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Department for Education publishes new college oversight regime

  • United Kingdom
  • Education - Briefings

05-04-2019

On 31 January 2019 the new insolvency regime for further education and sixth form colleges came into force. Two days beforehand the Department for Education (DfE) finally published the long awaited guidance on the legislation as well as a set of Q&A to help build awareness of the changes amongst colleges – see our previous briefing for more details.

At the time the DfE announced that it would publish full details in March 2019 setting out what was going to change within the FE college intervention regime, ahead of the new insolvency regime coming into operational effect on 1 April 2019.

The DfE has now published, on 1 April 2019, its policy document “College Oversight: Support and Intervention”. This sets out how the DfE will work with colleges to identify financial and quality issues early on and sets out the support and advice available to colleges when they need it from the FE Commissioner (FEC) and the Education and Skills Funding Agency (ESFA). Notably, in the ministerial forward from Anne Milton it states “…we know there is a risk that colleges will still get into financial difficulty, so we will continue to monitor them, offer support and intervene when necessary. Where colleges get into very serious difficulty and run out of money, we can use insolvency as a last resort to prioritise the protection of current learners.”

In the summary at the start of the document it states that the “strengthened regime” builds on current arrangements whilst taking into account:

• the end of Exceptional Financial Support from March 2019

• the end of the Restructuring Facility, which closed to new applications in September 2018

• the new college insolvency regime, which came into force in January 2019

This new publication (which will be reviewed before October 2020) is aimed primarily at governors, principals, finance directors and/or senior leadership teams of further education colleges, sixth form colleges and designated institutions in England, although it states it may also be of interest to provider organisations such as the Association of Colleges and the Sixth Form Colleges Association.

The oversight regime itself is split into the following four areas:

• prevention

• early intervention

• formal intervention

• restructure or exit

Prevention

The purpose of prevention is to try and identify risks and issues early, before they become problems, and support colleges to take appropriate action. The DfE says it will do this by “continuously improving our engagement with all colleges using a range of data, indicators and intelligence” and by improving the data and information it collects from colleges, especially around financial forecasting.

College leaders (including governors) are urged to seek external help if they think the college may be heading towards difficulties, whether around finance or quality (including contacting the ESFA as early as possible) to ensure they receive support.

If, however, colleges do not come forward the ESFA will go to them if it thinks there are reasons for concern, asking for more information where necessary to understand the situation fully and decide what, if any, further support is required to protect learners, public funds and bring about change and improvement.

In particular, the ESFA may request:

• a meeting with the chair and/or the full board

• management accounts

• an assessment of the impact of any funding claw back or reduction in planned income

• banking terms

• copies of reports to the college’s senior management team and governors

• a copy of the college’s risk plan

• information about partnerships and subcontracting arrangements

• information on planned strategic developments, which may include federation or merger arrangements, corporate reorganisation, capital investments and estates plans and asset disposals

• reports from the college’s auditors on the management of the college, including financial compliance and health

It is emphasised that the monthly cash flow position of a college is as important as the year end position and that the college executive should undertake robust and comprehensive monthly cash flow forecasting and, where appropriate, ensure this is reviewed externally/independently.

The ESFA will continue to produce and supply to governors financial dashboards (which it says will be improved) that give an overview of the college’s financial health with an explanation of its position against key financial indicators, trends and benchmarks.

Where the college is part of a group, the ESFA will consider whether it needs to put in place tailored support and oversight as well as further guidance.

Early intervention

Where prevention efforts are not proving effective the matter will move to early intervention. Whilst each college’s position will be considered on a case by case basis, the triggers which will prompt the ESFA to consider whether to move a college into early intervention are:

• financial health and/or financial management/control concerns (this includes significant decline, a ‘Requires Improvement’ financial health rating, the forecast risk of inadequate financial health/not being able to meet liabilities within one or two years)

• two consecutive ‘Requires Improvement’ for overall effectiveness grades from Ofsted

• escalation by an ESFA case manager

• apprenticeship Grade 4 (‘Inadequate’) assessment where the overall assessment is ‘Requires Improvement’ or better

• poor/declining education performance data

Note that in this regard, from the 2019-20 budget-setting and financial planning round the ‘Satisfactory’ financial health category has been renamed ‘Requires Improvement’.

A college will exit early intervention as soon as the ESFA has evidence that it no longer meets the triggers - in the case of intervention due only to quality reasons, exit will be triggered by the publication of an improved Ofsted grade.

Where a college in early intervention does not improve or resolve the issues identified it may be escalated to formal intervention.

Formal intervention

If a college meets the triggers for formal intervention on financial grounds, the ESFA will consider placing it into formal intervention and will issue a Notice to Improve. The formal intervention category has been strengthened by the addition of new criteria/triggers as detailed in Annex B to the document as follows:

• “inadequate” assessment of financial health assessed by the ESFA on financial plans or accounts

• cash related concerns

• one or more qualified audit opinion on a funding audit, qualified accounts, a modified regularity report

• upheld investigations related to college financial management and governance and/or funding audits and/or significant fraud or fraud practice

• evidence of financial practice/action taken by an accounting officer and/or governors that is not in the best interests of value for money, the protection of public funds, the effective delivery of service for learners or does not meet the public benefit test

• subcontracting where in the ESFA’s assessment there has been a significant/material non-compliance with subcontracting rules

• failure to submit financial accounts within 30 days of the published deadline or 30 days of any agreed deadline beyond the published date

• escalation by the FEC from a diagnostic assessment

• escalation by the ESFA if a college fails to demonstrate sufficient progress in resolving issues that have triggered early intervention

If a college meets the triggers for formal intervention the FEC will undertake an intervention assessment of the capacity and capability of the governance and leadership team to “deliver rapid and sustainable improvement”.

The FEC will consider recommendations such as:

• changes to governance and/or leadership

• conditions or restrictions on funding

• new or revisions to existing recovery plans, curriculum reviews and quality improvement plans

• further activity to determine the most appropriate way forward that is in the best interest of local learners and employers - this could take the form of escalation into consideration of restructure or exit

• placing the college into Supervised College Status

Restructure or exit

Where support and intervention are not enough to deliver improvement a “structural solution” will required. This could be:

• a restructure of the existing institution

• a merger with another institution

• the disaggregation of the existing institution, which could result in a smaller core institution

• the complete dissolution of the board conducting that institution or closure of the institution

The policy states that colleges should consult with their ESFA case manager on potential options and should also ensure suitable professional advice, such as financial due diligence, business change support, estates advice and legal advice, is received on all major decisions.

The policy also sets out a number of tools that might assist with assessing the options.

Independent Business Reviews (IBRs)

IBRs are intended to establish clarity on a college’s position and to provide a robust and independent assessment of the options for its future. They are a tool for colleges and their lenders and funders to help make informed decisions, including whether structural change is necessary.

A college can commission its own IBR or they can be commissioned by lenders or the DfE where there are concerns about future viability. IBRs are usually conducted by an accountant specialising in financial reviews and restructuring who may be a licensed insolvency practitioner and will result in an assessment of options and recommendations for the college to consider.

Structure and Prospects Appraisal (SPA)

A SPA is a structured way of assessing options to change a college’s structure and/or provision in a clear, objective and evidence based way. Colleges are strongly encouraged to undertake a SPA if they are considering a structural change or they can request an FEC led SPA.

FE Commissioner local provision reviews

Whilst SPAs are focussed on a single institution FEC local provision reviews consider the overall provision for learners in the area and can include multiple relevant institutions and consider whether the Government needs to create new capacity.

This review will result in a report that identifies and educationally appraises what the alternative solutions are for FE provision in the area; provides an outline financial assessment of the options and Includes a recommendation on which option the FEC views as being best.

Funding, the powers of the Secretary of State and the new insolvency regime

Finally the document deals with the issue of funding and reminds colleges of the powers of the Secretary of State and the existence of the new insolvency regime.

Funding

Emergency funding can be provided where a college is otherwise likely to run out of money but this will only be provided for the time it takes to make a decision on the future of the college, and will be the minimum to keep the college solvent during that period.

Funding may also be available to support the restructuring of a college or changes to a college’s provision or operations. This will be considered on a case by case basis and is provided in exceptional circumstances and at the DfE’s discretion.

Secretary of State powers

The Secretary of State continues to have powers under sections 56A and 56E of the Further and Higher Education Act 1992, in appropriate circumstances, to remove all or any of the members of the governing body; appoint new members if there are vacancies (however arising) and/or give directions to the college related to the exercise of its powers and performance of its duties.

The FE insolvency regime

Having reminded colleges of the relevant provisions of the new regime (see our briefings 21 July 2016, 31 October 2016 and 5 January 2018) and the DfE’s previously published guidance the policy document goes on to state that the aim is to lower the risk of a college entering insolvency through early identification of issues and taking appropriate action early to enable a turnaround where possible.

The document also points out, however, that Governors have duties as charity trustees to ensure the good financial management of college corporations and that these are all the more important in the event that a college corporation encounters financial difficulty that could result in insolvency. Governors are referred to the detailed list of their duties contained in the “Further education corporations and sixth form college corporations: governance guide”.

Comment

According to the DfE the main features of the strengthened college oversight regime are:

• greater clarity and consistency for colleges by simplifying the regime, collating multiple pieces of guidance into one place and an end-to-end ESFA case manager as a single point of contact

• continuation of key sources of support aimed at helping colleges achieve good and outstanding quality and financial health

• a preventative function to identify problems sooner through financial dashboards for colleges and with additional indicators to alert the ESFA to investigate the college’s position in more detail and take follow up action if required

• renaming the ‘Satisfactory’ financial health category to ‘Requires Improvement’

• extending the triggers for early and formal intervention

• strengthening the oversight of subcontracting and data

• a strengthened role for the FEC to review provision in a local area with the aim of ensuring long term high quality provision for learners which meets an area’s educational and economic needs

• introduction of the statutory college insolvency regime

• use of Independent Business Reviews to support effective decision making, including use of DfE commissioned IBRs

• renaming ‘Administered College Status’ (which involves enhanced monitoring, such as ESFA observers attending college board meetings) to ‘Supervised College Status’

Our assessment of the new regime is that financial awareness will be paramount with an emphasis on monthly monitoring of cash flows. The FECs office has also flagged the need for financial forecasting to be realistic rather than aspirational with any hint of the latter being likely to trigger intervention processes.

For more information contact

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