Guidance

College requirements for indemnities, guarantees and letters of comfort

Updated 12 April 2023

Applies to England

Purpose

1: This document is to help colleges understand:

• the concepts of indemnities, guarantees and letters of comfort
• when and how to seek approval from the Department for Education (DfE) for them.

2: It is one of a series of guides issued by the Education and Skills Funding Agency (ESFA) following the decision of the Office for National Statistics (ONS) in November 2022 to classify the English further education (FE) college sector to central government.

Status

3: This document explains requirements for colleges and their subsidiaries, which arise from their status as central government bodies, as well as providing guidance in respect of those requirements. The overall requirements for all central government bodies are set out in HM Treasury’s Managing Public Money (MPM). This publication seeks to explain those requirements in the context of the FE college sector.

4: The requirements set out in this publication will remain in force until such time as it is withdrawn or superseded.

Who is this publication for?

5: This guide is primarily for use by:

• college finance directors and accounting officers, and
• college governors as charity trustees

6: Colleges include further education colleges, sixth for colleges and designated institutions under the Further and Higher Education Act 1992. This guidance also covers their subsidiaries (i.e. references to “colleges” in this guide should be taken to mean “colleges and subsidiaries”).

7: College internal and external auditors may also find it helpful in planning their work.

Background

8: When ONS determined that English colleges were to be classified to the central government sector, this meant that colleges would be required to follow the overall financial control framework for all central government bodies, Managing Public Money. MPM provides a flexible framework of financial oversight, whereby the majority of financial decision-making is delegated to operational leadership in organisations. However, there are certain classes of transaction where additional controls apply. This includes indemnities, guarantees and letters of comfort.

9: Whilst MPM explains that public sector organisations may take on liabilities by:

• providing indemnities
• writing a letter or statement of comfort, and
• issuing specific guarantees

Such contingent liabilities mean that future expenditure may arise if certain conditions are met, or certain events happen. For this reason, DfE approval may be required in certain cases.

Indemnities

10: An indemnity is a contractual agreement of one party (indemnifier) to accept the risk of damage or loss suffered by another party and to compensate the other party (indemnity holder), due to the actions of the indemnifier or any other party. Indemnities are included in agreements usually to offer protection to one party in agreeing to the contract, if one party cannot fulfil their contractual obligations.

11: Indemnities are usually found within contractual agreements that organisations sign on a routine basis; they arise in the normal course of business – for example unavoidable liabilities occurring in the purchase or supply of goods and services in the discharge of the organisation’s business.

12: In a college setting, some examples of what these contracts may look like include:

• a catering contract that supplies catering services to students and staff
• a data-sharing agreement that ensures information transfers between organisations
• a utilities contract that supplies electricity / water / gas to the college’s buildings
• a commercial IT contract which supports the college to run business as usual
• a land transaction contract for the buying or transfer of land to a college

13: Colleges should assess contracts that contain indemnities and understand whether they are within the normal course of business. They may need to obtain their own independent legal advice before entering into them. The college should also maintain a contract register, including known indemnity clauses with the necessary assessments. Governors should provide the appropriate oversight and challenge to the college to ensure the appropriate assessments and records management are maintained.

Letters of comfort

14: MPM explains that letters of comfort, however vague, give rise to moral and sometimes legal obligations. They should therefore be treated in the same way as any other proposal, which may give / gives rise to a liability. Great care should be taken with proposals to offer general statements of awareness of a third party’s position, or oral statements with equivalent effect. Creditors could easily take these to mean more than intended and threats of legal action could result.

Guarantees

15: A guarantee is another type of contingent liability. Typically, it is a commitment provided by a guarantor to take responsibility for the debt or performance obligations of another party in the case of that party defaulting on its obligations.

16: You can read more about indemnities, letters of comfort and guarantees in annex 5.4 of Managing Public Money.

DfE approval process

17: Colleges have delegated authority to enter into indemnities, letters of comfort and guarantees up to certain individual and cumulative limits.

18: Indemnities arising in the normal course of business do not require DfE approval. This is likely to address the majority of commercial contracts entered into by colleges. Colleges should follow their normal internal approval procedures.

19: DfE consent is required for indemnities not arising in the normal course of business, for letters of comfort and for guarantees where:

• the case exceeds 1% of annual income or £45k individually (whichever is smaller); or
• the case takes the college’s cumulative total of such contingent liabilities for the academic year beyond 5% of annual income or £250k (whichever is the smaller).

20: For these purposes, income will be the budgeted total income for the current year, as approved by the college corporation’s board.

21: Examples of approval levels are set out in the annex to this guide.

22: Colleges should use the DfE college approvals form to request permission for any item beyond their delegated limits. The proposed transaction must not be entered into until the college has received documented permission from DfE.

Annex: examples of approval thresholds for indemnities not arising in the normal course of business^{[footnote 1]}, for letters of comfort and for guarantees

Illustrative standing data

		Approval required as in excess of individual limit?	Approval required as in excess of annual limit?
College’s annual income	£1,000,000	-	-
1% of annual income	£10,000	-	-
5% of annual income	£50,000	-	-
Cumulative value of college’s write-offs in financial year to date (before scenarios below)	£35,000	-	-

Illustrative scenarios

Example	Amount	Approval required as in excess of individual limit?	Approval required as in excess of annual limit?
Case 1: Value of proposed indemnity, letter of comfort or guarantee	£1,000	No. Individual item doesn’t exceed £45k or 1% of income	No. Individual item doesn’t take cumulative total beyond £250k or 5% of income
Case 2: Value	£10,000	No. Individual item doesn’t exceed £45k or 1% of income	No. Individual item doesn’t take cumulative total beyond £250k or 5% of income
Case 3: Value	£15,000	Yes. Individual item is under £45k but exceeds 1% of income	No. Individual item doesn’t take cumulative total beyond £250k or 5% of income
#Case 4: Value	£40,000	Yes. Individual item is under £45k but exceeds 1% of income	Yes. Individual item doesn’t take cumulative total beyond £250k but does take them beyond 5% of income

1. Indemnities arising in the normal course of business do not require DfE approval. ↩