Model Financial Memorandum Between HEFCW and Institutions

Circular W16/21HE: Annex A

Section 1: Organisation details

Which organisation are you responding on behalf of?

Organisation: Enter your organisation name.

Would you like us to consider anonymously publishing your views?

No ☐Yes☐

Please tell us in which capacity you are completing this consultation:

Please select the capacity in which you’re completing this.

If you’re responding in a professional capacity, please specify your type of organisation:

Where do you work?

Section 2: Specific questions

1. Balance of the Code

Institutions are autonomous from government and our regulation is designed to take account of that. Ultimate responsibility for the proper stewardship of an institution rests with its Governing Body.

However, institutions in receipt of public funds must be held accountable for those funds.

In designing the Code, we have sought to design a regulatory framework which allows for proper accountability and autonomy without creating excessive regulation.

Do you agree that the code strikes an appropriate balance between institutional autonomy and regulation?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

Do you have any comments? If so, enter them here. (Please refer to specific examples or references if possible.)

1. Financial viability definition

Financial viability is a key aspect of the ‘organisation and management of financial affairs’, and its consideration is fundamental to the obligations of the 2015 Act.

It is important that all stakeholders hold a shared understanding of what we mean when we refer to ‘financial viability’. We have not sought to provide an exhaustive definition as there are many factors that influence financial viability and it would be impossible to be exhaustive in our definition.

Instead, we have linked financial viability to the concept of ‘going concern’, which we consider is a well-understood term not only in financial circles but in the wider public understanding; that is, that an institution has sufficient funds to meet its financial commitments as they fall due.

References to going concern within statutory accounts are usually made on the basis of the coming 12 months; that is, that the accounts are completed on the basis that those charged with governance believe the organisation to be a going concern for at least 12 months beyond the date of approving the accounts.

Whilst we have used the common understanding of ‘going concern’, we have applied this over the short to medium term. This allows for consistency with the timescale of financial forecasts, and importantly, this timeline allows us to form a view of viability over the length of educational programmes (such as a 3-year degree programme). We consider that stakeholders in the HE system would expect the regulator to consider viability over the term of a study programme.

Do you agree that the definition of financial viability should be consistent with 'going concern' over the short to medium term?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

Do you have any comments? If so, enter them here. (Please refer to specific examples or references if possible.)

1. Appointment of accountable officer

We have included the requirement for the Governing Body of each institution to designate an Accountable Officer. The Code defines an Accountable Officer as:

The officer accountable for the organisation and management of the institution’s financial affairs and for reporting to HEFCW on behalf of the institution’s governing body.

The new regulatory regime under the 2015 Act applies to all of an institution's funding, including that received as tuition fees. The 'accountable officer' is therefore accountable for compliance with the Code, which covers all 'public funding'.

The Accountable Officer is also the senior person within the organisation with the responsibility to meet with HEFCW at reasonable notice, and, if required, at regular intervals.

This arrangement mirrors the arrangement that HEFCW currently operates with Higher Education institutions in Wales, where the terms of the Memorandum of Assurance and Accountability require an Accountable Officer to be appointed to be accountable for any funding provided under that memorandum.

Do you agree that the governing body should appoint an officer to be accountable to HEFCW for compliance with the terms of the Code?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

Do you have any comments? If so, enter them here. (Please refer to specific examples or references if possible.)

1. Governance of financial affairs

The 2015 Act states that the Code should relate to ‘the organisation and management of financial affairs’[1].

We have included some governance requirements within the Code; but have restricted these to only those areas where we believe that they are intrinsically and inseparably linked to the sound organisation and management of financial affairs.

As recognised within the body of the Code, the governing body of an institution is collectively responsible and has ultimate responsibility that cannot be delegated for overseeing the institution’s activities, for determining its future direction, and fostering an environment in which the institution’s mission is achieved.

Governing bodies and senior management are the primary stakeholders served by assurance functions and risk management models and we believe that they are therefore the parties best positioned to provide oversight and help ensure that effective processes are reflected in the organisation’s risk and control processes.

Do you agree that the included requirements relating to governance are those that are necessary for the proper organisation and management of financial affairs?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

If you don’t agree, please provide reasons/comments.(Please refer to specific examples or references if possible.)

1. Borrowing permission

The 2015 Act states under S27 (2) (a) that the Code may make provision about “circumstances in which a regulated institution is to enter into a transaction of a class specified in the Code only with the consent of HEFCW.”

We have included within the Code the requirement that institutions obtain written approval from HEFCW before entering into financial commitments, when those commitments are over a certain threshold.

Information on the threshold’s method of calculation is outlined at Annex B in the Code.

We know from discussions with, and publications by, financial lenders and credit agencies that the regulatory framework currently operated by HEFCW under its 92 Act powers (which includes borrowing thresholds) helps to contribute positively towards lenders assurance[2]. Furthermore, bank covenants often include a requirement for funding council approval.

For those HEIs that are currently subject to HEFCW’s Memorandum of Assurance and Accountability, this requirement is similar to the existing borrowing requirements and the MAA requirements will be revised in order to ensure that they do not conflict with the Code. We therefore consider it should not be any additional burden for HEIs under the existing MAA to meet this requirement.

The adherence to borrowing thresholds may be new to other organisations, however, will only be relevant where the institution proposes to enter into significant new financial commitments.

We have not yet determined the threshold to be applied; we are awaiting more data from the next set of financial forecasts to be submitted to us July 2016 (under the new FEHE Statement of Recommended Practice)before doing so. We will, however, aim to set the threshold to be commensurate with the current threshold defined in our Memorandum of Assurance and Accountability, of 5x EBITDA insofar as we are able. We welcome your views on this approach.

The MAA was consulted on in Summer 2015; the responses to that consultation indicated that, where possible, there was support for maintaining parity with the English Higher Education sector in respect of borrowing threshold requirements.

We would like to know whether:

a)You consider the proposed approach of setting the threshold to be commensurate with 5x EBITDAto be appropriate, once more data is obtained; and

b)Whether you are content that we consider maintaining a similar borrowing threshold with England, provided that that threshold is acceptable to us?

We do not consider that this requirement infringes upon the autonomy of institutions and therefore on the classification of those providers currently defined as ‘Non-Profit Institutions Serving Households’. It is ultimately the sole responsibility of the Governing Body to ensure that increases in financial commitments don’t compromise future sustainability of the institution.

Do you agree that the proposed approach of setting the threshold to be commensurate with 5x EBITDA (once more data is obtained) is appropriate?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

Do you have any comments? If so, enter them here. (Please refer to specific examples or references if possible.)

Do you agree that we should consider maintaining parity with the borrowing threshold in England, provided that the threshold is acceptable to us?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

Do you have any comments? If so, enter them here. (Please refer to specific examples or references if possible.)

1. Acting in the student interest

We believe that the protection of the student interest lies at the heart of the Higher Education (Wales) Act 2015. It is in the interests of all stakeholders to provide, and to be seen to provide, a stable regulatory environment for students. The regulatory environment in England requires the Higher Education Funding Council for England (via the Operating Framework) to have an objective to protect the student interest.

We consider that this responsibility is conferred upon HEFCW via the Higher Education (Wales) Act 2015 and that the protection of the student interest should be a key consideration in considering the organisation and management of financial affairs within an institution.

Do you agree that HEFCW has a responsibility to act in the student interest in respect of financial requirements?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

Do you have any comments? If so, enter them here. (Please refer to specific examples or references if possible.)

1. Audit Code of Practice

The 2015 Act states that the Code may make provision about the accounting and audit arrangements of regulated institutions[3].

The Audit Code of Practice section of the Code is similar to the Audit Code of Practice within HEFCW’s current Memorandum of Assurance and Accountability.

Do you agree that the Audit Code of Practice is fit for purpose?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

Do you have any suggestions for areas to modify or improve, or anyother comments?If so, enter them here. (Please refer to specific examples or references if possible.)

1. Exercise of discretion in invoking the Statement of Intervention

The Code splits its provisions into two sets:

1. ‘must’ requirements which are specific legal requirements or requirements under the Code and which must be complied with; and
2. ‘should’ provisions which are not requirements, but which we consider to be good practice.

A failure to comply with a ‘must’ requirement would ordinarily result in HEFCW instigating the processes within the Statement of Intervention.

However, we recognise that there are circumstances where the ‘must’ provisions may fail to be met and where HEFCW considers that the effects of the failure, or likely failure, are not severe or that the institution’s proposed actions to remedy the failure are acceptable. In such cases, it may not be proportional to instigate the Statement of Intervention.

To this end, we have included a provision that HEFCW may exercise discretion in instigating the Statement of Intervention.

Do you agree that HEFCW should exercise discretion in respect of breaches of the Code, rather than automatically invoking the Statement of Intervention?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

Do you have any comments? If so, enter them here. (Please refer to specific examples or references if possible.)

1. Link between risk and our Statement of Intervention functions

The 2015 Act states that HEFCW must form a view as to whether an institution has, or is likely to fail to meet the requirements of the Code. As outlined within the Code, we therefore have assurance processes to inform our view of the ‘likeliness’ of such a failure occurring. The Code outlines our proposal to undertake risk assessment, to inform this view.

When HEFCW assesses an institution to be at ‘high risk’, HEFCW will engagewith the institutionin accordance with HEFCW’s Statement of Intervention. This forms the formal mechanism for instigating the processes within the Statement of Intervention.

In so doing, we have tried to keep the relationship between the Code and the Statement of Intervention clear and simple.

We define high risk as:

The institution has failed, or is likely to fail, to comply with a requirement imposed by the Code and the effect of this is to give rise to financial viability concerns over the short to medium term.

There are clearly circumstances in which we may need to intervene in accordance with our Statement of Intervention, but where the viability of the institution is not in question. For instance, repeated compliance failures by an institution, which in themselves are minor in impact, but which represent a continuing failure to engage in correct processes and imply a lack of appropriate control over the organisation and management of financial affairs. In these circumstances, repeated failure may also risk an institution’s fee plan being refused, which in itself becomes a viability concern.

Do you agree that the linkage between the risk assessment process and the Statement of Intervention is clear and appropriate?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

Do you have any comments? If so, enter them here. (Please refer to specific examples or references if possible.)

1. Regulatory requirements and good practice

Do you agree that the Code strikes an appropriate balance between ‘must’ and ‘should’ provisions?

Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree / Don’t know
☐ / ☐ / ☐ / ☐ / ☐ / ☐ /

If you don't agree, which provisions do you consider need modification (if not outlined in other answers) and why do you believe such modification(s) would allow for a more appropriate regulatory environment?

1. Other matters

Do you have any other comments?

Please enter any other comments you have.

Summary of consultation questions

Question 1:Do you agree that the code strikes an appropriate balance between institutional autonomy and regulation?

Question 2:Do you agree that the definition of financial viability should be consistent with 'going concern' over the short to medium term?

Question 3:Do you agree that the governing body should appoint an officer to be accountable to HEFCW for compliance with the terms of the Code?

Question 4:Do you agree that the included requirements relating to governance are those that are necessary for the proper organisation and management of financial affairs?

Question 5a:Do you agree that the proposed approach of setting the threshold to be commensurate with 5x EBITDA (once more data is obtained) is appropriate?

Question 5b:Do you agree that we should consider maintaining parity with the borrowing threshold in England, provided that the threshold is acceptable to us?

Question 6:Do you agree that HEFCW has a responsibility to act in the student interest in respect of financial requirements?

Question 7:Do you agree that the Audit Code of Practice is fit for purpose?

Question 8:Do you agree that HEFCW should exercise discretion in respect of breaches of the Code, rather than automatically invoking the Statement of Intervention?

Question 9:Do you agree that the linkage between the risk assessment process and the Statement of Intervention is clear and appropriate?

Question 10:Do you agree that the Code strikes an appropriate balance between ‘must’ and ‘should’ provisions?

Question 11:Do you have any other comments?

1

[1] Part 4 S(27)(1)

[2] For example, Moodys

[3] Part 4 S(27) (2)(b)