Further Education Bodies (Insolvency) Regulations 2018

Lord Storey Excerpts

Tuesday 30th October 2018 Grand Committee

[Lord Jones (Lab)]

My Lords, I thank the Minister for his cogent introduction and my noble friend for his eloquent steer in a debate such as this. My remarks will be very brief. The regulations refer to Section 124A of the Insolvency Act, which is headed “Petition for winding up on grounds of public interest”. Will the Minister expand on how he perceives the public interest in the context of this sphere of education? The matter is complicated, and obviously the provision is necessary, but can he give a recent instance of where a specific further education establishment has been perceived to be insolvent? Has that happened? Does he know of a sixth-form college that has been wound up? Has that happened?

Paragraph 7 of the Explanatory Memorandum on the policy background is helpful. Does the Minister know whether exceptional financial support has been given to one of these institutions? Like others in this debate, I think the further education sector is crucial to the future of Britain’s economy. In particular, FE colleges might help us save what remains of our manufacturing base.

[Lord Storey (LD)]

My Lords, I preface my remarks by saying that we value further education. It will go through a renaissance and the need for vocational courses, skills development and apprenticeships will help it to blossom. This instrument is technical but it is absolutely right that we should agree it.

However, I have a number of concerns. We have had the area reviews, of course, but why do we allow a further education or sixth-form college to become insolvent? One would think that further down the line we would take strong and robust action to ensure that that does not happen. If a college closes down the effect on the local community and economy can be devastating. If we allowed a further education college in, say, Northumberland to close down because we had not kept our finger on the pulse, imagine the effect that that would have in a predominantly rural area.

It is important that we understand the mechanisms for ensuring that this does not happen. I see in the document that 37 further education colleges published notices to improve financial health. What do the Government do to make sure that that support is given?

I agree with the comments of the noble Lord, Lord Watson, about cuts, but it is not always about cuts; it is about management as well. An institution might not have all the resources it needs but it might be so well managed that it thrives nevertheless. It is about the management of the college as well as its finances.

I have three further questions. First, the Minister said that insolvency will not always mean closure. Will he expand on that and say what other actions can be taken? Secondly, do these regulations apply to university technical colleges? Thirdly, if we want to create the level playing that the Minister talked about, should we not ensure that all sixth-form colleges are treated equally and that those that have to pay VAT will no longer have to do so? Will he perhaps explain why sixth-form colleges that are not in a multi-academy trust have to pay VAT?

[Lord Agnew of Oulton]

My Lords, I thank noble Lords for the interesting points they have raised. There have also been a number of questions which I will certainly try to address.

I say to the noble Lord, Lord Watson, that we are adamant that this provision is for exceptional circumstances. I made that clear in my opening comments. In answer to noble Lords who raised questions about our commitment to this sector, it might be worth summarising the extent of that commitment. In the current academic year, 2018-2019, we expect to spend some £7 billion, which includes apprenticeships. That gives a sense of the proportion of our public spending that we are putting into this age group.

I can reassure all noble Lords that this instrument is designed as an exceptional mechanism. The main reason for it is that under traditional insolvency arrangements, the lenders take control of the process. The provisions in these regulations make sure that learners are given more priority. That is the overarching principle of why this is being done.

On the specific question that the noble Lord, Lord Watson, asked about how the various bodies involved in the sector would interact with one another, we are still developing intervention systems so that we can respond effectively to the early signals of poor financial health to focus on preventing colleges from getting into positions of insolvency. This allows the FE commissioner and his team to go into colleges at an early stage, work with principals and governors and share best practice on better financial management to help college boards develop sustainable plans for financial resilience. College boards may need to make tough decisions to make to become more resilient. We will rely on their engaging with us early on, as soon as they know there is a problem. That goes somewhat to the point that the noble Lord, Lord Storey, made about the quality of management and governance. That is very much what we are pushing for, to ensure that when the canary in the coalmine sings, it is listened to and early action is taken.

--- Later in debate ---

[Lord Agnew of Oulton (Con)]

I will certainly take the noble Baroness’s views back to the department and reiterate them; I understand exactly what she is staying. She also raised a question about providing guidance to governors. We are committed to providing clear guidance, particularly on their duties and liabilities under insolvency law. The general College Governance guide, last published in 2014, will be updated. Both sets of guidance have been drafted and are being developed with the stakeholders—the Insolvency Service, the Association of Colleges and the Sixth Form Colleges Association—ready for publication in, we hope, the next few weeks.

The noble Lord, Lord Jones, asked whether I have any specific examples of colleges that have become insolvent. The short answer is no, as they have so far resolved their issues. In 2016 we created the restructuring facility, a fund from which some £330 million has been drawn across the sector. That has been used specifically to help them carry out the restructurings and some of the mergers to which other noble Lords referred, so there has been a period of consolidation over the last two years.

The noble Lord also asked about sixth-form colleges. There is a provision—this also addresses the point made by the noble Baroness, Lady Garden—for sixth-form colleges to convert to academy status. If they do that, they get the benefit of VAT recovery. The question was: why cannot everybody do that? The reason is that it is a complicated process. It is an option that we have offered to sixth-form colleges but not all of them have taken it up.

[Lord Storey (LD)]

There are all sorts of reasons. If a sixth-form college chooses not to become an academy or part of a multi-academy trust, it is penalised by having to pay VAT; but if it chooses to go down that route, it gets the reward of not having to pay VAT. Is that what the Minister is saying?

[Lord Agnew of Oulton]

That is, in essence, correct. However, one of the advantages of the FE sector is that colleges are allowed to borrow money commercially. If that is a route they want to take or have taken, that can be a barrier to conversion to academy status.

The noble Baroness, Lady Garden, asked about the role of private providers in subcontracting. These regulations are specifically designed simply for the further education sector, not for independent subcontractors. If a further education college were to become insolvent, a subcontractor could become one of the creditors.

I hope I have answered all the questions that have been raised.

[Lord Storey]

There was the question of university technical colleges.

[Lord Agnew of Oulton]

These regulations do not apply to university technical colleges. A UTC is framed under the academies legislation and has a funding agreement in the same way as an academy has, but UTCs are a separate legal entity.

As I have outlined, these regulations make necessary modifications to insolvency law so that it effectively applies to FE bodies and can bring the further education insolvency regime into effect. Cases of insolvency are rare and will continue to be so, but we cannot afford to be complacent. It is essential that this legislation is put in place for the FE sector to provide legal certainty and, most importantly, to ensure that learners are protected in the event of financial failure.

Motion agreed.