Consultation 99/45 Proposed revisions to the model financial memorandumThis version of the document contains the Executive Summary and first part of the document only. The full document is available as a Word file or in print from HEFCE publications.
Executive summaryPurpose 1. This document consults on proposed revisions to the financial memorandum between the HEFCE and the institutions it funds, originally issued in 1996. Key points 2. The financial memorandum needs to be reviewed to take account of recent changes. These include: a. The increasing use by institutions of more complex collaborative arrangements, including arm’s length organisational structures such as subsidiary companies or joint ventures. b. The general trend towards more openness in governance and accountability. c. The use of more sophisticated forms of financial instrument. 3. In addition, it is good practice to review financial memoranda every three years. The last major revision was in 1996, though there was a minor change on 1 August 1997. 4. A copy of the revised model financial memorandum is attached at Annex A. Annex B suggests a structure for responses. The current model financial memorandum (circular 15/97) is available on the HEFCE web site: www.hefce.ac.uk. 5. This consultation relates only to Part 1 of the financial memorandum. Part 1 covers the general terms and conditions which apply to all payments to institutions and other conditions which only apply to those higher education institutions where lead accountability is with the Council. Part 2 of the financial memorandum will continue to incorporate any special conditions applying to particular institutions, and to include our annual funding agreement with individual institutions. Changes to Part 2, resulting from changes to Part 1, will be incorporated into Part 2 for the academic year 2000-01. Action required 6. This document is being sent to both heads of institutions and chairs of governing bodies. Institutions are asked to return a single co-ordinated response to Andrew Clark at the HEFCE by Friday 17 December 1999. Areas of change7. We have identified a number of substantive areas of the financial memorandum where we believe that revision is desirable:
8. Wherever a substantive change is being proposed, the text amendments are shown in bold italics in the revised version at Annex A. One paragraph, on sanctions, has been deleted (see below). Wherever practicable, the text has been updated to reflect current thinking on ‘clear English’. Sanctions 9. Sanctions (for example for late data submission) were not explicitly attached until 1996, and there has never been cause for them to be invoked. Under the Further and Higher Education Act 1992 (the 1992 Act), we have the power to apply specific conditions of grant. We also have a general reserve power, in paragraph 15 of the financial memorandum, to suspend the payment of grant if ‘it is appropriate and reasonable to do so in order to safeguard public funds’. We now think paragraph 15 is sufficiently explicit, and the specific sanctions (formerly in paragraph 41) can be deleted. Accountability 10. Institutions are increasingly adopting arrangements which lengthen the chain of accountability for public funds, through more collaboration with, and the delivery of higher education by, partner organisations which are neither higher education institutions (HEIs) nor further education colleges (FECs). We wish to encourage collaborative provision, but we need to be satisfied that accountability arrangements are in place to safeguard the public investment in higher education. 11. Under the 1992 Act and the Teaching and Higher Education Act 1998 (the 1998 Act), we have powers to fund the provision of:
We do not have general power to fund the provision of education or research by bodies outside these sectors. 12. The 1998 Act introduced the concept of funding for a ‘connected institution’, whereby HEIs could pass on HEFCE grant to other institutions with HEFCE consent. We have taken legal advice on the circumstances in which the connected institution funding route applies. This established that, except where the body which ultimately receives the funds is an HEI in its own right, our grant must be paid to an HEI for the provision of education, research or related facilities and activities (as defined by the 1992 Act) by the HEI. In other words, the HEI to which we allocate grant must, in passing it on to any institution which is not an HEI in its own right, retain sufficient control over the activity to remain ‘the provider’. The connected institution mechanism applies only in restricted circumstances, and paragraph 33 of the proposed revised financial memorandum clarifies the position. Monitoring of borrowing and financial commitments 13. The financial memorandum currently requires institutions to seek HEFCE consent when the annualised servicing costs of their long-term borrowing exceed a certain threshold. Since this requirement was introduced, financial practice within the sector has developed. Some institutions have taken on long-term financial commitments that differ from traditional borrowing in their accounting treatment (they may not appear on the balance sheet), and therefore may not be covered by the current monitoring arrangements. Nevertheless, institutions’ financial health is sensitive to all long-term commitments, whether on or off balance sheet. We therefore propose that the agreed thresholds take account of all institutions’ long-term commitments, rather than just borrowing (paragraphs 55-57). Our intention is to retain 4 per cent as the threshold for obtaining consent, as this was originally intended to cover all long-term commitments. We also propose to clarify when HEIs need to seek our consent. 14. Another issue relates to the financial commitments of joint venture companies. Current monitoring arrangements capture borrowing by an institution’s subsidiaries. The proposals in this consultation would extend the thresholds to apply to the subsidiaries’ other financial commitments. However, borrowing by organisations that are not subsidiaries, but where the institution may guarantee the loan, is not currently covered. Such guarantees also represent a potential threat to an institution’s financial health, and we therefore wish to ensure that these are captured by any monitoring arrangements (paragraph 57). 15. Currently, HEFCE circular 6/96 explains the sections of the financial memorandum which deal with estate management, disposals of Exchequer-funded assets, and borrowing. We propose to include these details as an annex to the revised model financial memorandum, thus bringing all the relevant requirements into a single document. Use of HEFCE funds 16. The financial memorandum currently requires our funding to HEIs, to be used in accordance with section 65(2) of the 1992 Act for:
For the avoidance of doubt, we intend to state, in paragraph 10, that further education colleges may only use our funds as specified in the 1992 Act, namely:
17. In addition, the financial memorandum currently specifies activities - such as research contracts, residences and consultancy - that it expects in normal circumstances to be self-financing, and therefore not subsidised by our funding. It also requires institutions to assess the full cost of these activities. We intend to extend these requirements to overseas activity. We have already indicated, in a letter to all institutions (circular letter 33/98), that this is how we interpret the existing financial memorandum. We define overseas activity as activity taking place outside the United Kingdom of Great Britain and Northern Ireland. Submission date for statutory financial statements 18. Institutions are currently required to submit audited financial statements by the end of December, for the accounting year which ended the previous 31 July. This is some five months after the end of the accounting year. The financial statements form part of the financial monitoring process and earlier submission would enable us to identify any potential problems sooner. We have considered two possible approaches: i. A submission date of 31 October for draft financial statements, with the final statements following by 31 December. ii. No submission of draft financial statements. Final statements submitted by 30 November. Our preferred option would be the submission of audited financial statements by 30 November, as institutions would not have to make two returns and would not have to reconcile the draft statements to the final statements. Were 30 November to be introduced as the submission date, there would be a phased introduction. The first submission would be for the accounting period ending 31 July 2001, with the financial statements being submitted by 30 November 2001. Governance 19. We believe that higher education, like other public and private sectors, should adopt high standards of governance. The Stock Exchange Listing Rules require listed companies to include in their annual report and accounts a narrative statement of how they apply the relevant principles of the Hampel report on corporate governance. Where there is non-compliance for all or part of the year, listed companies must disclose how they have failed to comply and why. A parallel in the higher education sector would be to require HEIs to show that they have followed the guidance on governance issued by the Committee of University Chairmen (HEFCE 98/12). This was an action recommended by the Dearing Report. We are therefore consulting on whether we should use this guide or seek to produce an English code in collaboration with the sector. In either case we believe there is a strong case for greater disclosure. Timetable20. We are working to the following timetable:
Responses21. Responses are invited by Friday 17 December 1999, to: Andrew Clark |
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