Related Parties and Conflicts of Interest

During the course of your recent audit or Independent Examination, it is highly likely that, as Trustee, you would have been asked to show your related party registers.  All too often it is the case that an adequate related party register is not maintained by a charity, despite it being an internal control requirement imposed by the Charity Commission, and a legal requirement under certain legislation.

So what is a related party, and why is a register required?

FRS 102 SORP - Related parties is a term used by the FRS 102 SORP that combines the requirements of charity law, company law and the Financial Reporting Standard applicable in the UK and the Republic of Ireland. The term is used to identify those persons or entities that are closely connected to the reporting charity or its trustees.

The following ‘natural persons’ are classed as related parties:
A. any charity trustee and custodian trustee of the charity;
B. a person who is the donor of any land to the charity (whether the gift was made on or after the establishment of the charity); and
C. any person who is:
1. a child, parent, grandchild, grandparent, brother or sister of any such trustee (A) or donor (B) of land;
2. an officer, agent or a member of the key management personnel of the charity;
3. the spouse or civil partner of any of the above persons (A, B, C1 and C2);
4. carrying on business in partnership with any of the above persons (A, B, C1, C2 and C3);
5. a person, or a close member of that person’s family, who has control or joint control over the reporting charity;
6. a person, or a close member of that person’s family, who has significant influence over the reporting charity.
‘Close member of a person’s family’ refers to:
7. that person’s children or spouse;
8. the children/stepchildren of that person’s spouse or domestic partner;
9. dependents of that person; and
10. that person’s domestic partner who lives with them as husband or wife or in an equivalent same-sex relationship.

A charity is not necessarily related to another charity simply because a particular person happens to be a trustee of both. It will only be ‘related’ if the relationship means that one charity, in furthering its charitable aims, is under the direction or control of the trustees of another charity.

The following entities, which are not ‘natural persons’, are classed as related parties of a reporting entity (including a reporting charity) if any of the following conditions apply:
• the entity and the reporting charity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others);
• one entity is an associate or joint venture of the other entity (or a member of the group in which the other entity is the parent or a member);
• both entities are joint ventures of the same third entity;
• one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
• the entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity;
• an entity that is controlled or jointly controlled by a person, or two or more persons, identified in A, B or C;

So as you can see, the list is quite exhaustive.  As a Trustee, you have a duty to avoid any conflicts of interest or loyalty between yourself and the charity.  This is to ensure that the charity is operating in the best interest of the public at all times.  In order to be able to do this, the other Trustees and Senior Management must hold adequate related party registers to ensure that all potential conflicts are known prior to entering into contracts that might raise a conflict.

The guidance and rules are simply there to ensure that transactions and services are always at ‘arm’s length’, and that there is no personal gain to the Trustee.

There may also be times that a charity is using the services of a related party with no problems and all transactions are at ‘arm’s length’.  However, that related party could develop a bad reputation, which could then damage the reputation of the charity by proxy.  If the charity has an adequate related party register in place, if the above situation arose, then the charity has adequate means to identify a potential issue as to mitigate it quickly and effectively.

It is your duty as Trustee’s to decide upon the correct approach and direction in identifying/recording related parties.  You should also implement procedures to ensure that any registers are kept up to date. 

Please do not hesitate to contact the Charity Team if you have any queries regarding the requirements of the charity.