The head of the National Council for Voluntary Organisations (NCVO) has strongly criticised the Charity Commission (CC) for bringing 'damage and disrepute' to the sector over its handling of the Cup Trust scandal.

Sir Stuart Etherington, who heads up the body that champions 10,000 UK charities, said the CC had jeopardised public trust in charities.

Over two years the Cup Trust raised £176m but donated a paltry £55,000 to charity, thereby enabling wealthy investors to reap £46m in tax relief through the abusive use of Gift Aid rules.

Speaking at the Association of Charitable Organisations (ACO) spring conference today, Etherington said that the whole sector was 'rocked and outraged' when news of the scandal emerged in January.

'Most of the frustration I hear from charities is directed at the CC, for allowing such a set-up to register as a charity in the first place, and then for failing to act when it became obvious that the so-called charity was a sham.

'The commission's credibility as an effective regulator has been seriously undermined, and I fear it has lost the respect of the sector, with many reviving accusations that it is a paper tiger - not so much a light-touch regulator as a no-touch regulator.

'The complete lack of intervention by the commission in this whole affair has also brought damage and disrepute to the sector as a whole, putting us at serious risk of losing the trust and confidence of the public.'

Despite the CC announcing last week that it had opened a statutory inquiry into the Cup Trust case, this had 'only made matters worse: while the investigation is obviously necessary, to say that it's shutting the stable door after the horse has bolted doesn't quite do it justice'.

Etherington said The Cup Trust issue raised the question of whether there are more charities in the UK that operate similar schemes, and whether the appropriate regulatory framework was in place to ensure such cases are investigated and shut down.

The charity chief said he welcomed the National Audit Office's review of the commission and that the body was 'a vital and necessary organ' to ensure it remained independent from the state and political interference.

But he said the commission had shown a 'disappointing lack of bravery to defend charity', and a certain unwillingness to take a stronger position if this would risk using any political capital'.

'What was so obvious in the Cup Trust case is how a legalistic approach dominated common sense, meaning that decisions were made following the letter of the law rather than the spirit, no matter what disastrous consequences this caused.

'The commission was so concerned about what it couldn't do, that it didn't do what it could do.'

He asked whether there was 'a broader cultural issue running through the commission, following 'significant cuts', 'staff churn' and a 'loss of institutional memory'.

'It needs to rebuild its credibility with the sector and with government, and to regain our respect'.

Despite his stinging criticism, the NCVO head said he had sympathy for the commission, which over the past few years had been 'used as a political football'.

'I am confident that the commission will get through this rough patch and will establish itself once again as the proper custodian of confidence in charities. Our relationship with the public, and ultimately our future, depends on this.'