Connected party transactions and conflicts of interest

In September the Education Funding Agency (EFA) issued the revised Academies Financial Handbook (AFH), which came into effect on 1 September 2014.  The AFH highlights the EFA's focus on good governance, conflicts of interest and connected party transactions.

Each member of an academy trust’s board of directors has a statutory duty to:

• avoid conflicts of interest;
• declare any interests in proposed transactions; and
• reject benefits from third parties.

When dealing with any potential conflict, academy trusts will have to consider not only the provisions of their articles of association but also the requirements of the AFH.  The provisions of the AFH are effectively incorporated into the academy trust's funding agreement with the Secretary of State.

For example, Articles 6.6 to 6.9 of the DfE model articles of association permit an academy trust to engage one of its directors to provide services, or to appoint someone already providing services to its board of directors, provided that certain procedures are followed.

However, sections 3.1 and 3.2 of the AFH set out additional requirements.  In particular, a connected party transaction may only be acceptable if:

• spending is for the purpose intended and there is probity in the use of public funds;
• spending decisions represent value for money and are justified as such;
• internal delegation levels exist and are applied within the academy trust;
• a competitive tendering policy is in place and applied; and
• relevant professional advice is obtained where appropriate e.g. external audit.

In such circumstances the academy trust must also consider the charging restrictions set out in the AFH:

• any goods or services provided by a connected party must be ‘at cost’ if the value exceeds £2,500 in the relevant financial year.  If the award of the contract will take the cumulative value of contracts awarded over £2,500, the element over £2,500 must be charged at no more than cost.  The rules are slightly more relaxed for legal or audit services.
• the supplier must provide a statement of assurance confirming that the charges do not exceed to the cost of the goods or services.
• the arrangement must be an open book agreement so that the supplier can demonstrate clearly, if requested, that the charges do not exceed the cost of supply.
• an academy trust must seek the EFA’s explicit prior approval for transactions with connected parties that are "novel" or "contentious" i.e. transactions which are outside of the academy trust’s normal activity or which might give rise to public criticism.

In addition, academy trusts are required to maintain a register of interests recording the business and pecuniary interests of the members, directors, local governing bodies as well as the academy’s senior leadership team.  The members' and directors' business and pecuniary interests must be published on the academy's website.

A breach of the AFH requirements could in principle result in an academy trust being issued with a ‘Financial Notice to Improve’.  Academy trusts need to ensure that rigorous processes are in place to identify actual and perceived conflicts of interests, and to manage them effectively.

For more information please contact Chris Hook or 0191 211 7929.