Dear Vice-Chancellor or Principal
1. This letter acknowledges with thanks the institutional responses to the consultation on HEFCE's Financial Memorandum (FM) with higher education institutions (HEIs) and explains how they have shaped the new FM that will take effect from 1 August 2010 ('Model Financial Memorandum between HEFCE and institutions: Terms and conditions for payment of HEFCE grants to higher education institutions', HEFCE 2010/19). No action is required in response.
2. Overall, institutional responses and the constructive discussions that we held with the main sector groups following the close of the formal consultation have enabled us to produce a much clearer document.
3. The FM continues to fulfil its main purpose of detailing the conditions of grant for HEFCE funds. It also makes the legislative and regulatory context for the FM more explicit and clarifies the roles and relationships between HEFCE, governing bodies and heads of institutions.
4. The need for greater clarity was underlined by institutional responses to the recommendations: the majority challenged our proposals, many with detailed commentaries. Our analysis of these responses has resulted in greater clarity on the role of governing bodies, the question of quality and standards and the employment status and lines of accountability for the accountable officer. We studied the responses carefully, listened to sector representatives and improved the FM as a result.
5. This final version has now been approved by the HEFCE Board and the Secretary of State for Business, Innovation and Skills.
Summary of responses
6. There was an unusually high level of engagement from the sector with this consultation and we received 123 responses, including 110 from HEIs.
7. The replies to the four specific consultation questions and the action taken in finalising the FM are summarised as follows:
- Seventy-eight per cent of respondents disagreed with the initial proposals on accountable officers. Much of the disagreement centred on a misperception that HEFCE was claiming the right to instruct a governing body to dismiss its vice-chancellor or principal. We have now clarified this. The appointment and dismissal of a head of institution is a matter for the governing body, although in exceptional circumstances HEFCE may take the view that the accountable officer is failing to meet his or her responsibilities and, following the process set out in the FM, we may ask the governing body to appoint someone else to report to HEFCE on behalf of the institution.
- Sixty per cent of respondents disagreed with our proposal to cover the corporate governance of institutions more fully in the FM. Most of the criticism assumed incorrectly that we were adding to the burden on governors, particularly in our new Annex I which summarises the mandatory responsibilities of governing bodies. We have now clarified the distinct roles of: HEFCE, as regulator; governing bodies; and heads of institutions. We have also summarised the role of governing bodies in the FM and confirmed that we will operate within our existing powers when the public interest is at risk.
- Eighty-one per cent of replies challenged our proposition that the FM should refer to quality and academic standards. The concern expressed by most respondents was that we were seeking to transfer responsibility for quality and standards from senates or academic boards to governing bodies. This was not our intention. The revised text makes it clear that we are asking governing bodies, as part of their overall governance remit, to ensure that they have confidence in quality and standards, based on advice from their senate or academic board.
- Seventy-four per cent of replies disagreed with the detail of our proposed framework for borrowing consents. Our current framework was discussed when the FM was reviewed in 2008 and this led to detailed discussions with finance directors, which drew on independent advice. The resulting recommendations, which were incorporated in the consultation draft of the FM, were not well received in the sector. That said, we have rejected the suggestions in a small number of responses that there should be no framework, or that consent should only be required by institutions in financial difficulty: this is inappropriate at a time when institutions generally face demanding financial circumstances. We have therefore agreed to stick to our existing consent process for the time being and to revisit this topic in discussion with the sector in 2010-11 or 2011-12. This will also enable us to take account of international financial reporting standards and potential changes to balance sheet reporting of long-term liabilities.
8. In addition to the replies received on our main consultation questions, we also received comments on many other issues. Each has been considered carefully and some have led to changes in the final version of the FM. Two subjects that attracted particular comment were HEFCE's risk processes and our role in relation to the sector's internal auditors.
9. A number of respondents expressed concerns about our institutional risk system, in which we designate institutions as either 'at higher risk' or 'not at higher risk'. It was felt that: our risk assessment methodology, which leads to these classifications, was subjective; we might not follow due and reasonable process in agreeing and communicating our risk assessments to institutions; and we might be careless in making our risk assessments public, thereby damaging institutions. These concerns are unfounded.
10. We have an absolute duty to assess institutional risk, but we do this openly and transparently. We consult about changes – as we have done with this FM – and we publish details about how we work; see, for example, 'Accountability for higher education institutions: new arrangements from 2008' (HEFCE 2007/11). We always aim to follow due and proper process in our risk work and, of course, we have legal responsibilities under the Freedom of Information Act. We have added a fuller explanation of the risk system in the FM to underline these points.
11. Respondents to the FM consultation also raised questions about some of the issues incorporated in our risk assessment process. We have been clear in the FM that the focus is on financial risk but that we are duty-bound to consider other factors that may have a direct or indirect effect on the financial health of institutions.
12. Later in 2010 we will discuss our risk classifications with sector groups. The present approach was adopted some years ago and it is timely to evaluate whether it is appropriate for the medium and longer term.
13. On internal audit, some replies suggested that we should not require coverage of particular business areas, including financial control. It was argued that internal audit is an independent profession with its own professional standards and that its work is determined in each institution, according to risk assessments made by auditors and agreed by audit committees with advice from management. HEFCE discontinued its own audits of risk management, financial control and governance in institutions some years ago on the basis that we could rely on internal auditors. We have found that in a small number of cases, major failures of financial control still occur, sometimes leading to calls for HEFCE to help the institutions involved out of difficulty at very short notice. On the basis that prevention is better than cure, the new FM includes a recommendation that internal auditors should always be able to provide their governors and management teams with assurance about the effectiveness of internal financial control.
14. As indicated in the FM consultation process, and the parallel consultation on our role as principal regulator of HEIs that are exempt charities under the 2006 Charities Act, we have incorporated a number of important changes in the final version of the FM:
- the annual assurance statement now has two parts; part 2 requires new assurances about exempt charity HEIs' compliance with charity law
- there is a new annex that sets out the information requirements for exempt charity HEIs, including information that must be accessible on web-sites, disclosures in financial statements and related reports, and serious incident reporting. (For serious incidents of a financial nature, we have adjusted the wording of the Audit Code to align our funder and regulator interests.)
15. Our principal regulator responsibilities started on 1 June 2010 and the new reporting requirements will apply for the first time to the 2009-10 financial year.
16. If you raised another topic in response to consultation that you feel has not been addressed in this letter, please contact Paul Greaves, Head of Assurance (tel 0117 931 7378, e-mail firstname.lastname@example.org) who will explain how the subject has been dealt with.
17. In this letter I have indicated that we will be talking to sector groups in the coming months about our borrowing consent process and our approach to institutional risk classifications. We will also reconsider our guidance on financial strategies and we intend to open a dialogue about an anti-fraud initiative. Work in these areas will be undertaken in the spirit of partnership that has characterised recent discussions on the FM, and we will be in touch shortly to initiate action.
18. Thank you once again for engaging with the FM consultation. We now have a clear document that defines the formal relationship between HEFCE, governing bodies and heads of institutions; puts a premium on preventative action; and provides assurance that, in the exceptional circumstance when something goes wrong, there is a clear mechanism to put it right. The expertise and diligence of governing bodies and the relationship of trust between HEFCE and institutions has served higher education well and must continue to do so.
Sir Alan Langlands