How to avoid creating restricted funds when fundraising
Charities may seek donations for a specific purpose or aim, such as a scout group trying to buy a new minibus or a soup kitchen trying to buy a new oven. If a donor gives money to a charity for this specific purpose, this is known as a “restricted fund”, meaning the charity is duty-bound to spend the money on that purpose.
In a previous article, we considered the risks associated with raising money for a particular aim and how these can be avoided.
When members of the public fundraise on a charity’s behalf, there is a risk that a “restricted fund” will inadvertently be created, limiting the charity’s spending of that money.
In this article, Samantha Pritchard, partner, and Anna Glover, solicitor, both in our charities team, consider how such risks might arise and how they can be managed.
Code of Fundraising Practice
The Code of Fundraising Practice (Code) sets out the Fundraising Regulator's expectations. Although not legally binding, the Charity Commission recognises the Code as reflecting the legal requirements and expected fundraising standards to be followed by charities and their fundraising partners.
Within the Code are standards relating to volunteer fundraisers. The Code distinguishes between volunteers operating “on behalf of” and “in aid of” charities. “On behalf of” volunteers are those acting on the instructions of the charity. “In aid of” volunteers are those who are fundraising voluntarily.
Usually, voluntary fundraisers are a huge benefit to the charity – they work hard to raise awareness and funds to support the charity's charitable objects. However, there is a risk that volunteers will inadvertently attach “conditions” to the donations, creating a restriction that limits how the charity can spend the money raised.
“In aid of” volunteers
A charity might not be aware of voluntary “in aid of” fundraisers until they have received the donations the volunteer has collected. However, if or when the charity becomes aware of them, they must tell the volunteer to use the phrase “in-aid-of” in their fundraising communications. They need to make clear that the volunteer is responsible for all aspects of their fundraising activity, and that the charity will not accept any liability relating to their fundraising. The charity should also direct the volunteer to information on how to fundraise legally and safely.
In addition to the above, if the voluntary fundraiser implies or states that donations will be used for a specific purpose, this could create a restricted fund that obligates the charity to use the money for that purpose (even if neither party intended this).
For that reason, if a charity becomes aware that a volunteer is raising money on its behalf, it should encourage fundraisers to use clear, general language, unless a specific agreement is in place with the charity. If a specific purpose is mentioned, a more general “secondary” purpose should be included to scoop up any surplus funds.
“On behalf of” volunteers
Charities have more responsibility for volunteers who fundraise on the charity’s instructions (i.e. the charity has asked or directed them to fundraise). The Code sets out the duties owed by the charity to such volunteers, including providing appropriate training and support on legal and safe fundraising and carrying out appropriate checks to ensure that the volunteers are suitable to represent the charity.
In addition, the charity should communicate clearly with the volunteers to ensure that they are not attaching conditions to any fundraising that have not been agreed with the charity.
A practical example
The risk of creating restricted funds is demonstrated by a recent investigation by the Fundraising Regulator into Anaphylaxis UK. The Fundraising Regulator found that this charity breached the Code by failing to use donations made to a memorial fund for their intended purpose. In this case, a family raised funds for the charity in a memorial fund in their son’s name. The family understood that the money raised would be held as a restricted fund pending their input into its use. Instead, the charity applied the funds to support the charity’s overall objectives, without the family’s input. The family complained to the Regulator on the basis that the money donated had not been used for the purpose for which it was given.
Early exchanges between the charity and the family found that there was confusion about how the funds could be used and that the charity’s communication had inadvertently introduced a condition regarding the use of the funds (namely, that the family could input on how the funds were spent). The regulator ultimately found that the charity did not use the funds for the purpose they were given.
As a result of the investigation, the Fundraising Regulator found that the charity had failed to provide sufficient information to donors and adequate support for the family. In order to remedy the breach, the regulator asked the charity’s trustees to review whether funds raised via the family’s campaign were spent on activities aimed at raising awareness among young adults and, if not, the trustees should seek legal advice on whether they can refund the donations in light of the Charity Commission’s guidance.
Final thoughts
Donations are essential to the operations of many charities and are usually a win-win for all involved – the donor can support a worthy cause, while the charity can put the money to good use.
To ensure that the donations can be spent as intended, it is important for charities to take steps to avoid creating unintended “restricted funds” which limit how the money can be spent. Charities should encourage fundraisers to use clear, general language when fundraising. If a specific purpose is mentioned, a secondary purpose should be included to apply to any surplus funds.
The trustees of a charity (and any others responsible for fundraising) should ensure that they are aware of these risks and may wish to consider putting a donations policy in place.
If you need legal support in relation to restricted funds, or any other aspect of charity law, do not hesitate to contact Samantha Pritchard at [email protected] or 0191 211 7905.
Restricted funds are donations that must be used for a specific purpose chosen by the donor. For example, a donor might give money to a scout group specifically to help buy a new minibus or donate to a soup kitchen to pay for a new oven.
When a donation is given for a specific purpose, the charity is legally required to use the money for that purpose only. This is known as a restricted fund.
Charities should keep clear records of restricted funds and make sure the money is spent exactly as promised to donors.
The main difference is the level of involvement and responsibility the charity has in the fundraising activity.
An “in aid of” volunteer fundraises independently to support a charity. The charity may not know about the fundraising until after the event or campaign has taken place.
An “on behalf of” volunteer fundraises under the charity’s direction or instruction. In this situation, the charity has greater responsibility for overseeing the fundraising activity and supporting the volunteer.
It’s important for charities to understand the distinction, as different legal and regulatory responsibilities apply to each type of fundraising arrangement.
An “in aid of” volunteer is someone who independently raises money to support a charity without being directly managed or instructed by the charity.
For example, someone might organise a sponsored walk, bake sale or community event and donate the proceeds to a charity afterwards.
If a charity becomes aware of this type of fundraiser, it should ask the volunteer to clearly state that the fundraising is “in aid of” the charity. The volunteer should also make it clear that they are personally responsible for organising and running the fundraising activity.
Charities should provide guidance on fundraising safely and legally, but they are generally not responsible for the volunteer’s actions.
It is also important to be careful about how the fundraiser is described. If a volunteer tells donors that money will go towards a specific project or item, this could accidentally create a restricted fund. This means the charity may become legally required to use the money only for that stated purpose.
To avoid confusion, charities should encourage volunteers to use broad and general wording unless there is a formal agreement in place for a specific fundraising campaign.
An “on behalf of” volunteer is someone who fundraises under the direction, authority or instruction of a charity.
Because the charity is more closely involved, it has greater responsibilities towards the volunteer and the fundraising activity.
This can include:
- Providing training and support
- Giving guidance on legal and safe fundraising
- Carrying out checks to make sure volunteers are suitable to represent the charity
- Monitoring fundraising activities where appropriate
Charities should also make sure volunteers understand what they can and cannot say during fundraising campaigns. This helps prevent volunteers from accidentally attaching conditions to donations or creating restricted funds without the charity’s agreement.
Clear communication between charities and volunteers helps protect both the charity and donors while ensuring fundraising stays compliant with fundraising regulations.