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OFT investigation a 'scandalous waste of public money'

9 November 2005

Will charity shops and care homes be next?

The Office of Fair Trading has informed fifty charitable independent schools that it intends to fine them for exchanging financial information. The schools have until March 2006 to respond, and the whole process is likely to take another year from now, at which stage it will have lasted for three and a half years, at massive public expense.

Exchange of information is commonplace among charities. Until March 2000, schools were specifically exempted from competition law and were freely able to exchange any information without restriction. This exemption was silently removed - without debate (or even any mention) in Parliament - and without any consultation with schools or their representatives. Schools continued to exchange information in ignorance that the law had changed.

Commenting on the OFT's actions, Jonathan Shephard, ISC General Secretary, said:

"This is a Kafkaesque situation. The law seems to have changed without Parliament realising - and without the independent sector being consulted - contrary to the Government's own strict guidelines on consultation. Schools are now being held liable for breaking a law which no-one knew applied to them. The moment that schools realised that the law had changed they immediately stopped exchanging information. This was done before the OFT launched its investigation, and was quickly backed up by a Code of Practice agreed with the OFT.

"The OFT's broad assertion that sharing information produced higher fees is highly contentious. Fees in the independent sector rise in line with costs in the maintained sector, for the obvious reason that most of the costs are staff salaries and pensions. Schools - along with care homes and other charities - are concerned to keep their fees as low as practicable. Sharing information is an effective - though no longer legal - way of doing just that.

"The OFT has so far spent two and a half years and hundreds of thousands of pounds on this investigation. It is a scandalous waste of public money. The OFT needs a result for the sake of its own credibility. We note that fines go into the Consolidated Fund, which pays money to the OFT for its operating expenses.

"The OFT has failed to understand that charities have no motive for raising more money than is needed for charitable activities. All surpluses stay within the charity and must be used for charitable purposes. There is no possibility of any personal gain. The fines which the OFT intends to impose will diminish charitable assets, or force charities to raise charges - damaging the very people whom the OFT is supposed to protect. The arguments against fines are very strong, and will be made robustly as the process continues.

"The attack by the OFT on the charitable sector is something that should worry all charities. The OFT appears to have no understanding of the charitable ethos of sharing information. We have no doubt that exchange of information among charities in non-educational sectors still continues - and these are sectors which have never had an exemption from competition law. Will charity shops and care homes be next?"

ends

Editorial note: For the purposes of background information, we are publishing the text of the letter sent on 23rd September 2005 by Jonathan Shephard, ISC General Secretary, to Vincent Smith, Director of Competition Enforcement at the OFT.

Dear Mr Smith,

OFT investigation into charitable independent schools

I am writing to you a year to the day since we last met at your offices to discuss the progress of this investigation. At the time, the indication was that, by now, the investigation would long ago have reached its conclusion. I do need to state, on behalf of the sector, the continuing load on the resources (both financial and administrative) of the schools which are part of the investigation. All of them are charities.

Obviously you are bound to conduct a careful and objective investigation. There is, though considerable surprise at the length and weight of this investigation, for the following reasons:

Under the Restrictive Trade Practices Act 1976, consolidating the Restrictive Trade Practices Acts 1956 to 1973, the provision of primary, secondary and further education is excluded from the scope of the Act. This exclusion was silently withdrawn, without debate and without consultation, by the Competition Act 1998. There is no reference in Hansard to any mention, in either House, of the removal of the exclusion
The Cabinet Office Code of Practice on Consultation http://www.cabinetoffice.gov.uk/regulation/consultation/documents/pdf/code.pdf sets out detailed protocols for consulting organisations likely to be affected by regulatory change. This was no consultation in this case. Although the text of the Code of Practice has altered over time, the basic principles are unchanged and were not followed in this case
The Independent Schools sector is consulted on an almost weekly basis on proposed changes to legislation, including changes which are very minor. The sector was not consulted on the Competition Act 1998 and was not on notice that the law had changed
Following an article in The Sunday Times on 27 April 2003, the Independent Schools' Bursars Association (ISBA) was alerted by its solicitors on the following day that the Competition Act 1998 could apply to independent schools
Immediate action was taken: delegates to the ISBA conference in May 2003 were given written guidance; this was refined and issued to all members on 2 June 2003
The OFT's letters initiating its investigation were sent on 20 June 2003
The sequence of dates makes it absolutely clear that, to the extent that the independent sector needed to put its house in order, this was done immediately it was on notice that this needed to be done, and that the sector took firm action before the investigation was opened by the OFT
All of the schools being investigated are charities. There is no possibility of personal gain or profiteering even if there has been a breach of competition law, because all surpluses remain within the charity and must be used in pursuance of the charity's objects
The charitable ethos, unlike the commercial ethos, is to exchange information. This had been entirely legitimate throughout the entire career of every trustee of every independent school. Given that there was no consultation, and that no-one was informed that the law had changed, it is hardly surprising that exchange of information continued
It is highly probable that exchange of commercial information continues to take place between fee-charging charities outside the education sector (and which therefore have never enjoyed statutory exemption). If I may quote directly from the July 2005 edition of "Governance" - a magazine for charity trustees: "Charities constantly share information and best practice. If I am employing a charity shop manager, I will probably telephone my equivalent in another charity to check out remuneration". This is followed by a warning about Competition law, but the message is very clear: exchange of commercial information is a commonplace among charities. A further example, of which I have been personally informed in a face to face meeting, is of charitable care homes comparing charges - with the praiseworthy aim of keeping them as low as possible. It is not easy to find a distinction between exchange of fee information in schools and exchange of fee information in other charitable sectors.

I do recognise that OFT must investigate carefully and objectively. It does seem that, if there has been a breach of competition law, it will have been (a) inadvertent; (b) in continuation of a practice which was specifically allowed by Statute for very many years before; (c) remedied as soon as known, and (d) remedied ahead of other charitable sectors which, unlike the education sector, have never been allowed to exchange commercial information. Given all of this, and given what can justifiably be called a monumental failure to consult, and given also that any penalty imposed on the charities can only damage the charities themselves or the fee-paying parents in whose interests OFT is acting, it does seem a case where OFT might actively consider accepting binding commitments. In effect, these are already in place, because all ISC schools are operating under a strict code of conduct agreed with OFT.

Kind regards

Yours sincerely

Jonathan Shephard