Transforming Community Services Agenda – what FTs need to know

The Revisions to the NHS Operating Framework 2010/11 published by the Department of Health on 21 June 2010 confirm the new Government's intention to progress the Transforming Community Services Agenda and cement the timeframe which has to be met.

Separation of the provider arm from the commissioning PCT must be achieved by April 2011. Where this transfer involves an NHS Foundation Trust it will be subject to Monitor's regulatory regime.

What is Monitor's involvement in TCS?

Monitor will ensure that the FT remains in compliance with its terms of authorisation after completion of the transfer. The scope of Monitor's involvement is determined by the size of the services to be acquired relative to the size of the FT. Monitor is not involved in approving the proposed transfer, but will consider its impact on the FT's financial and other risk ratings.

Where the acquired services are between 10-24% of the FT's income, assets or consideration to total FT capital, the transfer is classed as a material transaction.  Where the acquisition is 25% or greater than the FT's income, gross assets or capital it will be classed as a significant transaction. The distinction between the two categories impacts on the additional reporting requirements and also how Monitor uses the information provided to it to assess the FT's risk ratings post-transfer.

Even if the acquisition does not meet the thresholds for a Material Transaction or Significant Transaction, the FT is required to report the transfer to Monitor in accordance with the Compliance Framework 2010/11.

The FT must receive formal notification from Monitor that it has complied with the requirements of the Compliance Framework before entering into a legally binding agreement.

What does this mean for FT's acquiring PCT provider arms?

1.    Reporting requirements to Monitor

The FT Board must notify Monitor of the proposed transaction once a detailed review has been completed but before the FT is committed to the transaction. FTs may wish to notify Monitor of a potential transfer prior to commencing the detailed review.

With Material Transactions the Board of the FT is required to:

• Self certify that it is satisfied that it has carried out a range of activities, including:
• • Conducted appropriate financial and market due diligence;
  • Received appropriate external professional advice;
  • taken into account the best practice advice set out in the Risk
  • Evaluation for Investment Decisions by NHS Foundation Trusts;
  • Complied with any consultation requirements; and
  • Understood the relevant commercial risks.
• Self certify that the proposed transaction is compliant with the Principles and Rules of Co-Operation and Competition.

With Significant Transactions the Board is also required to:

if, upon evaluation of the FT post-transfer, Monitor's financial risk rating is lower than level 3 or its governance risk rating is below amber, the FT would not be expected to enter into the transaction without satisfying itself and Monitor that the risks identified can be mitigated.

2.    Review of the working capital facility

The FT will need to review and reassess its financial, governance and Working Capital Facility arrangements as the increased income generated post-transfer may impact upon the level of borrowing required. Any variation of the WCF will require Monitor's approval in line with the Prudential Borrowing Code and the Variation of the Terms of Authorisation: Guidance for NHS Foundation Trusts.

The FT may find that it is in a different bargaining position post-transfer, which may impact upon the terms and conditions it is able to negotiate in the WCF; including, but not limited, to the interest rates, profit margins and costs.

3.    Apply for authorisation to increase the prudential borrowing limit

If upon review the FT determines that it requires an amended WCF this is likely to impact upon its Prudential Borrowing Limit.  A variation of the PBL needs to be approved by Monitor in line with the PBC and Variation Guidance.

In approving the revised WCF and PBL, Monitor may require the FT to submit a revised financial model.

Consequences of failing to obtain authorisation for an increase in the PBL and WCF

A breach of the PBL or WCF is classed as a significant breach of the FT's Authorisation and can result in Monitor implementing its escalation procedure set out in the Compliance Framework. In these circumstances, Monitor may use its statutory powers to impose a series of remedial actions and a timeframe within which these must be completed. This leads to a number of adverse consequences including negative publicity, increased supervision and monitoring by Monitor and increased reporting burdens.

Timescales

FTs are under significant time pressures to initiate and complete negotiations with potential funders, comply with Monitor's reporting regime and obtain Monitor's sign off for any major transactions and for any variations to the WCF and/or PBL. These activities must be completed before the FT enters into a legally binding transfer agreement to acquire the PCT's provider arm; by April 2011. FTs must ensure that sufficient review time by Monitor is factored in to the overall timeline of the transfer.

How can Bevan Brittan help?

Our strategic understanding of the complexities of the health economy and policy is unrivalled. We advise over 50 FTs on a full range of legal issues, including estates, capital procurement, contracts, commercial and corporate matters, banking and finance. We have excellent working relationships with the major funders in the FT field, including Barclays, Lloyds TSB and Royal Bank of Scotland.

Ways in which we can help during the TCS transfer:

• Assist and advise on Monitor's reporting regime, the Compliance Framework and REID in relation to transactions;
• Facilitate relationships with major lenders in the FT market to open up negotiations for the WCF;
• Support the procurement of the WCF, assisting in decisions in relation to appointment of a preferred funder;
• Advise and seek to negotiate the terms of the WCF agreement and related financial documents;
• Assist and advise on the application to Monitor for a variation to the WCF and/or PBL to avoid breaching Authorisation; and
• Advise on all aspects of the TCS Programme and acquisition of PCT Provider Businesses.