Section 3: General duty of regulator

54.     This section requires the Independent Regulator to exercise its functions in a manner that is consistent with the Secretary of State's general duties under the 1977 Act. Amongst other things, the Secretary of State must promote and provide a comprehensive health service in England and provide clinical facilities to universities with medical or dental schools. The Secretary of State must also secure that NHS goods and services are provided free of charge.

Authorisation

Section 4: Applications by NHS trusts

55.     This section allows NHS trusts to make applications to become NHS foundation trusts. They may only do so with the support of the Secretary of State. The section sets out the minimum information which must be included in an application by an NHS trust for NHS foundation trust status. In addition, once an application to be an NHS foundation trust has been made, subsection (4) gives an NHS trust that has made an application the shadow powers necessary to prepare for authorisation to be an NHS foundation trust.

Section 5: Other applications

56.     This section allows persons other than NHS trusts to apply to set up an NHS foundation trust. They may only do so with the support of the Secretary of State. This allows organisations that are not currently part of the NHS such as charities and voluntary sector organisations to become involved in the establishment of a new NHS foundation trust.

57.     Subsection (2) sets out the minimum information which must be included in such an application. In conjunction with this, subsection (3) imposes a test which requires the Independent Regulator to consider certain matters before an application made under this section may proceed, and a certificate of incorporation be issued. Once such a certificate is issued, the applicants are incorporated as a public benefit corporation and are given the shadow powers necessary to prepare for authorisation to be an NHS foundation trust.

Section 6: Authorisation of NHS foundation trusts

58.     This section provides the Independent Regulator with the power to authorise applicants under sections 4 or 5, whom the Independent Regulator is satisfied have met the necessary criteria set out in subsection (2), to be NHS foundation trusts. The criteria are that the constitution and governance arrangements are in accordance with Schedule 1, that the applicant has taken steps to secure that the membership of its public and (if it has one) patients' constituencies will be representative of those eligible for such membership, that necessary steps to prepare for NHS foundation trust status have been taken, that the applicant will be able to provide the goods and services which it will be required to provide, and that any other requirements the Independent Regulator considers appropriate are met. Under subsection (3), in deciding whether an applicant will be able to provide the goods and services required under its authorisation, the Independent Regulator must consider any Commission for Healthcare Audit and Inspection (CHAI) report or recommendation relating to the applicant, and must also consider the applicant's financial position.

59.     Subsection (5) sets out that the Independent Regulator may not authorise an applicant as an NHS foundation trust unless satisfied that the applicant has sought the views of specified persons. The specified persons are: individuals who live in the applicant's proposed public and patient constituencies; the local authorities who it is proposed will appoint a member of the board of governors; and, if the applicant is an NHS trust, its staff and its Patients' Forum.

60.     Under subsection (5)(e) the Secretary of State may make regulations setting out additional consultation requirements. Under subsection (6), an authorisation may not be granted unless the Independent Regulator is satisfied that the applicant has complied with any regulations on consultation.

Section 7: Effect of authorisation

61.     Section 7 sets out the legal effect of an authorisation to be an NHS foundation trust. Under the section, where authorisation is granted to an NHS trust it ceases to be an NHS trust and becomes an NHS foundation trust. Where authorisation is granted to a public benefit corporation it becomes an NHS foundation trust.

62.     Subsection (5) provides that the property, rights and liabilities of applicants continue with the NHS foundation trust.

63.     Subsection (7) provides that, like NHS trusts, NHS foundation trusts are not Crown bodies: see paragraph 18 of Schedule 2 to the National Health Service and Community Care Act 1990 ("the 1990 Act").

Section 8: Amendments of constitution

64.     This section sets out that an NHS foundation trust's constitution may only be amended with the Independent Regulator's consent, so that the Independent Regulator can ensure any alterations are appropriate.

Section 9: Variation of authorisation

65.     This section allows the Independent Regulator to vary an NHS foundation trust's terms of authorisation. In deciding whether to vary an authorisation, the Independent Regulator must take into account any report or recommendation by an overview and scrutiny committee of a local authority made pursuant to the Local Government Act 2000, or by the Commission for Patient and Public Involvement in Health.

Section 10: Register of NHS foundation trusts

66.     Subsections (1) to (3) require the Independent Regulator to keep a register of NHS foundation trusts, and set out the information that the register must contain.

67.     Subsections (4) and (5) provide that the register must be available to the public for inspection, and that copies or extracts from the register must be available for a reasonable charge.

Financial matters

Section 11: Power of Secretary of State to give financial assistance

68.     This section provides for the Secretary of State to give loans, public dividend capital, grants or other payments to NHS foundation trusts.

69.     Subsection (3) provides the necessary statutory cover for the Secretary of State to guarantee payments due under Private Finance Initiative (PFI) agreements entered into by NHS foundation trusts. Such agreements are currently entered into by NHS trusts. They are certified as "externally financed development agreements" within the meaning of the National Health Service (Private Finance) Act 1997. The section envisages that these certification arrangements will continue.

Section 12: Prudential borrowing code

70.     This section provides for the Independent Regulator to set a code according to which the total borrowing limit of an NHS foundation trust will be determined. The code, and any revisions to it, must be laid before Parliament by the Independent Regulator.

71.     The section requires that, in making and revising the code, the Independent Regulator must have regard to commercial best practice for determining the amount of loans to not-for-profit sector organisations. This would include taking into account the current and future ability of NHS foundation trusts to service debt. In addition, before making the code, the Independent Regulator must consult interested parties including the Secretary of State, NHS foundation trusts and any other persons the Independent Regulator considers appropriate. The Independent Regulator must also consult interested parties before revising the code.

Section 13: Public dividend capital

72.     Under section 10 of the 1990 Act, each NHS trust is given an originating capital representing the excess of its assets over its liabilities when it is established. This originating capital is "public dividend capital" and the NHS trust must pay dividends on it at a set rate. It constitutes an asset of the Consolidated Fund.

73.     Subsection (1) sets out that the public dividend capital of an NHS trust applicant immediately before authorisation is granted continues as public dividend capital under the same conditions for the NHS foundation trust. Under subsection (2) the capital remains an asset of the Consolidated Fund.

74.     Subsection (3) provides for the Secretary of State, with the consent of Treasury, to decide the terms on which any public dividend capital of an NHS foundation trust is issued. Under subsection (4) the dividend to be paid by an NHS foundation trust is the same as that payable by NHS trusts in England under section 9(7) of the 1990 Act.

75.     Subsection (5) requires the Secretary of State to consult the Independent Regulator before deciding the terms on which any public dividend capital of an NHS foundation trust is to be issued.

76.     Subsection (6) requires that any repayment of public dividend capital made to the Secretary of State must be paid into the Consolidated Fund, as it is for NHS trusts.

Functions

Section 14: Authorised services

77.     This section sets out the powers and functions of the Independent Regulator when authorising an NHS foundation trust to provide goods and services.

78.     Under subsection (1) an authorisation must authorise an NHS foundation trust to provide goods and services for purposes related to the provision of health care. But subsection (2) provides that the authorisation must ensure that the principal purpose of the NHS foundation trust is the provision of goods and services for "the health service in England", which, by virtue of section 40 (the interpretation provision to Part 1) means the National Health Service provided by the Secretary of State pursuant to the 1977 Act.

79.     Subsection (3) gives NHS foundation trusts powers to enter into other, non-health care related activities for the purposes of generating income to be used for the health service in England. Such activities may be subject to any restrictions set out in the authorisation.

80.     Paragraph 85(a) of Schedule 4 gives NHS foundation trusts the power to make accommodation or services or both available for patients who give undertakings to pay such charges as the trust may determine. The power is conferred in the same terms as it is conferred upon NHS trusts.

81.     Subsection (4) allows the Independent Regulator, as part of an authorisation, to require an NHS foundation trust to provide particular NHS services. By exercising this power, the Independent Regulator can ensure that NHS foundation trusts are obliged to continue to provide certain goods and services to the NHS. Subsection (6) provides that an authorisation must authorise an NHS foundation trust to carry out health care research and to make facilities and staff available for education, training and research carried on by others. An authorisation may also require such services. Subsection (7) sets out the factors the Independent Regulator is to consider in deciding whether to require provision of particular services by an NHS foundation trust; and subsection (8) sets out the terms in which such a requirement may be framed.

Section 15: Private health care

82.     This section gives the Independent Regulator power to restrict any goods or services provided by an NHS foundation trust that are not provided for the purposes of the health service in England.

83.     Subsection (2) obliges the Independent Regulator to exercise this power to impose a cap on the total level of income derived from the provision of services to private patients, if the NHS foundation trust was an NHS trust. In the case of an NHS foundation trust that was an NHS trust in the financial year ending 31 March 2003, the cap must restrict the NHS foundation trust to the proportion of total income received from private patients in that year. For NHS foundation trusts that were not an NHS trust throughout this period, the cap must restrict the NHS foundation trust to the proportion of total income received from private patients in its first full financial year as an NHS trust.

Section 16: Protection of property

84.     This section provides a 'lock' on any assets of an NHS foundation trust that are needed for the provision of goods or services required under its authorisation.

85.     The section allows the Independent Regulator to designate property as "protected" if it considers that the property is needed for the provision of: goods or services that the NHS foundation trust must provide to the NHS in England; research the trust is required to carry out, or staff and facilities that the trust is required to make available for the purposes of education, training and research under its authorisation.

86.     If property is designated as protected in this way, an NHS foundation trust may not dispose of it without the Independent Regulator's approval.

Section 17: Financial powers

87.     This section gives NHS foundation trusts powers to borrow money, subject to the prudential borrowing limit calculated according to the code set under section 12.

88.     Subsections (4) and (5) give NHS foundation trusts financial and investment powers for the purposes of their functions, including powers to invest money, form subsidiaries and enter into joint ventures.

89.     In addition, subsection (6) allows NHS foundation trusts to give financial assistance to anyone in connection with their functions. The powers are however, potentially subject to any terms of the authorisation set by the Independent Regulator.

Section 18: General powers

90.     This section gives an NHS foundation trust general powers to do anything it needs to in relation to its functions. In particular, subsection (2) sets out that this includes acquiring and disposing of property, entering into contracts, accepting gifts and employing staff.

Section 19: Information

91.     This section sets out requirements for NHS foundation trusts and other health service bodies to provide information in certain circumstances.

92.     Under subsection (1), both the Secretary of State and the Independent Regulator are given the power to specify information which an NHS foundation trust is required to disclose. In each case, the provision of the information is included as a term of the NHS foundation trust's authorisation.

93.     Subsection (2) gives the Independent Regulator a power to require other health service bodies - defined in section 40 as being Strategic Health Authorities, Special Health Authorities, NHS trusts, Primary Care Trusts and NHS foundation trusts - to provide any information the Independent Regulator requires for the purposes of its functions.

Section 20: Entry and inspection of premises

94.     This section provides for the Independent Regulator to include right of entry and inspection of premises as a term of authorisation for NHS foundation trusts.

Section 21: Fees

95.     This section allows the Independent Regulator to charge NHS foundation trusts a reasonable annual fee as a term of their authorisation.

Section 22: Trust funds and trustees

96.     This section provides for the Secretary of State to appoint trustees for an NHS foundation trust to manage charitable assets on its behalf. The arrangements are analogous to those set out under the 1990 Act for NHS trusts.

97.     Subsection (2)(a) allows for the Secretary of State to make provision as to the persons by whom trustees are to be appointed. It is anticipated that the appointment of trustees will be delegated to the NHS Appointments Commission, which is a Special Health Authority established under the 1977 Act.

98.     Subsection (3) allows the Secretary of State to transfer property from an NHS foundation trust to the trustees of the NHS foundation trust where trustees have been appointed under this section.

99.     Subsection (4) provides that trustees of an NHS trust that becomes an NHS foundation trust are to be treated as though they were appointed under this section.

Failure

Section 23: Failing NHS foundation trusts

100.     This section gives the Independent Regulator broad powers where an NHS foundation trust is breaching or has breached obligations under an Act or its authorisation. Under the section, the Independent Regulator may issue a warning notice, and may also require Directors or the Board of Governors to act, or to cease acting, in a particular way. The Independent Regulator also has the power to remove or suspend any or all of the directors and members of the Board of Governors, and appoint directors to act in the interim period.

Section 24: Voluntary arrangements

101.     This section gives the Independent Regulator powers to intervene in the operation of an NHS foundation trust in cases of financial difficulty.

102.     Under this section, the Independent Regulator has powers to require an NHS foundation trust's directors to make a proposal for a voluntary arrangement with its creditors. In addition, the Independent Regulator also has the power to require an NHS foundation trust's directors to obtain a moratorium on its business prior to the approval of a voluntary arrangement.

103.     Provisions to require the directors of a company to reach a voluntary arrangement with the company's creditors, and also to obtain a moratorium over its business, are set out in detail in Part 1 of the Insolvency Act 1986. Subsection (2) gives the Secretary of State the powers to apply Part 1 of the Insolvency Act 1986, including related provisions of that Act, with modifications to NHS foundation trusts.

Section 25: Dissolution etc.

104.     This section gives the Secretary of State the power in certain specified circumstances to dissolve an NHS foundation trust by order. The power may be exercised where an NHS foundation trust fails to comply with a notice under sections 23 or 24, or where an NHS foundation trust fails to implement a voluntary arrangement under section 24, and where the Independent Regulator considers that, despite the exercise of its powers under either of those sections, the goods and services of the NHS foundation trust remain at risk. Before an NHS foundation trust is dissolved, the Independent Regulator must consult those individuals specified by the Secretary of State. This provision is intended as a safeguard on the use of the power. Where an NHS foundation trust is dissolved under this section, the Secretary of State may transfer any of its property, rights and liabilities to the persons listed in subsection (3). The transfer is made by order.

105.     Subsection (4) makes provision for Schedule 3 which sets out the legal effect of any transfer of employees of a dissolved NHS foundation trust. Under the Schedule, the contract of any employee that is transferred under section 25(3) is not terminated. Rather, it transfers to the transferee as if it were originally made between the employee and the transferee. The employee is however, given the right to object to such a transfer. Where an employee objects in this way, his contract of employment is terminated.

106.     Subsection (6) gives the Secretary of State the powers to apply Part 4 of the Insolvency Act 1986, which relates to the winding up of companies, with modifications to the dissolution of NHS foundation trusts.

107.     Subsection (7) allows the Secretary of State to exercise his powers under this section where the Independent Regulator refuses to give an authorisation to a public benefit corporation.

Section 26: Sections 24 and 25: supplementary

108.     This section makes further provision about modification of the Insolvency Act 1986 under section 24, and the transfer of property, rights and liabilities under section 25(3).

109.     Subsection (3) provides that an order made under section 25(3) must be exercised to secure the provision of essential NHS goods and services.

110.     Subsection (4) requires the power in section 25(3) to be exercised in a way that does not result in a net loss of value to the trust. If necessary, this can be achieved through the use of the powers in section 11, which allow the Secretary to give financial assistance to NHS foundation trusts. Subsection 4 provides for regulations to set out how to determine whether a transfer would result in a net loss of value.

Mergers

Section 27: Mergers

111.     This section provides a mechanism for mergers between two NHS foundation trusts or between an NHS foundation trust and an NHS trust.

112.     Under subsection (1) an NHS foundation trust and another NHS foundation trust, or an NHS foundation trust and an NHS trust, may make a joint application to the regulator for authorisation as a new NHS foundation trust. Subsection (2)(a) provides that, as for new NHS foundation trusts, if the application involves an NHS trust, the application must be supported by the Secretary of State; and subsection (2)(b)-(d) sets out the matters that must form part of such an application.

113.     Subsection (4) allows the Independent Regulator to issue a certificate incorporating the directors of the applicants as a public benefit corporation, and to authorise the corporation to become an NHS foundation trust, if the Independent Regulator is satisfied that the criteria set out in subsection (5) have been met. The criteria are that the constitution and governance arrangements are in accordance with Schedule 1, that the actual membership of the applicant's public constituency (and, if there is one, of its patients' constituency) will be representative of those eligible for such membership, that the new NHS foundation trust will be able to provide the goods and services which it will be required to provide, and that any other requirements the Independent Regulator considers appropriate are met.

114.     Subsection (8) sets out that the Independent Regulator may not issue an authorisation unless satisfied that the applicant has sought the views of specified persons.

115.     Under subsection (5)(f), the Secretary of State may make regulations setting out additional consultation requirements. Under subsection (7), an authorisation may not be granted unless the Independent Regulator is satisfied that the applicant has complied with any such regulations.

Section 28: Section 27: supplementary

116.     This section provides for the Secretary of State to make orders dissolving the applicants, and transferring their property, rights, liabilities and staff to the new NHS foundation trust authorised under section 27.

Co-operation

Section 29: Co-operation between NHS bodies

117.     This section amends section 26 of the Health Act 1999. This amendment requires NHS foundation trusts to co-operate with other NHS bodies in exercising their functions. In turn, other NHS bodies must also co-operate with NHS foundation trusts.

Patient and public involvement

Section 30: Public involvement and consultation

118.     This section amends section 11(2) of the Health and Social Care Act 2001. This amendment provides that, when planning service provision and considering service change, NHS foundation trusts must involve and consult patients and the public.

Section 31: Patients' Forums

119.     Subsection (2) amends section 15 of the National Health Service Reform and Health Care Professions Act 2002 ("the 2002 Act"). This amendment will require a Patients' Forum to be established for every NHS foundation trust.

120.     Subsections (3)-(5) make consequential amendments to Part 1 of the 2002 Act so that the provisions relating to public and patient involvement in health apply to NHS foundation trusts in a consistent way. The subsections include an amendment to section 17(1) of the 2002 Act, which provides for the Secretary of State to make regulations requiring NHS foundation trusts to allow members of a Patients' Forum authorised to do so under the regulations to enter and inspect the premises of NHS foundation trusts. There is also an amendment to section 18(2) of the 2002 Act, which provides that where a Patients' Forum prepares an annual report about activities that relate to an NHS foundation trust, it must send a copy to the Independent Regulator.

Section 32: Commission for Patient and Public Involvement in Health

121.     This section amends section 20 of the 2002 Act. The amendments enable the Commission to promote the involvement of members of the public in England in decisions made by NHS foundation trusts which might affect their health.

Miscellaneous

Section 33: Taxation

122.     Subsection (1) amends section 519A of the Income and Corporation Taxes Act 1988. This amendment exempts NHS foundation trusts from income and corporation taxes.

123.     Subsection (2) amends section 61(3) of the 1990 Act. This amendment exempts NHS foundation trusts from stamp duty.

124.     Subsection (3) amends section 41(7) of the Value Added Tax Act 1994. This amendment provides for Value Added Tax to apply to NHS foundation trusts in the same way it applies to NHS trusts.