Part 2: Proposals for new initial condition E7 - Effective governance

42. Before a provider is able to enter the regulated higher education sector and access the benefits of registration, it must be properly prepared to ensure it will offer high quality education to students, treat students fairly and reduce risk of misuse of public money. This is particularly important given the increasing challenges and risks in the higher education sector discussed in the introduction to this consultation.⁷ Our initial view is that part of this preparation will be to have a robust business plan. This will support a viable and sustainable business that meets regulatory requirements.
43. Providers that are seeking registration are less likely to have had a strong history of delivering higher education, and some providers are not sufficiently prepared to do so. Some providers applying for registration have not been able to demonstrate that they have sufficient understanding of how the higher education sector operates. This can result in a provider making unrealistic assumptions in its planning, such as overestimating its ability to recruit students in a competitive market, which can pose risks to the ongoing viability of the provider and cause associated harm to students.
44. Part of being sufficiently equipped to deliver higher education is preparing to meet the relevant regulatory requirements. We have encountered issues where newly registered providers were not sufficiently aware of the regulatory framework and so did not have robust plans in place to meet ongoing requirements. For example, providers have faced difficulties in returning important financial information to the OfS, or returning accurate data to the designated data body or the Student Loans Company (SLC) because they had failed to adequately prepare for these obligations. This creates risks for students as it can delay or weaken the OfS’s ability to tackle risks including those relating to financial sustainability and the quality of higher education that students receive. Addressing compliance issues that arise in underprepared providers after they are registered also creates a drain on the resources of both the provider and the OfS.
45. It is also important that a provider understands the most substantial areas of risk associated with its business model and has in place appropriate strategies for managing these risks. Through our regulation of registered providers, we have identified common high-risk approaches to delivering higher education and ways of operating adopted by some newly registered providers that are more likely to lead to potential breaches of our conditions and harm to students and taxpayers. These include:
1. A provider pursuing rapid growth that outstrips its ability to effectively support students, or to exercise effective internal controls, and therefore protect public money.
2. A provider pursuing a low-cost-high-volume business model to maximise surplus generation, without sufficient consideration of the potential negative consequences for students’ academic experiences or value for money.
3. A provider’s future plans being dependent on the decisions of third parties or other factors outside its control, such as the need to be granted a student sponsor licence by UK Visas and Immigration (UKVI), achieve certain professional, statutory and regulatory body (PSRB) accreditation, be granted degree awarding powers, or reliance on partners to award qualifications on its behalf and support any plans for growth.
46. Where a provider does not have robust plans in place, it may encounter financial challenges after registration. Providers have at times taken steps to address this without fully considering the risk of doing so, for example:
1. Rapidly entering into new partnership arrangements because of the unexpected withdrawal of a current partner without having the governance and management processes needed to manage this change properly.
2. Employing financially incentivised external recruitment agents to meet recruitment targets that are too ambitious.
3. Taking out additional unplanned borrowing to fund unanticipated expenditure.
47. All of these behaviours can result in negative consequences for students and taxpayers.
48. Our proposal to require a business plan is intended to reduce these risks. We would be able to test a provider’s preparation and its understanding of the sector, the OfS’s conditions of registration and the risks it may face (and how it plans to account for these in its business). We consider this proposal would help us to identify providers that are not yet ready for registration. It would also allow the OfS to better understand areas of risk that could be mitigated through the imposition of specific conditions of registration targeted at those areas.
49. We welcome innovation in the sector because this is an important means of creating diversity and competition. Innovation can benefit students by increasing choice and driving improvement. We do not intend to prevent providers from pursuing legitimate commercial objectives or strategies, even where these may carry increased risk, nor seek to refuse a provider’s registration application based solely on the business model it has chosen to pursue, provided we can gain assurance that those risks sit with the provider or its shareholders and not with its students or taxpayers. While we want to facilitate new providers to enter the market and test new delivery models, this cannot be done in a way that causes detriment to students.
50. We have considered whether our proposal to require a provider to have in place a business plan, would result in additional burden for a provider. A provider that is new to the higher education sector is already required to produce a business plan as part of its application for registration (as set out in Regulatory advice 3).⁸ This proposal would move that obligation into the initial condition of registration, apply it to all providers wanting to register, and expand the requirements of the business plan as proposed in this consultation.
51. Our initial view is that well-prepared providers are highly likely to have appropriate business plans in place. We have designed the requirements for the business plan to align where possible with content that is typically expected to be covered in business or strategic plans that providers may need to have in place for other purposes. We have also aligned the scope and time period for forecast information with the requirements in initial condition D, to ensure that there is appropriate consistency.⁹ We recognise that although a well-prepared provider is likely to have the information we require, it may not have it in a single document. We are therefore proposing that a provider could submit an existing document or documents containing the information to minimise burden.
52. Our initial view is that the proposed content of the business plan largely mirrors what might typically be covered in standard templates for a business plan, or for a strategic plan (with the exception of the content about a provider’s arrangements to ensure compliance with the OfS’s ongoing conditions). We therefore expect that most providers should be able to submit documents they already have or repurpose existing material to fulfil this requirement with minimal additional burden. For a provider that does not already have a plan in place, we think that the creation of a plan will ensure it undertakes necessary business planning before applying for registration and so help to avoid risks to students and taxpayers.
53. We have also considered the cumulative impact of changes that would be brought about by proposed new condition E7. Our initial view is that any additional burden relating to the provision of a business plan will be balanced by the removal of the requirements for a self-assessment of the provider’s management and governance arrangements. On balance, we think this means that the new requirements rebalance the focus of a provider’s efforts, rather than creating significant additional burden, in aggregate.

[7] See Introduction.

[8] See Regulatory advice 3: Registration of English higher education providers with the OfS.

[9] See Condition D: Financial viability and sustainability.

54. To address the issues above, we propose to introduce new requirements for a provider to:
1. Have a business plan which:
1. Meets requirements relating to the comprehensiveness, clarity and coherence of the plan, the provider’s understanding of the higher education sector and relevant risks (and strategies to manage those risks), and the provider’s understanding of requirements that will apply to it under the OfS’s ongoing conditions of registration.
2. Covers the provider’s current financial year and four future years.
2. Have the ability to deliver that plan in practice.
3. Demonstrate significant consideration of the interests of students in formulating its business
4. Include specific information about its courses and planned approach within its business plan.

Business plan

55. We are proposing that the business plan includes elements that may normally be found in a business plan created for the purposes of securing investment, plans produced by an established provider to set out shorter term operational priorities, or elements that might normally be found in a business strategy or strategic plan. We think that the information required for the business plan should be readily available to any provider operating a well-run business. We have proposed allowing flexibility for a provider to satisfy this requirement, in full or in part, by submitting any documents of this nature that it already has (see 'Format of the information submitted').

Question 3a: Do you agree with the proposal that initial condition E7 should include a requirement for a provider to have a business plan which describes the provider’s business, sets out its objectives over the medium term, and its strategy for achieving them?

Please give reasons for your answer.

Proposed requirements

56. Our initial view is that the business plan should meet the following relevant requirements:
• The plan must be comprehensive, to ensure it provides sufficient detail about a provider’s plans. This would enable us to judge whether the provider is sufficiently prepared to deliver higher education, and whether its planning is based on sufficient understanding of the higher education sector. Our initial view is that a comprehensive plan, covering all aspects of a provider’s intended activities, would enable the OfS to make a judgement on whether the provider has managed to identify all relevant risks.
• The plan must be clearly and professionally written, to avoid any ambiguity about what a provider’s plans are.
• The plan must be coherent and consistent with any other information available to the OfS when assessing the provider’s application. Coherence and consistency are important to avoid any ambiguity about the provider’s plans, while also providing some assurance that it represents the provider’s genuine intention for how it will operate and its ability to do so in practice.
• The plan must demonstrate a sound understanding of the higher education sector. This should ensure that providers either have sufficient experience in the higher education sector, or take steps to ensure a sufficient understanding of the sector before finalising their plans and applying for registration with the OfS. They will therefore be better prepared to deliver higher education courses as planned and comply with conditions of registration if registered.
• The plan must demonstrate a sound understanding of risks and demonstrate the provider has appropriate arrangements to manage risks and comply with conditions of registration. This should provide assurance that the provider has considered the risks that are most relevant to its circumstances and approach before finalising its plans and applying for registration, and has committed to actions to manage those risks in order to limit the risk of future non-compliance and harm to students.
• The plan must demonstrate a sound understanding of the ongoing conditions of registration. This should ensure that a provider will review the regulatory framework and gain an understanding of the requirements before finalising its plans and applying for registration with the OfS. This will reduce the risk of that provider’s future non-compliance.

Question 3b: What is your view of the proposed requirements of the plan?

Time period for plan

57. We have proposed that the business plan covers a five-year period. Our aim in doing so is to ensure a provider has made sufficiently detailed plans over the medium term. We consider this length of time will allow a provider to sufficiently set out its intended course of direction, and therefore demonstrate key strategic objectives and targets, and consideration of associated risks. A five-year period also aligns with the period over which financial forecasts and information is required for a newly established provider (that does not have audited financial statements) under condition D. Our initial view is that a shorter period would not provide a sufficiently long-term view of a provider’s aims to enable it to illustrate its plans for change and therefore demonstrate that it has undertaken sufficient planning and is appropriately managing risks.
58. We have specifically suggested that the plan covers a five-year period – comprising the provider’s current financial year plus four additional years – to align with the financial forecasts and information requested from newly established providers under condition D. To produce these forecasts, we think that a provider will have undertaken a detailed level of planning over this period. This means a business plan covering this period would minimise the additional burden arising from this proposal.

Question 3c: Do you agree with the proposal that the business plan should cover a five-year time period?

Question 3d: If you think another time period is more appropriate, please explain what this time period is and why.

Ability to deliver the plan in practice

59. We have proposed that a provider should, in the OfS’s judgement, have the ability to deliver its business plan in practice. The overarching aim of the business plan requirement is to prevent harm to students by ensuring a provider has undertaken the preparation and planning necessary to inform its plans. However, any assessment of those plans would be meaningless if the provider is unable to deliver them in practice.
60. Our proposed approach to considering the ability of a provider to deliver plans in practice mirrors the OfS’s consideration of the quality plan a provider must submit in relation to initial condition B7 – where credibility of the plan is assessed by reference to whether a provider has the capacity and resources to deliver it in practice.¹⁰ In considering a provider’s ability to deliver its business plan for initial condition E7, we propose that capacity and resources would be a central consideration, but other factors would also be taken into account. This is because a provider’s business plan will include elements that are reliant on much more than a provider’s capacity and resources (for example, any recruitment targets a provider sets out will also depend on the conditions of the market and activity of other providers). The proposed consideration of a provider’s ability to deliver its plan would therefore take into account a wider range of factors (for example, whether targets are realistic in the context of the sector).
61. As is the case for assessment of a provider’s set of governing documents, we are proposing that our judgement of whether a provider has the ability to deliver the arrangements and activities set out in its business plan may, in part, be informed by communications with key individuals in a provider’s senior management and governing body, and assessments of those individuals’ knowledge and expertise. For more information around these proposed tests of key individuals, see Proposal 4.

Question 3e: Do you agree with the proposed approach to considering a provider’s ability to deliver its business plan in practice?

Significant consideration of the interests of students

62. We propose that the business plan must demonstrate that the provider has given significant consideration to the interests of students in its formulation. This is intended to address the issue of providers adopting high-risk business models without ensuring students are protected from potential detriments arising from those approaches.
63. In a business plan that sets out a provider’s overarching purpose, its planned activities, targets and risks, under our proposals we would expect to see the interests of students as a primary consideration. Where a provider is also pursuing commercial objectives, which have the potential to conflict with the interests of students, we would expect it to demonstrate awareness of the potential risks, and to have given thorough consideration to how any such conflicts will be managed. The proposed guidance underpinning the condition (see Annex D) sets out a number of indicators that we are proposing to take into account when assessing this part of the plan. We invite respondents’ views about whether these are the best ways of identifying potential risks in this area.

Question 3f: Do you agree with the proposal that the business plan should include significant consideration of the interests of students? Please give reasons for your answer.

Plans for compliance with ongoing conditions of registration

64. We propose that as part of the specific information requirements (see Table 1) a provider’s business plan should set out how it will ensure compliance with the OfS’s ongoing conditions of registration, if it is registered. We would also consider a provider’s ability to deliver this element of its business plan in practice by reference to the capacity and resources that a provider has in place (or plans to put in place) for ensuring compliance.
65. Our initial view is that requiring consideration of regulatory compliance in a provider’s business plan would ensure that it is prepared to meet the ongoing conditions of registration and this will help to ensure that the interests of students continue to be protected.

Question 3g: Do you agree that requiring a provider set out its plans for ensuring compliance with the OfS’s ongoing conditions of registration would provide assurance that the provider is adequately prepared to deliver higher education and has an understanding of the regulatory requirements?

Specific information required to be included in plan

66. Paragraph E7B.5 of the proposed condition specifies the information we propose should be included in a provider’s business plan. Table 1 sets out how each information requirement in the business plan would support the OfS’s assessment of the plan.

Table 1: Business plan information requirements

67. We invite respondents’ views on whether there are better ways of gaining the assurances and information we are seeking.

Question 3h: Do you agree with the proposed information that would need to be included in the business plan?

Question 3i: Is there any additional information you think should be included as part of the business plan?

Information requirements related to a provider’s business objectives and targets, and strategies for achieving them

68. We are not proposing that the OfS carried out a detailed qualitative assessment of the business objectives, target and strategies set out in a provider’s business plan. Instead, we propose that assessors will undertake a qualitative assessment against requirements that apply across all elements of the plan, namely: comprehensiveness, clarity and consistency with other information in the provider’s application, understanding of the sector or potential risk, consideration of the interests of students. For example, we are not proposing any assessment of whether the objectives and targets are the proper things for the provider to pursue (other than where these have scope to conflict with students’ or taxpayers’ interests) nor whether the provider’s planned strategies for achieving these targets are the most effective approaches. This is because providers should be free to determine their own strategic aims and approach. We are not proposing that the OfS should seek to endorse or approve a provider’s business plan or strategy as part of this requirement or seek to assess its likelihood of success. Instead, we are proposing that we would ask for this information as a means of understanding a provider’s chosen approach and direction of travel to enable an assessment of whether the provider has undertaken a level of planning necessary to articulate its plans, and as a means of determining whether the provider’s understanding of the potential risks that arise from these plans is sound.

Format of the information submitted

69. We are proposing to allow providers to decide on the best format for meeting the business plan requirements rather than specifying a format. The information could be provided in a single or multiple documents. A provider may choose to submit an existing business plan or strategy documents, if necessary supplemented by additional narrative to meet the criteria set out in the condition. If we were to proceed with this proposal, we may decide to publish further guidance for providers about how to best organise and signpost information contained across multiple documents, or how to structure a single document where that approach is taken. Alternative options related to this proposal are discussed in Annex B.

[10] See Condition B7: Quality.

70. We have considered alternative options for achieving our overarching aims, which are set out in Annex B. For Proposal 3, these are:
1. Retaining the current arrangements.
2. Adopting the proposed approach but considering different ‘relevant requirements’ (including setting a lower threshold than ‘sound understanding’ and adopting alternative approaches to assessing a provider’s plans to ensure ongoing compliance).
3. Setting a lower threshold than ‘sound understanding’.
4. Adopting the proposed approach with alternative information requirements.
5. Adopting alternative means of collecting information about a provider’s provision.
6. Introducing a survey as an alternative submission requirement.
7. Adopting the proposed approach but considering a different time period.
8. Adopting the proposed approach with an alternative submission format.

Question 3j: Do you have any further comments about this proposal?