’s a site where anyone can look up volunteering opportunities, and quite often, charities look specifically for finance professionals, whether that be as a trustee, as a treasurer, or on a more time-limited project. So for anyone interested in any kind of volunteering, I strongly recommend having a look.”
Discussion with Nikesh Pandit
“Thank you very much, Kristina. Over the last few years, the Financial Conduct Authority has increased its focus on non-financial misconduct. The regulator holds that a culture where non-financial misconduct is tolerated is not healthy, it’s not safe, and it’s not acceptable. Individuals have also been banned from working in the financial services industry for non-financial misconduct. But what is non-financial misconduct? And what are the parallels for Chartered Accountants? Nikesh Pandit is here to explain all this. Nikesh, are you seeing an increase in focus on non-financial misconduct in the financial services industry and other professions?”
“I think the short answer is yes. But to really get under the bonnet of that question, I think the starting point is to understand the type of conduct that falls within the term non-financial misconduct. The term really includes personal misbehaviour, such as sexual misconduct, sexual harassment, discrimination and bullying that’s committed inside or indeed outside the workplace. The recent focus has been on conduct largely relating to integrity rather than financial dishonesty. We’re seeing the FCA increasing its focus on that kind of conduct, and it probably kicked off in properly in say September 2018, when Megan Butler who was then the FCA’s Executive Director for Supervision responded to a House of Commons paper on sexual harassment, where she said in terms that sexual harassment and other forms of non-financial misconduct can amount to a breach of the FCA’s conduct rules, which include the requirement to act with integrity. That was then followed in December 2018 by the FCA’s Christopher Willard who was then the Executive Director of Strategy and Competition, giving a speech where he said non-financial misconduct is misconduct, plain and simple. So we have these sort of high level statements by the FCA, but that’s also translated into real outcomes.
“The FCA announced that it had prohibited three individuals from working in financial services on the basis of sexual offences. The FCA said that those individuals were not fit and proper, because each of them lacked the necessary integrity and reputation to work in the regulated financial services sector, and it considered a prohibition order to be appropriate in order to advance the FCA’s consumer protection and integrity objectives. Then, more recently, in August 2021, we’ve had the Upper Tribunal decision, really going to the heart of non-financial misconduct, in the case of Frensham. Again, this was a case involving a sexual offence. Mr Frensham was an independent financial advisor and FCA approved person, and in March 2017 he was convicted of attempting to meet a child following sexual grooming; he committed this offence while he was an approved person and on bail for a similar offence, and he received a suspended sentence.
“The FCA found that Mr Frensham was not a fit and proper person to perform any function in relation to any regulated activity, because he lacked the necessary integrity and reputation. The grounds for that finding were quite interesting, especially how the Upper Tribunal interpreted it, because the Upper Tribunal said that the prohibition was justified not solely on the basis of the conviction, but it was the conviction, coupled with the fact that Mr Frensham had failed in his obligation to be open and transparent with the regulator. So it was quite an interesting decision where I think the Upper Tribunal said that looking purely at the circumstances around the conviction was not enough in this case. But that, coupled with the issues around being open and transparent, took the case over the line to justify the prohibition.
“The Upper Tribunal’s decision in this was quite interesting, because what they did find is that the FCA could have probably conducted its case more thoroughly, and in particular, they felt that the case would have benefited from more criminological and psychological evidence to support the view that Mr Frensham’s offence actually created a significant risk that he would, in a likewise manner, seek to exploit vulnerable clients such as the elderly. We may well see the FCA requiring or producing more expert evidence. We also might see the FCA going after non-financial misconduct that doesn’t necessarily relate to sexual offences. Indeed, it may well be easier to find a link between an individual’s lack of personal integrity and lack of professional integrity in cases not involving sexual misconduct. For instance, you could have an issue around bullying in the personal setting, where someone engages in that sort of misconduct because they respond badly to criticism. And that could be something that links more directly, say, into an issue in the professional setting. So I think that’s where the FCA is going in this particular issue around more evidence from a psychological and criminological perspective – to justify the link between a lack of personal integrity and professional integrity.”
“This is clearly something that the regulator is paying more attention to. But we’re also seeing developments within the professions as well. Can you talk a little bit about that?”
“Yes, the profession probably of most interest here might be ICAEW and I think we’ve seen action by the ICAEW. Firstly, there’s been guidance in this area. We’ve had the guidance on boundaries of personal and professional life and ethics that was issued by the Consultative Committee of Accountancy Bodies (CCAB), which of course includes ICAEW. And we’ve had beyond the guidance, some real outcomes too.
“If I could just take ICAEW’s December 2021 disciplinary update, there were two cases involving non-financial misconduct. The first case was the tribunal of the disciplinary committee severely reprimanding a member and fining him £5,000 and required him to pay costs for using his corporate mobile phone to make excessive and inappropriate personal phone calls to a premium rate line. Another case related to a partner in a firm who was severely reprimanded, fined £7,000 and required to pay costs, because he acted inappropriately towards an employee who was completing her training contract, in that he used language of a sexual nature while at lunch on a skiing holiday organised for employees of the firm. Then shortly after that lunch while having drinks with colleagues, he again used language of a sexual nature directed at the trainee, in circumstances where he knew or ought to have known that such conduct was not wanted or invited. In this case, the tribunal seriously considered excluding that individual from the profession, but decided that a reprimand and financial penalty would be sufficient. So these two cases alone from the December 2021 update, plus the guidance, I think show that professions as well as the FCA are really active in this area.”
“So as you say, the regulator is increasingly active here, and the professions are taking this very seriously. But what does this mean for the average professional? And how should we translate the increase in this concern into our professional lives?
“I suppose, taking the individual alone, one of the things that we’ll definitely be seeing, and probably increasingly as more decisions are published by the regulators and the professions, is individuals being more mindful about non-financial misconduct or potential non-financial misconduct, both inside and outside of work. I think the whole inside/outside work is quite interesting at the moment, because obviously, due to COVID-19, a lot more of us are working from home and those boundaries between work and home are blurred. You can certainly see a scenario where somebody is at work at home, but they also might have their personal laptop near them or a personal phone and they go on Twitter or another form of social media and they say something or get involved in some sort of debate and suddenly, they’re essentially putting stuff out there on their employer’s time. That narrows the gap between what is conduct that happened in a personal capacity and conduct that happened at work.
“I think individuals will also want to remind themselves of relevant policies and procedures at work in this area, not just around diversity inclusion, but social media policies, whistleblowing policies and reporting obligations. I think, as regulators grapple more with this area, there will be more guidance. I think it’s a duty of regulated professionals to keep on top of that guidance; it’s not just something that they should wait for their employers to put out there – I think that there’s a real need to stay on top of matters that are coming out from the regulator if you’re a regulated professional.
“Then what I think will also be quite interesting, given the guidance that came out of Frensham, is that there is more of an avenue now to push back as well, if you are facing these kinds of allegations. Individuals can say, ‘I did do this, this did call into question my personal integrity, but what is the link to my professional integrity?’
“From an organisational perspective, I think we’re definitely going to see employers ramping up their systems and controls in this area, pushing training. I think we will also see more investigatory steps; part of the regulatory obligation on employers is to figure out whether an incident is something that the regulator should be made aware of. I think people should certainly expect to see their firms taking more immediate steps regarding this sort of conduct when it comes to internal investigations.
“On the organisational front the interesting thing will be how different firms approach it. I think we’ll see some firms potentially taking quite a strong line on this, and perhaps even a sort of almost defensive line where they rule out social functions. They may indeed have postponed Christmas events and things like that, due to COVID -19, and now they’re thinking whether they should reschedule these events, and they might do them in a different way, because of the concerns coming from the professions and the regulators.
“The interesting thing around the response, and whether employers take a zero risk approach, is there really is a concern that if you cease holding events at a firm level, then people may break off into their little groups. Then you can see the re-emergence or further entrenchment of old boy networks and cosy clubs. And of course, those facets of corporate life are not necessarily conducive to equality and diversity and creating healthy cultures as well. So employers may well end up in a tricky scenario where, on the one hand, they want to limit their risk but equally the solution that they think will limit the risk may indeed lead to some pretty bad outcomes in terms of the bigger quality and diversity picture.”
“It’s an interesting dilemma, isn’t it? And as you’ve mentioned, that diversity and inclusion agenda is very present with the regulators at the moment. We’ve seen the recent consultations in that regard as the financial services industry, and indeed, also the accountancy profession, move to become more diverse and inclusive. What role does cracking down on non-financial misconduct play in that?”
“Well, I think there are probably two key areas. The first is signalling – it really shows that the financial services industry, the accountancy profession takes a strong line against conduct such as racism and sexual harassment. And I think, hopefully, that strong line will show people who are considering joining the financial services profession that this might be a profession they can feel comfortable in. And indeed, people who are in the profession can say, ‘This is a profession I can stay in because my regulator and my professional body is taking a hard line on these things, and they want me to feel comfortable.’
“The other big area is around culture. The FCA, I think, very much takes the view that tolerance of non-financial misconduct is a driver of poor culture; effectively, if you tolerate something like sexual harassment, then you’re creating an environment which will essentially not encourage people to speak up, to be heard to challenge decisions. That can really lead to poor outcomes, firstly, in terms of social justice, where I think the FCA wants to see an environment where people have the chance to speak out no matter what their protected characteristics are, that they can say they’re pleased that they can contribute to ideas and as a result of that they can further themselves within their organisations. So I think there’s a social justice side to it, that you want to create cultures where people can speak up and because of that speaking up, they can get on within their institutions.
“I think there’s also a customer outcome side to this as well, where the thinking is that if you have a diverse group of people contributing ideas, people are not scared to contribute, then that will lead to diverse output. Then we will have more diverse ideas and products that will hopefully better cater for the diverse society that financial services is there to serve.”
Discussion with Lindsey Wicks
“Now I’d like to welcome back Lindsey Wicks, ICAEW Technical Editor for Tax, to discuss some of the hot topics in tax as we start off 2022. We’ve been talking about misconduct, which is also particularly relevant for tax professionals to be considering at this time of year. Could you tell us a little bit about the recent briefing from HMRC in this area?”
“Yes, as you mentioned, HMRC has issued a briefing setting out its approach to tax fraud. At this time of year, a very busy time of the self-assessment season, the role of tax professionals is really to help taxpayers get their tax filings correct. In HMRC’s briefing, it set out its steps for preventing fraud happening in the first place. HMRC’s approach is to build checks and controls into its systems, to make legislative changes to make it harder to commit fraud in the first place, and to work with businesses to help them to spot where they’re at risk. That final point is really where tax professionals can also be helping out.
“ICAEW and other professional bodies and associations have set out some guidance. We’ve talked a lot about professional guidance and conduct. For tax the guidance is professional conduct in relation to taxation (PCRT). This is useful when discussing complex filing positions with taxpayers at this time of year. Alongside the main guidance, there are also help sheets on submission of tax information and tax filings, provision of tax advice, dealing with errors – so that links in with fraud, potentially – and handling requests for data from HMRC.
“Many of these help sheets contain really practical flowcharts, setting out actions and considerations when dealing with various situations. These flowcharts might help you decide whether or not you need to cease acting for clients, whether you need to make a report to your money laundering reporting officer – all those kinds of practical tips.
“Going back to HMRC, and when there is tax fraud, it’ll generally try to investigate fraud using its civil powers. But In serious cases, it does have criminal powers available. In England and Wales, the relevant bit of legislation would be the Police and Criminal Evidence Act. Civil investigations will either be conducted under Code of Practice 8, or Code of Practice 9. When HMRC issues its letter, it will say what Code of Practice it’s applying. Code of Practice 8 doesn’t involve any allegation of fraud at the outset. HMRC will use Code of Practice 9 where fraud is suspected. But when taxpayers receive the initial letter HMRC won’t set out the nature of its suspicions.
“To avoid going down the criminal route, taxpayers are invited to make a full disclosure. If they do so, then this is followed up by them engaging a professional to make a full report. This is something that ICAEW members might get involved in doing. These cases need to be handled with real care. If any subsequent admissions come to light, then HMRC reserves the right to use its criminal powers. So it’s one of those areas where specialist knowledge is required to guide taxpayers through the process.”
“Moving away from fraud, there have also been other high-profile announcements, hopefully of a more administrative nature. What do members need to know about self-assessment deadlines?”
“Like last January, HMRC hasn’t changed the 31 January filing and payment deadline for self assessment, but it has provided a delay on when it’s going to charge penalties for late filing and for late payment. This is just a penalty waiver, so interest will still apply on unpaid tax from 1 February and the current rate of interest is 2.75% on late paid tax. Also, if tax payers do file after 31 January, these tax returns will be treated as late which means that the window HMRC has to enquire into the return is also extended. So to avoid penalties, first of all, returns have got to be filed by 28 February to avoid a £100 late filing penalty. That’s the initial penalty that’s applied for a late return. Then normally, a 5% late payment penalty is charged on 2 March.
“This year, the late payment penalty will apply if tax hasn’t been paid by 1 April, or if a Time to Pay Arrangement hasn’t been set up by 1 April. This is where taxpayers have difficulty paying and make an agreement with HMRC. They can do this under a self-serve arrangement if the liability is less than £30,000 pounds; if they need a bigger facility, then they need to arrange that with HMRC by 1 April to avoid the 5% late payment penalty.”
“Many reasons to mark April Fool’s Day in the diary then!”
“Yes, there are! There are also a few other complexities around these extensions. Self-employed taxpayers may also need to pay their class two national insurance liability separately by 31 January if they want to claim contributions-based allowances such as Employment and Support Allowance. There are quite a few of these other practicalities where we’re going to be issuing more guidance that has been agreed with HMRC.”
“We’ve also seen some changes to Statutory Sick Pay Lindsey, and some interesting approaches being taken by companies here.”
“Yes, that’s very true. Statutory Sick Pay (SSP) has been a key issue since the start of the pandemic. SSP isn’t normally a government-funded benefit, it’s just a statutory minimum that employers have to pay to qualifying employees. Many employers pay more than this minimum. Normally, there’s a three-day wait before SSP is payable. But at the start of the pandemic, this was suspended because the government wanted people to isolate to curb the spread of Coronavirus. As this pushed up the cost for small employers, the SSP Rebate Scheme (SSPRS) was introduced. This scheme ended on 30 September at the same time as the Coronavirus Job Retention Scheme. As we know, just before Christmas, we saw case rates going through the roof again. So it was announced that the SSPRS would be introduced for small employers for absences from 21 December 2021. Employers that are eligible to claim a rebate have got to be UK-based, have less than 250 employees on 30 November 2021, have a PAYE scheme in place at 30 November 2021, and they’ve got to be paying COVID-19-related SSP. These small employers can claim up to two weeks of COVID-19-related SSP per employee. The two-week period is reset from 21 December 2021, so if they’d claimed under the first iteration of the rebate scheme, they can claim again for the same employees under this new iteration.
“Another change to SSP that happened back in December was a change to the self-certification period. Normally, employees can self-certify the first seven days of sickness absence. But as we know, there was a big push to deliver booster jabs in the run up to Christmas, so to free up GP capacity to deliver the booster programme, the self-certification period has been increased to 28 days. That’s for absences beginning on or after 10 December 2021 and beginning on or before 26 January 2022. Now, these are all the government changes, but as you mentioned, some employers have also decided to change their policies about when they pay more than the statutory minimum.”
“Thank you, Lindsay. That’s all really useful for businesses to know. I’m afraid that’s all we have time for today. My thanks to all our guests, Kristina Kopic, Nikesh Pandit and Lindsey Wicks."