New guidance for colleges on reclassification

The Education and Skills Funding Agency has published several short guides on some of the implications for colleges of public sector reclassification and to support the sector in meeting new requirements, particularly in relation to HM Treasury’s ‘Managing Public Money’ document.

Whilst the breakdown into short guides is welcome, there is little new information in them with many questions still unanswered. All of the topics covered are directly relevant to most colleges right now and they certainly will be in the months and years ahead.

The guides cover:

• senior pay controls for colleges
• write-offs and losses
• special payments, including severance, compensation and ex-gratia payments
• indemnities, guarantees and letters of comfort
• novel, contentious and repercussive transactions

In summary, these guides reiterate most of what we already knew from the initial flurry of documentation issued by Department for Education (DfE) on 29 November 2022 in response to the ONS’ decision to reclassify colleges. We have a little more clarity around senior pay controls and the process for applying for consent where that is needed (with some key deadlines looming). There is also a bit more narrative around the DfE’s expectations on what factors colleges should take into account when addressing issues such as severance payments and write-offs, some of which will require prior ESFA consent.

The guidance on novel, contentious and repercussive transactions is particularly brief and we can see that this is an area where there is work to be done, to help the ESFA better understand how this regime might be applied most appropriately to colleges. Where a transaction falls into that category, prior consent must be obtained.

One line in the guidance which could give rise to concern reads “if a transaction could reasonably be considered to be novel, contentious or repercussive, then it must be treated as such.” Given that there is no de minimis financial threshold, and the scope for differing views on this, we can anticipate that colleges will need to demonstrate robust, well documented processes and procedures if arriving at a conclusion that something is not novel, contentious or repercussive. This is an issue we are looking at closely with clients – both from an operational perspective and thinking about the impact this has on decision-making and governance.

In each of the areas covered by the guides there are still aspects which are yet to be clarified and which need to be worked through with live cases. Doing so in real time is difficult, when answers are needed more quickly than the ESFA may be able to provide them. There is a College Financial Handbook to follow which will contain more detail, but it is a good year away and some of these rules apply now.

There is no new information on borrowing restrictions, which came into force immediately upon reclassification. The challenges of this continue to be felt most keenly by some colleges, coupled with a system that does not yet seem ready to facilitate colleges’ financing requirements and a banking sector which has been sent the message from Government that there is unlikely to be significant new commercial borrowing by colleges. This is going to cause a range of issues to emerge for the sector and for colleges individually, for some time to come. 

We are currently working through scenarios with colleges across the country as the sector navigates the important operational and governance changes that reclassification brings. If you want to discuss how it is affecting your college or how we might create positive opportunities for the sector arising out of reclassification, please get in touch with Tom Morrison, Ciara Campfield or your usual Stone King contact.