HEFCE Circular 5/96
Model Financial Memorandum between the HEFCE and Institutions
This version of the memorandum is superseded by HEFCE 2010/19 from 1 August 2010.
To Heads of HEFCE-funded institutions
Heads of DENI-funded Universities
Summary The model Financial Memorandum between the Higher Education Funding Council for England and Institutions.
Reference 5/96
Publication Date March 1996
Enquiries to Regional Finance Advisers or Regional Finance Officers
This circular is in two parts:
The model Financial Memorandum between the HEFCE and institutions is at pages 4 to 15.
Annex A summarises how the Council has taken account of the responses from institutions to Consultation Paper 1/95 `Proposed Revisions to the Model Financial Memorandum between the Higher Education Funding Council for England and Institutions'.
Contents
Paragraphs
Introduction 1-9
General 1
Definitions 2
Application 3-4
Scope 5-7
Compliance with Financial Memorandum 8-9
Responsibilities of the Council 10-15
Responsibilities of the Institution 16-31
Stewardship 16-17
Designation of Principal Officer 18-19
Financial Management 20-22
Value for Money 23
Provision of Information 24-27
Subscription to HESA and HEQC 28
Connection to JANET and / or SuperJANET 29-30
Insurance 31
Allocation and Payment of Funds 32-43
Estate Management 44-55
General 44-46
Disposal of Exchequer Funded Assets 47-55
Sale 47-49
Lease 50-53
Transfer 54
Application of Section 69 (4) of the Act 55
Borrowing 56-58
General 56
Long-term Borrowing 57
Short-term Borrowing 58
Monitoring of Estate Management and Borrowing 59
Provision of Contractual Services 60-61
Financial Statements 62-64
Audit 65-69
Other Matters 70-73
Revision 70
Interpretation 71-72
Effective Date 73
Signature of Designated Office Holder 74
Model Financial Memorandum between the HEFCE and Institutions
Introduction
1. This Memorandum sets out the terms and conditions for the payment by the Higher Education Funding Council for England of funds to the governing body of (name of Institution) out of funds made available by the Secretary of State for Education and Employment.
Definitions
2. For the purpose of this Memorandum:
`month' means calendar month.
`accounting period' means that period covered by the Institution's audited financial statements, usually the twelve months from 1 August to 31 July.
`academic year' means the twelve months from 1 August to 31 July.
`Act' means the Further and Higher Education Act 1992.
`deficit' means the historical cost deficit as given in the Note of Historical Cost Surpluses and Deficits in the Statement of Recommended Practice: Accounting in Higher Education Institutions (SORP).
`capital expenditure' means expenditure used to
- create or purchase a new asset
- replace an existing asset
- refurbish or remodel an existing asset
`Secretary of State' should be taken as referring to the Secretary of State for Education and Employment.
`DfEE' means the Department for Education and Employment.
`the Council' means the Higher Education Funding Council for England.
`predecessor Councils' means the Polytechnics and Colleges Funding Council and the Universities Funding Council, including responsibilities inherited from the University Grants Committee under the Education Reform Act 1988.
`the Institution' means (name of Institution).
`Governing body' means the university council, board of governors or other body ultimately responsible for the management and administration of the Institution's revenue and property, and the conduct of its affairs.
`Chief Officer of the Council' means the Chief Executive of the Higher Education Funding Council for England.
`TTA' means the Teacher Training Agency.
`FEFC' means the Further Education Funding Council for England.
`lead accountability' refers to lead accountability in all institutions designated by the DfEE as higher education institutions, except those institutions where the DfEE has assigned the lead accountability role to the TTA. These will normally be institutions which receive 55 per cent or more of their recurrent grant (ie the combined recurrent grant from the Council and the TTA) from the TTA.
`Exchequer funds' means Government grant or grant-in-aid including grants paid on the advice of the University Grant Committee, paid by the Council and its predecessor Councils, by the DfEE to former voluntary and direct grant colleges and by the Research Councils. It does not include funds provided by a local authority.
`Exchequer-funded assets' are assets acquired or developed, wholly or in part, with Exchequer funds in the form of specific capital funds. They do not include assets, where the ownership was transferred from a local authority to a higher education institution on or after 1 April 1989.
`licence' means any licence other than a licence of residential accommodation to a registered student.
`Providing body' means the providing body of a former voluntary college directly funded by the DfEE
`HESA' means the Higher Education Statistics Agency.
`HEQC' means the Higher Education Quality Council.
`JANET' means the Joint Academic Network; `SuperJANET' means the enhanced Joint Academic Network.
Within this Memorandum, references to the financial position, financial statements and / or borrowing of the Institution mean references to the consolidated financial position, financial statements and / or borrowing of the Institution and its subsidiary undertakings as defined in the Companies Act 1985 and revised by the Companies Act 1989, and in accordance with Generally Accepted Accounting Principles.
Within this Memorandum, `shall' and `must' denote mandatory requirements, and `should' denotes the Council's view of good practice.
Application
3. This Memorandum is in two parts. Part 1 sets out the terms and conditions which apply in common to those institutions listed in paragraphs 5 to 7. Part 2, the schedule, consists of conditions specific to the Institution, a schedule of funds available in the academic year and the educational provision the Institution has agreed to make in return for those funds. References to this Memorandum embrace both Part 1 and Part 2.
4. Nothing in this Memorandum shall require the Institution to act in a manner which would cause it to lose its charitable status or which would be inconsistent with its charter and statutes.
Scope
5. The terms and conditions in this Memorandum shall apply to all institutions for which the Council has lead accountability.
6. Paragraphs 1-4 (Introduction), paragraph 8 (Compliance with Financial Memorandum), paragraphs 10-12 and 14-15 (Responsibilities of the Council), paragraphs 16-17 (Stewardship), paragraphs 24-27 (Provision of information), paragraphs 29-30 (Connection to JANET or SuperJANET), paragraphs 32-43 (Allocation and payment of funds), paragraphs 44-55 (Estate Management), paragraphs 56-58 (Borrowing controls), paragraph 59 (Monitoring) and paragraphs 70-73 (Other matters) shall also apply to any institution for which the TTA has lead accountability and which receives funds from the Council.
7. Paragraphs 1-4 (Introduction), paragraph 8 (Compliance with Financial Memorandum), paragraphs 10-12 and 14-15 (Responsibilities of the Council), paragraphs 16-17 (Stewardship), paragraphs 24-27 (Provision of information), and paragraphs 32-37 and 40-43 (Allocation and payment of recurrent funds) and paragraphs 70-73 (Other matters), shall also apply, via the Funding Agreement, to any institution for which the FEFC has lead accountability and which receives funds from the Council.
Compliance with Financial Memorandum
8. The responsibility for ensuring that the Institution complies with this Memorandum and related guidance rests with the governing body of the Institution.
9. In exercising its powers under this Memorandum, the Council will act reasonably at all times.
Responsibilities of the Council
10. Payments to the Institution by the Council are in support of activities specified in section 65(2) of the Act namely: a. The provision of education and the undertaking of research. b. The provision of any facilities, and the carrying on of any activities, which the governing body of the Institution considers it necessary or desirable to provide or carry on for the purpose of or in connection with education or research.
11. Payments will be subject to the provisions of the Act, the conditions set out in this Memorandum and such terms and conditions as the Council may from time to time prescribe in accordance with the Act and after the consultation required under section 66(1) of the Act. The payment of funds will, in accordance with section 65(3) of the Act, be subject to such terms and conditions as the Council may impose, including those set out in this Memorandum but, in accordance with section 65(4) of the Act, shall not relate to the application by the Institution of any sums derived otherwise than from the Council. In determining what funds to allocate to the Institution the Council will have regard to the desirability of not discouraging the Institution from maintaining and developing its funding from other sources, in accordance with section 66(2) of the Act.
12. The Chief Officer of the Council has been appointed as its Accounting Officer and as such is responsible and accountable to Parliament for ensuring that the uses to which the Council puts funds received from the Secretary of State are consistent with the purposes for which the funds were given and comply with the conditions attached to them. The Chief Officer of the Council is also responsible for promoting good value for money through grants paid to institutions and associated guidance.
13. As part of these responsibilities the Chief Officer of the Council is required to be satisfied that the governing body of the Institution has appropriate arrangements for financial management and accounting and that the uses to which the Council's funds are put are consistent with the purposes for which they were given.
14. In his role as Accounting Officer, the Chief Officer of the Council shall inform the Institution's governing body and / or its audit committee where he has serious concerns about the Institution's financial affairs.
15. In his role as Accounting Officer, the Chief Officer of the Council may suspend the payment of grant, either in whole or in part and either permanently or temporarily, if, in his opinion, it is appropriate and reasonable to do so in order to safeguard public funds.
Responsibilities of the Institution
Stewardship
16. The governing body of the Institution is responsible for ensuring that funds from the Council are used only in accordance with the Act, this Memorandum and any other conditions that the Council may from time to time prescribe.
17. The governing body of the Institution has a wide discretion over its use of public funds, and is ultimately responsible for the proper stewardship of those funds. Therefore it must ensure that in conducting its affairs it exercises its discretion reasonably and takes into account any relevant guidance on accountability or propriety issued from time to time by the Council, the National Audit Office or the Public Accounts Committee.
Designation of Principal Officer
18. The governing body shall designate a principal officer of the Institution, who will normally be the executive head of the Institution, and shall notify the Council whenever it designates such an officer. The designated officer will need to satisfy the governing body that the conditions in this Memorandum are complied with, and may be required to appear before the Public Accounts Committee alongside the Chief Officer of the Council on matters relating to grant to the Institution which arise before that Committee.
19. The designated officer of the Institution shall advise the governing body if, at any time, any action or policy under consideration by the governing body appears to the designated officer to be incompatible with the terms of this Memorandum. Should the governing body decide nevertheless to proceed the designated officer shall inform the Chief Officer of the Council in writing forthwith.
Financial Management
20. The governing body of the Institution shall ensure that it has a sound system of internal financial management and control.
21. The governing body of the Institution shall plan and conduct its financial and academic affairs to ensure that it remains solvent and that, taking one accounting period with another, its total expenditure is not greater than its total income.
22. In meeting the requirement in paragraph 21:
a. The Institution shall not have an historical cost deficit in two consecutive accounting periods unless there are sufficient discretionary reserves (1) to cover the deficit. A deficit of less than 0.5 per cent of total income as defined in the audited financial statements for the year in question, or #500,000, whichever is the lower, will not be taken into consideration for these purposes.
b. Negative discretionary reserves must be cleared by the end of the third accounting period after the year in which the deficit began to accumulate. An accumulated deficit will be considered to be cleared if it is less than 0.5 per cent of total income as recorded in the Institution's financial statements for the latest accounting period, or #500,000, whichever is the lower. The Council may, in its discretion, waive these conditions and substitute others on written application from the Institution.
Value for Money
23. The governing body of the Institution is responsible for delivering value for money from public funds. It should keep under review its arrangements for managing all the resources under its control, taking into account guidance on good practice issued from time to time by the Council, the National Audit Office or the Public Accounts Committee.
Provision of Information
24. The Institution shall provide the Council with such information as the Council may require for the exercise of its functions under the Act. This information shall be of a satisfactory quality and shall be provided at a time or times and in a format as specified by the Council. The Council will act reasonably in its requests for information and will have regard to the costs of providing this information and where appropriate to its confidentiality.
25. The Institution shall provide the Council's agent, HESA, with information required by the Council for the exercise of its functions under the Act. The information shall be of a satisfactory quality and supplied at a time or times and in a format as specified by HESA.
26. If the Institution fails to return information required by the Council by the specified deadline, or that information is not of a satisfactory quality, the Council reserves the right to take either or both of the following courses of action:
a. To carry out such investigations as the Council deems necessary to collect the data. The cost, in whole or in part, of such investigations may, where circumstances so warrant, be deducted from the recurrent grant of the Institution. (2)
b. To use its own reasonable estimates of data which it requires for the exercise of its functions under the Act.
27. If the Institution is overpaid grant as a result of the use of Council's estimates of data, the Council reserves the right to recover any overpaid grant, plus interest on the overpaid grant, in accordance with paragraph 43.
Subscription to HESA and HEQC
28. The Institution shall subscribe to HESA and HEQC.
Connection to JANET or SuperJANET
29. The Institution shall take appropriate measures, including signing its acceptance of the Acceptable Use Policy, to ensure that its use of JANET or SuperJANET, and networks connected to JANET or SuperJANET, conforms to acceptable practice and is in accordance with current legislation.
30. The Council reserves the right to withdraw the Institution's connection to JANET or SuperJANET if it does not take such measures as are referred to in paragraph 29.
Insurance
31. The Institution shall ensure that it has adequate insurance cover.
Allocation and Payment of Funds
32. The Council will determine the amount of funds to be allocated to the Institution in any year and may, in its allocations, distinguish between recurrent funds and capital funds. The Council may also, in its capital allocations, distinguish between formula capital funds and capital project funds.
33. The Institution shall only use funds for those activities eligible for funding as are specified in sub-sections 65(2)(a) and (b) of the Act. Unless otherwise directed by the Council, the Institution shall be free to vire between recurrent and formula capital funds.
34. The Institution shall use any funds which have been earmarked or provided for specific recurrent or capital purposes by the Council, solely for the purposes for which those funds have been earmarked or provided.
35. The Institution must report to the Council any use of funds which were earmarked or provided for specific purposes, for purposes other than those for which the funds were earmarked or provided, as soon as it becomes aware of such use.
36. The Council will normally make payments of formula funds to the Institution in monthly instalments, in accordance with a funding profile for the whole academic year which takes account of expected need within the higher education sector as a whole and receipts of tuition fees from local education authorities.
37. The Council will also be prepared on written application from the Institution to consider making such exceptional or ad hoc payments as the Council sees fit but such payments will not be made in advance of the Institution's need to make disbursements.
38. The Council may make contributions to the costs of capital projects submitted at the request of the Council which conform to criteria set out by the Council.
39. The Council will pay its agreed contribution to the costs of capital projects in accordance with a payment profile agreed with the Institution, as set out in the Council's estate procedures (3), and on submission of a valid claim which has been accepted by the Council.
40. The Council will notify the Institution, in writing, of the allocation of formula funds as soon as possible - normally by 31 March - in advance of the academic year to which they relate.
41. The Council reserves the right to retain a proportion, not exceeding 0.1 per cent, of the Institution's total formula recurrent grant, in respect of any academic year, if the Institution fails to return specified data of a satisfactory quality to the Council by the specified deadlines. These data and deadlines will be specified in the letter referred to in paragraph 40 notifying the Institution of their allocation of recurrent funds. Where these conditions have been met, the July payment to the institution will normally include this element of grant.
42. The Council reserves the right to require repayment by the Institution, in whole or in part, of funds received from the Council if the Institution fails to comply with any conditions to which those funds were subject.
43. The Council also reserves the right to require the payment of interest, at 2 per cent over the Base Rate specified from time to time by the Bank of England, in respect of any period during which a sum due to the Council in accordance with this or any other condition remains unpaid.
Estate Management
44. The Institution shall manage and develop its estate having regard to the guidance issued from time to time by the Council on estate procedures.
45. The Institution shall keep its holdings of land and buildings under review with the objective of rationalising and disposing of those which it considers, in light of its estate strategy, to be no longer needed. Former voluntary colleges and other institutions holding land and buildings not covered by exempt charitable status shall also take into account the requirements of the Charity Commissioners.
46. The Institution shall maintain its estate in accordance with a maintenance plan, covering its long-term and routine maintenance requirements.
Disposal of any Interest in an Exchequer Funded Asset
Sale
47. The Institution may sell any land and buildings, including any interest in land and buildings, which was acquired or developed in whole or in part using Exchequer funds, provided that all the following conditions are satisfied:
a. The Institution has taken independent professional advice on the terms and conditions of the sale.
b. The Institution decides that, having considered that advice, it is satisfied that the terms and conditions under which the sale is proposed are the best that can reasonably be obtained for the Institution at that time.
c. The Institution notifies the Council in writing of the sale within 15 working days of the exchange of contracts for that sale.
48. Where such a sale as is referred to in paragraph 47 occurs, the Institution may retain the proceeds (4) of that sale provided that all the following conditions are satisfied:
a. They are used for capital expenditure on assets, with a life of more than 12 months, that are used for activities eligible for funding as specified in sub-sections 65(2)(a) and (b) of the Act, but excluding capital expenditure on assets that are used primarily for activities listed in paragraph 60.
b. Where the expenditure is on an estates project, it conforms with the Institution's current estate strategy.
c. Where the expenditure is on an estates project, the Institution has regard to Council guidance, issued from time to time, on appraising property options (5).
d. The sale proceeds are reinvested in full within 3 years.
e. The institution notifies the Council in writing within 15 working days of the date the sale proceeds are first reinvested; if the reinvestment is done in stages, the institution must notify the Council in writing within 15 working days of each stage of the reinvestment.
49. Where the conditions under paragraph 48 are not satisfied, the Institution shall pay to the Council:
a. Where the Exchequer funds were provided before 1 August 1975, an amount equal to the original value of the Exchequer funds.
b. In cases where the interest in the land and buildings was acquired or developed, since 1 August 1975, wholly with the aid of Exchequer funds, all the sale proceeds (including any element in respect of intangible assets sold as part of the transaction) after deduction of the expenses of the transaction.
c. In cases where neither sub-paragraphs 49a or 49b apply, that proportion of the sale proceeds, after deduction of the expenses of the transaction, which corresponds to the value of the Exchequer funds as a percentage of the costs of acquisition or development of the land and buildings at the date of acquisition or development.
d. Where only part of the sale proceeds is reinvested in accordance with sub-paragraph 48a, but all other conditions in paragraph 48 are satisfied, the Institution shall repay that part of the sale proceeds that is not reinvested in accordance with sub-paragraph 48a, subject to sub-paragraphs 49a-c above.
e. Where the sale proceeds are only partly re-invested within three years, but all other conditions in paragraph 48 are satisfied, the Institution shall repay that part of the sale proceeds that is not reinvested within three years, subject to sub-paragraphs 49a-c above.
Leases
50. The Institution may grant a lease or licence over land and buildings acquired or developed, whether wholly or in part, with Exchequer funds, provided that all the following conditions are satisfied:
a. The Institution has taken independent professional advice on the terms and conditions of the lease or licence.
b. The Institution decides that, having considered that advice, it is satisfied that the terms and conditions under which the lease or licence is proposed are the best that can reasonably be obtained at that time.
c. The Institution notifies the Council in writing of the lease or licence within 15 working days of the execution of the lease or licence.
51. Where such a lease or licence as is referred to in paragraph 50 is granted and part or all of the consideration for the granting of the lease or licence is the payment of a premium, that premium shall be treated as sale proceeds and paragraphs 48 and 49 shall apply to its use by the Institution. If the consideration also includes periodic payments of rent during the life of the lease or licence, these shall be treated as rental income and paragraph 52 shall apply to their use by the Institution.
52. Where such a lease or licence as is referred to in paragraph 50 is granted, the Institution may retain the rental income provided that both the following conditions are satisfied:
a. The rental income is used for activities eligible for funding as specified in sub-sections 65(2)(a) and (b) of the Act, but excluding expenditure primarily on activities listed in paragraph 60.
b. The institution notifies the Council in writing within 15 working days of the date the rental income is first reinvested.
53. Where the conditions in paragraph 52 are not satisfied, the Institution shall repay to the Council the rental income, in full or in the proportion outlined in paragraph 49, after deduction of any ground rent or other charges, administration costs and any expenses borne by the Institution necessary to keep the land and buildings in a fit state to command that rent.
Transfers
54. The Institution may transfer its title to or grant any interest or licence in land and buildings, which were acquired or developed in whole or in part using Exchequer funds, provided that one of the following conditions has been satisfied:
a. The transfer or grant is in accordance with paragraph 47 or paragraph 50.
b. The transfer or grant is to a subsidiary undertaking and contains a direct covenant by the transferee with the Council that the transferee will observe and perform the conditions in paragraphs 47 to 54 of this Memorandum, and that covenant is guaranteed by the Institution; the institution must notify the Council within 15 working days of the transfer to the subsidiary.
c. The Institution has the prior written consent of the Council to the transfer or grant. The Council may attach conditions to such consent.
Application of Section 69 (4) of the Act
55. In respect of Exchequer funds provided to the Institution or to the trustees or the providing body of a former voluntary or direct grant college directly by the Department of Education, the Secretary of State has, under section 69(4) of the Act, directed the Council to be her agent in enforcing conditions the same as those in paragraphs 47 to 54 relating to the disposal of assets and the use of such assets as security for borrowing.
Borrowing (6)
56. It is the Council's responsibility to protect the public investment in institutions. In furtherance of this responsibility, and in its role of monitoring financial health, the Council will require the Institution to satisfy all the conditions on borrowing set out below and in related guidance to be issued by the Council:
a. That the Institution will be able both to repay the sum borrowed, and to pay interest thereon without recourse to additional grant from the Council.
b. That the ability of the Institution to maintain financial and academic viability will not be impaired as a result.
c. That the Institution can demonstrate the value to be generated by the transaction, if it involves refinancing, and of any new investments to be financed by the borrowing.
d. That any new investment is in accordance with the Institution's strategic plan.
e. That the Institution notifies the Council in writing of the use of any Exchequer funded asset as security for any borrowing within 15 working days of the signing of the borrowing agreement.
Long-term Borrowing (7)
57. The Institution shall obtain prior written Council consent before it undertakes such a level of borrowing that the annualised servicing costs of all long-term borrowing exceed a threshold of 4 per cent of total income as reported in the latest audited financial statements, or the estimated amount for the current year if that is lower. The annualised servicing costs of the borrowing consist of the costs of capital repayments and total interest costs spread evenly over the period of the borrowing (8). In assessing total long-term borrowing and total income, all inherited debt which is fully reimbursed by the Council, and all such reimbursements shall be ignored.
Short-term Borrowing
58. The Institution shall obtain prior written Council consent before its negative net cash or cash equivalents, as determined on a cash book basis and as defined in FRS 1: Cash Flow Statements, exceeds the lower of 5 per cent of total income or #2M.
Monitoring of Estate Management and Borrowing
59. The Council will monitor compliance with the requirements in paragraphs 44 to 54 and paragraphs 56 to 58.
Provision of Contractual Services
60. In determining the price to be charged for the following,
- research contracts
- residences, catering and conferences
- services to external customers, including consultancy,
the Institution shall assess the full cost of the service to the Institution.
61. The Council expects the full cost of such activities to be recovered unless the Institution considers it appropriate to do otherwise having regard to the circumstances of the particular case.
Financial Statements
62. The Institution shall keep proper accounting records and shall prepare financial statements in respect of each accounting period. The Institution shall provide the Council with 3 copies of its audited financial statements for the accounting period by 31 December following the end of the accounting period. At least one copy of the financial statements provided to the Council shall contain the signatures required under paragraph 64 of this Memorandum and shall be signed by the Institution's external auditors. The Institution shall make reasonable arrangements to make copies of the financial statements publicly available.
63. The Institution shall ensure its financial statements comply with the Accounts Direction issued from time to time by the Council. Such a Direction will cover information to be contained in the financial statements, the manner in which they are to be presented and the methods and principles according to which they are prepared, and will be in accordance with Generally Accepted Accounting Principles.
64. The financial statements shall be signed by the designated officer and by the Chairman or one other member of the governing body as appointed by the governing body. In the case of an institution which is a company limited by guarantee, the requirements of the Companies Act 1985 as revised by the Companies Act 1989 in respect of signatories to the financial statements shall apply.
Audit
65. The governing body of the Institution shall appoint an audit committee, and arrange to provide for internal and external audit, in accordance with the Council's Audit Code of Practice and any other directions, drawn up and published by the Council in consultation with institutions. Any requirements mandatory under the Audit Code of Practice shall be a condition of grant under this Memorandum.
66. The Council's Audit Service will, from time to time, evaluate the Institution's internal control arrangements. It may also carry out such additional investigations as it deems necessary. The cost, in whole or in part, of such additional investigations may, where circumstances so warrant, be deducted from the recurrent grant of the Institution.
67. The Institution shall provide the Council's Audit Service with access to all books, records, information and assets. The Council's Audit Service can require any officer to give any explanation which it considers necessary to fulfil its responsibilities. The books and records of the Institution shall also be open to inspection by the Comptroller and Auditor General.
68. The Council may carry out reviews designed to improve economy, efficiency and effectiveness in the management or operation of the Institution including value for money studies. The Comptroller and Auditor General may also carry out value for money studies of the Institution's use of resources.
69. DfEE internal auditors may accompany the Council's auditors on their visits to the Institution. On such visits the DfEE's auditors will be concerned only with the way in which the Council's auditors are carrying out tasks and will not themselves audit arrangements within the Institution.
Other Matters
Revision
70. After consultation with the Institution and such bodies representing the institutions as the Council considers appropriate, the Council may from time to time revise, revoke or add to any of the conditions in Part I of this Memorandum. The Institution may itself make proposals to the Council for revision, revocation or addition. The Council will, from time to time, review the thresholds and monetary limits in paragraphs 22, 41, 57 and 58 of this Memorandum to ensure they remain up to date. The Council will consult institutions if it intends to amend these limits.
Interpretation
71. The rights, powers and remedies reserved to the Council in this Memorandum are in addition to any other rights, powers and remedies which it may now or at any time hereafter hold. No failure to exercise or delay in exercising on the part of the Council any of its rights, powers and remedies shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any further or other exercise of the same or any other right, power or remedy.
72. Questions arising on the interpretation of any statement in this Memorandum shall be resolved by the Council after consultation with the Institution and such bodies representing the institutions as the Council considers appropriate.
Effective Date
73. Paragraphs 44 - 59 of this Memorandum shall take effect from 1 April 1996. The remaining paragraphs shall take effect from 1 August 1996.
Signature of Designated Office Holder
74. The designated office holder of (name of Institution) should signify below their receipt of this Financial Memorandum, which sets out the terms and conditions for the payment by the Higher Education Funding Council for England of funds to the Governing Body of (name of Institution) out of funds made available by the Secretary of State for Education and Employment.
Footnotes
(1) discretionary reserves comprise General Endowments and Income and Expenditure Account Reserves as defined in the Statement of Recommended Practice: `Accounting in Higher Education Institutions'
(2) this power relates to information required by the Council and returned to the Council or to HESA
(3) all references to the Council's estate procedures mean the existing guidance `Strategic Estate Management' (1/93), `Funding for Backlog Maintenance Work in 1993-94 and 1994-95' (Circular 12/93), `Appraising Property Options: Guidance on Techniques' (November 1993), `Draft Estate Procedures' (Circular 44/93), `Backlog Maintenance Priority II Work' (Circular 22/94), `The Private Finance Initiative and Council Policy' (Circular letter 4/96), and subsequent guidance as issued by the Council from time to time
(4) all references to sale proceeds shall include the accrued interest earned on the sale proceeds between the date of receipt of the proceeds and the date of the reinvestment of those proceeds
(5) the Council's current guidance is `Appraising Property Options: guidance on techniques' (November 1993),
(6) Borrowing includes finance leasing, as defined in SSAP 21 `Accounting for leases and hire purchase contracts' and other schemes where borrowing is the substance of the transaction, in line with FRS 5 `Reporting the substance of transactions'
(7) Long-term borrowing means amounts which are due for payment after more than 12 months, in accordance with Generally Accepted Accounting Principles
(8) in the case of Business Expansion Schemes (BES), the annualised servicing costs are the costs of buying out the shareholders of the BES company spread evenly over the period of the BES
Appendix 1
Scope of the Financial Memorandum
This appendix shows which paragraphs apply to institutions for whom the Council, the TTA and the FEFC have lead accountability.
Lead accountability
Section Paragraph HEFCE TTA FEFC
Introduction 1-4 * * *
5-7 *
8-9 * * *
Responsibilities of the Council 10-12 * * *
13 *
14-15 * * *
Responsibilities of the Institution 16-17 * * *
18-23 *
24-27 * * *
28 *
29-30 * *
31 *
Allocation and Payment of Funds 32-37 * * *
38-39 * *
39-43 * * *
Estate Management 40-55 * *
Borrowing 56-58 * *
Monitoring 59 * *
Provision of Contractual Services 60-61 *
Financial Statements 62-65 *
Audit 66-69 *
Other Matters 70-73 * * *
Signature of Designated 74 *
Office Holder
Annex A
Revisions to the Model Financial Memorandum Following Consultation
Introduction
1. This is the first substantive set of revisions to HEFCE's original model Financial Memorandum with institutions (25/93), much of which was based on material from the Universities Funding Council (UFC) and Polytechnics and Colleges Funding Council (PCFC) memoranda.
2. A draft revised Financial Memorandum was drawn up in the spring of 1995, and issued to the sector as Consultation Draft 1/95. This annex indicates how the Council has taken into account the main responses to its Consultation Paper (1/95) in finalising the revised Financial Memorandum, and provides details of changes to the consultation draft.
3. Paragraph references below are to the revised Financial Memorandum unless stated otherwise.
Issues Raised in the Consultation
4. Many respondents expressed the general concern that the Council should act reasonably in the exercise of powers under the Financial Memorandum. Although this had been taken as implicit by the Council, an explicit commitment to reasonableness has now been given by the addition of paragraph 9.
`In exercising its powers under this Memorandum, the Council will act reasonably at all times.'
Paragraphs 14-15 -suspension of grant/ matters of serious concern
5. The majority of respondents commented on these paragraphs (numbered 15 and 16 in the consultation draft). While most respondents accepted that the Chief Officer has the power to take the actions specified in paragraphs 14 and 15, some felt that a decision to suspend grant was so serious that it ought to be taken only by the HEFCE Board, not by the Chief Officer alone. The Chief Officer's power to suspend grant derives from his personal responsibility as the HEFCE Accounting Officer and the text of the paragraphs has been amended to make this chain of accountability clearer. In practice, it is difficult to envisage situations where the Chief Officer would not look to the Board, or at least the Chairman, for guidance on these matters, but in urgent situations, time may not allow it.
6. A number of respondents made the point that if the Chief Officer of the Council considers a matter to be `of serious concern', he should be obliged to inform an institution's governing body or audit committee, rather than have the discretion to do so. This change of emphasis has been incorporated into the text. The new text also clarifies the scope of Chief Officer's power to inform the governing body and/or audit committee of matters of serious concern by stating expressly that this refers to `concerns about the institution's financial affairs'.
Paragraphs 16-17 and paragraph 23 - stewardship and value for money
7. Most of the comments on paragraphs 16-17 and paragraph 23 concerned the words `sector representative bodies or other relevant authority'. Many institutions questioned whether the Financial Memorandum should require institutions to take account of unspecified guidance from undefined bodies and felt that these words were too vague and needed to be more tightly defined. The paragraphs were originally drafted to be wide enough to include guidance from, for example, the Nolan Committee on Standards in Public Life. On reflection, however, it would appear more straightforward for the Council to issue itself or endorse any guidance which it specifically wished institutions to follow, and the text has been amended accordingly.
8. There was also concern that the words `value for money' in paragraph 23 needed tighter definition. Given the potential limitations of any definition, none has been included.
Paragraphs 18-19 - designated officer
9. The original Financial Memorandum provided for Council approval of the designated office. A large majority of respondents commented on the proposal in the consultation draft which would have given the Council power to withdraw its approve of a particular designated officer. This proposal has now been dropped. Very few institutions objected to the proposition that the officer rather than the office should be designated, and this change has been retained. The text now makes it clear that it will normally be the executive head of the institution who is designated.
Paragraphs 20-22 - deficits and negative general reserves.
10. A number of institutions raised concerns over the proposal to delete the proviso in the original Financial Memorandum that institutions can add back any charge or deduct any release arising under Statement of Standard Accounting Practice 24 (SSAP 24): Accounting for pension costs in calculating the balance on their income and expenditure account for the purposes of meeting the Council's requirements on financial management.
11. SSAP 24 has been in force as an accounting standard since 1989-90 and institutions have always been required to observe the standard in drawing up their financial statements: the position on this is unchanged. However, the Council has always recognised that, in respect of the costs of enhanced pensions or additional years for staff which have retired early with added years or been made redundant, institutions whose staff are predominantly members of the Teachers Superannuation Scheme (TSS) are in a different position from institutions where most staff belong to funded schemes such as the Universities Superannuation Scheme (USS). All institutions must make provisions for these enhancement costs in their financial statements when the liabilities first arises. However, for institutions whose staff are predominantly members of TSS these payments are spread over a number of years, rather than being met in full at the outset as is the case for those institutions whose staff are predominantly members of USS. The impact on the financial health of these institutions will accordingly be different.
12. The proviso in relation to SSAP 24 embodied in the original Financial Memorandum was brought in largely as a short-term measure to help a significant number of institutions which would otherwise have been in breach of the Financial Memorandum. Circumstances have now changed, and the Council believes that the justification for continuing with this blanket exclusion is weak. However, the revised Financial Memorandum does allow the Council, at its discretion, to waive the conditions on deficits and to substitute others on written application from an institution. This allows the Council to take into account the impact of SSAP 24 in considering the position of any institution which breaches the Financial Memorandum conditions on deficits or negative discretionary reserves, and the Council is prepared to use its discretion here sympathetically.
13. A number of respondents also argued that the limit above which a deficit is considered to be cleared was too low, and therefore it has been raised from #300,000 to #500,000.
Paragraphs 24-26 and paragraph 41- provision of information
14. The great majority of institutions responded on this issue. The main concerns expressed were that the Council should act reasonably in its demands for information, both in terms of timescale and quantity of information; that it should give reasonable notice of changes to data requirements and formats; and that it should be reasonable in the exercise of powers under paragraph 26 (collection of data and use of estimates of data) and paragraph 41 (0.1 per cent of grant dependent on institution complying with deadlines and quality standards on specific data returns).
15. The Council has decided to retain these provisions substantially as in the consultation draft. However, in recognition of the concerns expressed about the imposition of penalties for late or inaccurate data returns, the new Financial Memorandum now makes it clear that the Council will give a reasonable period of notice when asking for data. In addition, the Council will:
a. Send a reminder to institutions about a week before the deadline, asking them to tell us in advance if they will be unable to return that data on time, and reminding them that they may otherwise incur a financial penalty.
b. Once data has been returned and reviewed, the Council will draw any material doubts about quality to the attention of the institution concerned and ask for explanations. If necessary, the Council will carry out, or arrange for, an audit of the data. In the light of the results of the audit - for example, whether the data were of an unacceptable quality, whether any errors were material, whether there was evidence of intent to deceive the Council - the Council will decide what action should be taken, after giving the institution an opportunity to comment. Depending on the circumstances this could be to confirm the data as submitted, to revise the data, to levy a charge on the institution for the cost of the audit, to impose a financial penalty, or a combination of these.
16. The commentary to the consultation draft made it clear that the Council's powers in paragraph 26a in relation to the collection of data could also be applied to data collected by HESA. No objections were received on this specific point, which has been retained.
Paragraphs 29-30 - connection to JANET
17. These paragraphs were added on the advice of the Joint Information Systems Committee. Although a number of respondents questioned their inclusion in a Financial Memorandum, the Council considers that the requirements of these paragraphs are best met in this way.
Paragraphs 32-43 - allocation and payment of funds
18. The only substantial comments on paragraphs 32-39 related to the sector's wish that the Council should commit itself to deadlines for announcing grant allocations and announcing payment profiles. Paragraph 40 now has the deadline `normally 31 March'.
19. There were a significant number of comments on the final sentence of paragraph 40 of the consultation draft - `The institution shall report any misuse of funds to the Council forthwith'. The comments have been accepted and the sentence replaced with wording proposed by the representative bodies.
20. Paragraphs 42-43 are based on the powers conferred on the Council in the Further and Higher Education Act 1992 to charge interest on `sums due to the Council'. Comments on this section centred on the proposed rate of interest of 2 per cent above Base Rate. A number of respondents thought this was too high, or was higher than they could obtain if they invested the money. No change has been made, however, given that the intention is to set an interest rate which will ensure that no institutions can benefit from holding Council funds to which it is not entitled.
Use of formula capital funds and the meaning of `capital expenditure'
21. A significant number of institutions objected to the proposed exclusion of maintenance contracts from the permitted uses of formula capital funds, and to the omission from paragraph 48, which covers the permitted use of sale proceeds, of an explicit reference to the refurbishment or remodelling of assets, even though this is specifically allowed in the current Financial Memorandum. The 1995 Budget Statement gave the Council additional flexibility over the use of its grant, with the result that the Financial Memorandum now allows institutions to vire freely between formula recurrent and capital funds. In consequence, paragraph 39 of the consultation draft which covered the use of formula capital funds has been deleted. To clarify what constitutes permitted capital expenditure, a definition has been added to the list in paragraph 2.
Paragraph 41- financial penalties
22. The consultation draft stated that the payment of the lower of 0.1 per cent and #100,000 of an institution's recurrent grant in any academic year would be conditional on the institution meeting all the conditions specified in Appendix 1 of the consultation document, and that where these conditions have been met, the July payment to the institution will normally include this element of grant. Appendix 1 set out the data and information institutions were required to submit to the Council, and indicated, where relevant, the deadlines for submission.
23. These provisions have now been amended: paragraph 41 now states that the Council will announce in the letter to each institution giving details of its grant allocations which data are to be subject to the financial penalty regime described above. The Council intends that, for the present at least, liability to financial penalties should only attach to funding round data and there will no longer be a blanket penalty for all breaches of the Financial Memorandum. Instead, the Council will retain the discretion about the level of financial penalty for each breach, up to a maximum of 0.1 per cent of the recurrent grant in any one academic year.
24. Some responses appeared to misunderstand the proposal in the consultation draft, and read it as a proposal to withhold part of an institution's grant each month and to pay it back to institutions who complied with the conditions in July. While that was never the intention of the original proposal, the revised wording should make it clear that any retention of grant for failure to comply with paragraph 41 will normally be taken from the institution's July grant payment.
Paragraphs 44-46 - estate management
25. Institutions welcomed the greater delegation of responsibility for estate management. Most comments on this section concerned the weight placed on estates strategies in the light of the need for institutions to be able to react to circumstances which may not have been foreseen in the estate strategy. The Council considers that estates strategies should be high level documents which should not unduly inhibit an institution's ability to react to unforeseen contingencies or opportunities. Estate strategies should also be reviewed as part of an institution's strategic planning cycle lest they become out of date. The wording is therefore unchanged from the consultation draft.
Paragraphs 47-55 - disposal of any interest in an Exchequer-funded asset
26. The delegation of responsibility in this section was welcomed.
27. Many respondents pointed out that the requirement for sale proceeds to be reinvested completely within three years could inhibit the use of PFI solutions, for example where the use of an asset is procured as part of a contract for the delivery of services, for which the institution pays over perhaps ten to twenty years. Although it is not within the Council's discretion to change the general three year limit at this stage, institutions are strongly encouraged to approach the Council if a particular case arises which frustrates PFI. The Council will consider each case carefully and if appropriate take it up with the DfEE.
28. Several respondents objected to the exclusion of self-financing activities (particularly residences) from the permitted uses of sale proceeds. In particular, if an institution sells an Exchequer-funded residence, this means that it cannot use the proceeds to build a new one, and may therefore have little incentive to dispose of unsuitable premises. The Council has reflected on these points and consulted the DfEE. As a result of this consultation, the word `primarily' has been added to paragraph 48a, to allow, in effect, a minimum level of self-financing activity.
29. Similar comments were made about paragraph 52 which details the circumstances in which an institution can retain the rental income from an Exchequer-funded asset. Again, the word `primarily' has been added to permit a minimum level of self-financing activity.
30. Paragraphs 47 and 50 have been amended to spell out what was meant by `full value'. These definitions have been included on the advice of the Council's solicitors and are based on definitions in the Charities Act 1993. The solicitors also advised the inclusion of the words `or licence' to those paragraphs dealing with leases, with the clarification, in paragraph 2 of the Memorandum, that licences of accommodation to students are excluded.
31. Paragraphs 48, 52 and 54 have all been amended to require institutions to notify the Council when they reinvest the proceeds of a sale or lease of an Exchequer-funded asset or transfer an Exchequer-funded asset to a subsidiary undertaking. In a similar vein, institutions are also required, by paragraph 56, to notify the Council when they use an Exchequer-funded asset as security. These notifications will enable the Council to satisfy its reporting requirements on the use of delegated responsibilities for Exchequer-funded assets.
32. As a result of discussions with the Council's solicitors, a number of amendments have been made to the substance and the wording of this paragraph of paragraph 54 (transfers of Exchequer-funded assets). The amended paragraph 54 only allows institutions to transfer an Exchequer-funded asset without seeking the prior consent of the Council where the transfer is to a subsidiary undertaking. It also requires the institution both to ensure that the transfer contains a covenant that the transferee will observe and perform the conditions in paragraphs 47 to 54 of the Memorandum, and also to guarantee that covenant. The requirement of the guarantee was added in response to the concern that Exchequer-funded assets could be lost, to give additional protection of the Exchequer interest in transferred assets, and to give the Council the option of pursing either the transferee or the institution if the transferee does not observe the conditions of the covenant.
Paragraphs 56-58 - borrowing controls
33. Most responses commented on the borrowing controls. Their responses can be summarised thus:
- All responses welcomed the delegation of decisions about borrowing under the proposed threshold
- A small minority of institutions felt that all decisions about borrowing should be delegated to institutions
- Nearly all responses welcomed the shift of emphasis from secured/ unsecured borrowing to long-term/ short-term borrowing
- A substantial number of responses argued that institution's total borrowing and total income should not be considered in calculating whether the borrowing fell above or below the proposed threshold - ie that self-financing activities should be excluded
- A substantial number of respondents thought that the proposed threshold (where the annualised servicing costs of all borrowing exceed 4 per cent of total income) was too low
- A tiny minority of institutions felt that the borrowing controls were too lax
- Clarification was sought that the borrowing controls applied to external borrowing by the institution and its consolidated undertakings, and that borrowing between the institution and its subsidiaries was excluded.
34. The inclusion of total income and borrowing was proposed as part of an increasing focus on the financial health of institutions, and as a quid pro quo for the delegation of responsibility for decisions involving Exchequer-funded assets. It has been decided to include nearly all borrowing for the following reasons:
a. The threshold is not intended to be an absolute limit (like the 7 per cent limit in the current Financial Memorandum); nor does it represent a "good practice" limit for the sector as a whole - given that the circumstances of institutions vary so greatly. The 4 per cent threshold is merely a trigger point above which institutions must seek Council consent for further borrowing (including refinancing). When institutions seek consent to exceed the threshold, the Council may agree a new threshold, and delegate to the institution discretion to borrow up to the new threshold without the need for further consent. In considering whether and where to set a revised threshold, the Council will take into account the institution's individual circumstances including the likely effect of the borrowing on its financial health, and will look at such factors as whether there are reliable income streams to service the borrowing etc.
b. Many respondents felt that debt which had been inherited from local authorities, and which was totally reimbursed by the Council, should be excluded, both because it was netted off, and also because institutions were given no choice about taking it on in the first place. This is accepted: inherited debt which is totally reimbursed by the Council will be specifically excluded from the calculation.
35. Most of the comments on the short-term borrowing controls in paragraph 58 were about the effects of a short-term and unforeseen `blip' in their cash flow, occurring, for example, if the pay-roll was paid the day before a major income item was received. After detailed discussions, it has been concluded that, given that the focus of the borrowing controls is net negative cash or cash equivalents (and this point has been emphasised in the text), there should be no unexpected blips. The arrangements in the consultation draft have therefore been retained.
36. Clarification on the consolidated borrowing position has been given by the addition of the following sentence to paragraph 2 of the Memorandum:
`Within this Memorandum, references to the financial position, financial statements and/or borrowing of the institution mean references to the consolidated financial position, financial statements and/or borrowing of the institution and its subsidiary undertakings as defined in the Companies Act 1985 and revised by the Companies Act 1989, and in accordance with Generally Accepted Accounting Principles'
Paragraph 59 - monitoring of estate management and borrowing controls
37. Respondents gave the clear response that further returns, as proposed in paragraph 64 of the consultation draft, would be unwelcome, particularly if the information needed could be obtained via existing returns such as the strategic plan or the financial forecasts. It has now been decided to seek specific information on estates matters as part of, and at the same time as, information on strategic plans. In addition, the second half of the former paragraph 64 - now paragraph 59 - has been deleted and now reads:
`The Council will monitor compliance with the requirements in paragraphs 44 to 54 and 56-58'
Paragraphs 65-69 - audit
38. Paragraphs 65-69 were accepted without significant comment, apart from paragraph 66, which gives the Council's Audit Service the power to carry out `audits for cause' and to charge the cost to institutions where circumstances so warrant. Most respondents accepted that in principle such audits could be carried out, but expressed concern that `where circumstances so warrant' gives the Council too open ended a power to charge institutions. Similar concerns to those expressed in connection with other sanctions, such as the need for liaison with the institution concerned, giving more detail about the process, requiring the Council's Audit Service to act reasonably, were also raised. The power remains substantially unaltered, but paragraph 9 of the Financial Memorandum, referred to earlier, confirms that the Council will act reasonably in the exercise of all its powers under the Financial Memorandum.