Committee reports on regulating financial sustainability in higher education

07 June 2011

The Commons Public Accounts Committee published a report today which, on the basis of evidence from the Department for Business, Innovation and Skills, the Higher Education Funding Council for England, and representatives from three institutions, examines the introduction of new funding arrangements for higher education.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"Unprecedented change is about to take place in the higher education sector as it moves towards a system in which funding for teaching follows the student. The Higher Education Funding Council for England will no longer be able to rely upon its funding role to influence the sector and a new system of regulation will be required.

"At present, more universities intend to charge higher fees than the Department had expected. If the universities’ plans to widen participation are approved by the Office for Fair Access, this will leave a substantial funding gap which will either require further cuts in higher education or further resources from the Treasury.

"It is also unclear whether higher fees will dampen down demand for places. This and other risks to the financial health of institutions will have to be monitored by the Funding Council during the transition to the new funding environment.

"Given that students will be required to spend more money on their own higher education, they will have to be able to make an informed choice about value for money offered by different institutions. The Department must make sure that students are provided with relevant and reliable information.

"Where an institution is at higher risk, the current practice of the Funding Council is to disclose nothing publicly for three years in the interest of that institution. We do not accept this practice and, where students’ investment and their education are at risk, urge earlier disclosure."

Margaret Hodge was speaking as the Committee published its 36th Report of this Session which, on the basis of evidence from the Department for Business, Innovation and Skills (the Department), the Higher Education Funding Council for England (the Funding Council) and representatives from three institutions on financial regulation, examined the introduction of new funding arrangements for higher education.

The regulated higher education sector in England comprises 129 Higher Education Institutions (institutions), which are autonomous, not-for-profit bodies that received nearly half of their £22 billion income in the 2009/10 academic year from public sources.  The Funding Council provides a third of the sector’s income and oversees the financial sustainability of institutions.  It is accountable to the Department.
Over the last five years student numbers and income have grown annually by 2 per cent and 6 per cent respectively.  In the context of this environment, the Funding Council’s ‘light touch’ approach to financial regulation has been cost efficient.  No institution has suffered a disorderly failure since the Funding Council was formed in 1993.

The sector has begun the transition to a new system of funding in which Funding Council grants to institutions will be replaced by higher tuition fees, paid by students through access to publicly-provided loans provided through the Student Loans Company.  The Funding Council currently exerts its influence through the allocation of funds to institutions. Under the new system the Funding Council’s role in the allocation of funds will diminish significantly and so its influence over institutions will weaken. The Department will need to provide new powers for the Funding Council to regulate these institutions.

The Committee found that the Department and the Funding Council need to decide how effective regulation will be maintained in a more challenging financial environment. To ensure the transition to a market-based system is smooth, the Funding Council must monitor risks as they emerge and respond quickly.  Uncertainty exists over how student demand for places will be affected by the higher fees. The Funding Council is not expecting any disorderly failures to occur, but a market-based system will increase risks to institutions and there is no guarantee that institutions in difficulty will be necessarily supported. The Department and the Funding Council need to develop contingency plans in the event of an institution failing.
Institutions are in the process of determining their fees for new students for the academic year 2012/13. All the indications are that more institutions will charge significantly higher fees than was anticipated by the Department. The Office for Fair Access has yet to agree the measures universities will adopt to widen participation where the proposed fees are above the £6000 level. However it is likely that a significant funding gap of hundreds of millions of pounds for the taxpayer will occur. Unless further resources are secured by the Department this could result in further cuts being made to the Higher Education budget.

The Funding Council also has a responsibility for promoting value for money, although it does not assess the value for money of institutions.  In future, prospective students will need better information to make an informed choice about where they will study, including comparable information on the financial health of, and value for money provided by, individual institutions. The Funding Council does not normally publish the names of institutions it judges to be at financial risk, so as to protect them while they are in recovery. Now that students are required to make a substantial financial investment in their degree, the Funding Council needs to strike a suitable balance between the interests of institutions and those of prospective students.  The Committee welcomes the review process subsequently announced by the Quality Assurance Agency.

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