Foundation trusts cannot use bailouts to hide financial failings, regulator warns

A new clause inserted in the regulator’s Compliance Framework rulebook for 2012-13 states that Monitor can adjust an FT’s financial risk rating by “removing exceptional, one-off” income received during the year “where this materially distorts its underlying position”.

The flexibility could give the regulator the power to intervene sooner in financially weak trusts.

Monitor rates the financial risk exposure of foundation trusts from one to five based on a basket of measures including operating surpluses. If an FT’s rating drops below three, the regulator will consider “escalating” the trust - subjecting it to closer scrutiny, or directly intervening in its management.

Under the new clause, FTs will not be safe from escalation if the only thing keeping their risk rating above two is a one-off bailout, or an advance payment from their commissioners.

In a document published alongside the new rulebook, Monitor states that “by ‘normalising’ the income calculation, we can better reflect the underlying efficiency of a trust’s business and act earlier to address serious financial concerns”.

However, it adds that the “adjustment” will not be applied to all trusts’ accounts and be used at the regulator’s discretion. “As we are not able to capture the full extent of one-off funding given to trusts,” it states, “we will have to apply a level of subjectivity to assess whether the funding (when evident) is justified.”

It adds that “such an adjustment will be applied extremely rarely, and only in cases where removing the one-off income will confirm that a trust has problems with ongoing financial viability”.

Foundation Trust Network chief executive Sue Slipman said Monitor’s position could be problematic where a trust had received “transitional funding” for investments to ensure its longer-term sustainability. “I think our members would want us to argue that [this kind of funding] is allowable income for investment,” she said.

“The danger for Monitor is if it gets to be in the position of trying to second-guess the business plan,” she added. “Effectively these are commercial judgements about commissioning intentions. You can see all sorts of examples where that would be quite a difficult judgement [for the regulator] to make. We will be forced to probe Monitor on what it counts as evidence.”

A Monitor spokesman said the regulator had “reserved the power to consider ‘one off’ payments” against a trust’s operating surplus since 2005, and it had been included in the footnotes of “all our Compliance Frameworks since then”.

The 2012-13 Compliance Framework also changes the way the regulator tracks a trust’s cost of capital. In the past Monitor measured this by dividing operating profits by total capital employed. It will now track a ratio of operating profits after financing costs to total financing (debt, private finance initiatives and taxpayers’ investment).

James Wilson, managing director of Assista Consulting, said the change would go “a long way” towards helping “asset-light community trusts” seeking FT status to “present their figures in a more positive light”.