The Act was introduced after consultation with major political parties, and largely followed the recommendations of the Committee on Standards in Public Life (known at the time as the "Neill Committee" after its chairman), an independent body set-up by former Prime Minister John Major to consider ways of making politics more transparent. The committee set out its proposals in its report, The Funding of Political Parties in the United Kingdom.
The Act created an independent Electoral Commission to regulate political parties and their funding arrangements. It also required parties to submit statements of their accounts on a regular basis, and prohibited the receipt of funds from foreign or anonymous donors. Restrictions on campaign expenditure were also put in place, dictating the maximum amount that parties were able to spend.
The law gave the newly-formed Electoral Commission a role in policing the registration of political parties.
The requirement for parties to officially register was the result of a fairly wide acceptance that the finances of all political groups should be properly regulated to reduce the perception of underhand dealings. In addition, political groups or individuals failing to register with the Commission would only be able to describe themselves as "independent" on ballot papers, or have a blank entry against their name. This built on the provisions of the Registration of Political Parties Act 1998, passed amid concern about voters being fooled by misleading ballot descriptions.
A small but non-refundable fee is payable for the registration of a party.
Under the terms of the law, parties are only allowed to accept donations in excess of £200 from "permissible donors", defined as either individuals on the electoral register, or political parties, companies, trade unions or similar organisations that are registered in the UK.
The provision of non-financial support to a party – such as subsidies or free materials – is counted as a donation. Each party is required to submit details of all donations received, whether by party headquarters or their subsidiary parts. Each report must provide sufficient information to prove that a donor counts as a "permissible source".
Parties on the separate register for Northern Ireland are exempt from the controls on accepting and reporting donations.
The Act places strict limits on the amount each party may spend in the run-up to the election (how that time period is defined depends on the type of election). The current limit for elections to the UK Parliament in Westminster stands at £30,000 per constituency contested within 365 days of a General Election, up to a maximum of £18.84 million.
December 2006 saw Prime Minister Tony Blair and politicians of other parties questioned by police as part of their investigation into the Cash for Honours affair. Part of their time was said to be spent looking at whether the Act had been breached by parties taking loans from supporters in return for nominations to the House of Lords. Unlike donations, loans made on a commercial basis did not have to be made public as long as they were made on "commercial terms".
The Government has since changed the law to require the declaration of all forms of loans, and a former civil servant, Hayden Phillips, has been asked to undertake a fundamental review of party funding arrangements.