In our briefing of 14 March we outlined the changes to be made to the governance of colleges by the Education Act 2011. To see the previous briefing click here. This briefing examines the changes which took effect on 1 April when the relevant provisions of the 2011 Act were brought into force. It also notes those aspects of the government’s reform agenda for colleges which are still outstanding.

Classification of Colleges

On 21 February 2012 ONS notified HM Treasury that in the light of the Education Act 2011 changes colleges would be reclassified to the private sector from April 2012 when the relevant provisions of the Education Act 2011 would come into force. It was also made clear that the re-classification was subject to the financial memoranda with the funding bodies being revised appropriately. As discussed below, the SFA has issued a revised financial memorandum. This appears to have satisfied ONS.

The NAO was expected to announce over the summer whether it would follow the ONS’s re-classification and remove the qualification on the SFA’s accounts until later this summer. No announcement has yet been made. However, it is clear that the government envisage colleges as being part of the not for profit/charitable part of the private sector rather than the public sector. Nevertheless, so long as a college receives more than 50% of its funding from public sources it will remain bound by the public procurement rules. Where a college is a statutory corporation and/or receives substantial amounts of public funding it will remain subject to the principles of public administrative law enforced by means of applications for judicial review. FE college corporations are specifically covered by the duty to promote equality in the Equality Act 2010 and by the Freedom of Information Act 2000.

Instrument and Articles of Government

The Modification Order amending FE colleges’ instruments and articles took effect on 31 March 2012. However, the Order as made was different from the draft circulated to colleges in one respect. A number of colleges commented that the deletion of the whole of Clause 11 - members not to hold interests in matters relating to the institution – would send the wrong messages to corporation members. Accordingly the Order as made only deleted clause 11(1) (no member to hold an interest in property held or used by the institution without the consent of the Secretary of State).

When sending colleges copies of the Modification Order as made, BIS also circulated a version of the instrument and articles which was described as “illustrative” and a “sample”. It was not intended to be a legally definitive account of colleges’ constitutional documents but rather just to provide colleges with help in understanding the impact of the 2011 Act on their existing instrument and articles before a corporation passed any resolution to amend them. The definitive statement of what colleges’ instruments and articles must contain is Schedule 4 of the Further and Higher Education Act 1992 as substituted by the 2011 Act.

Dissolution of Corporations

If corporations wish to merge, or if a corporation wishes to change legal form (e.g. to a company) it will be necessary for a college corporation to be dissolved and its assets and liabilities transferred to the continuing body. Under the Education Act 2011 changes dissolution can now only be achieved through a resolution of the corporation concerned.  However, the corporation will need to comply with two sets of regulations, one dealing with the consultation and other procedural requirements and the other setting out the bodies which can accept the assets and liabilities of the dissolved corporation. In our last briefing we described the two sets of draft regulations which BIS had published. The regulations came into force on 21 May 2012.

The regulations as made are slightly different from the drafts. The transitional provisions to take account of consultation undertaken by SFA (eg as part of a merger) under the current regulations were deleted from the regulation on publication of proposals and instead appeared in the third order commencing the Education Act. The regulations listing the bodies which can receive a dissolving college’s assets now include educational companies. Any such company which is not a charity would have to hold such assets on trust for charitable educational purposes.

Financial Memorandum

The SFA has issued a new financial memorandum which replaced the LSC 2006 memorandum from 1 April 2012. Most of the changes reflect the reduction in central controls resulting from the Education Act 2011 changes. However, the memorandum continues to stress the corporation’s responsibility for the financial viability of the college and to ensure that there is an accounting officer in place at all times. There continues to be a duty to notify SFA. This now applies where there is a “risk to solvency and viability”.

The memorandum continues to require corporations to have an audit committee and to report significant cases of fraud to SFA.

The memorandum continues to set down rules about the amount of payments that corporations can make to employees on termination of employment. The wording could be interpreted as being more restrictive than the previous wording, although this appears not to have been intended. We had expected SFA to issue a revised Financial Memorandum in August but this appears to have been delayed.

Joint Audit Code of Practice

We had expected the complete Code to have been issued by SFA and EFA in August but we understand that there has been delay and no revised expected publication date has been issued.

What should FE colleges do next?

From 1 April colleges are able to (but will not have to) exercise the new freedoms. Their instruments and articles have been automatically changed from 1 April 2012 to incorporate the changes in the Modification Orders.

It should be noted that the “illustrative” document issued by BIS does not delete material which is now obsolete in the light of the recent legal changes. For example, most corporations will not have members appointed by the SFA and no further such members can now be appointed. Most corporations can therefore delete reference to such members from their instruments, but they will need formally to resolve to make this change. Accordingly, we would suggest that even if your corporation does not intend to make substantive changes to its instrument and articles it should undertake a housekeeping exercise to ensure that its instrument and articles are legally up to date and reflect its particular position. Some corporations will wish to go further and undertake a more fundamental review of their processes and the extent to which amending the instrument and articles would help to improve them.