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

71. If the people responsible for running a provider are not sufficiently skilled or knowledgeable to fulfil their duties, this poses a variety of risks to students. Poor governance and management at a higher education provider can have a significant negative impact on students: it can mean that they don’t receive a high quality education, that they are not treated fairly or even that the provider is at risk of financial failure, which could significantly disrupt students’ education. There is also a risk that public funds would not be managed appropriately. Therefore, it is essential that key individuals in an institution are sufficiently knowledgeable and experienced to carry out their role.
72. The knowledge and expertise of key leadership positions within providers is not currently tested directly at registration, beyond expectations regarding the capabilities of senior leaders set out in the public interest governance principles. To satisfy current initial condition E1, a provider must ensure that its documents uphold these principles. The public interest governance principles relating to the governing body, and fit and proper persons, set these expectations in broad terms. We have encountered challenges with this approach at registration (see Proposal 2).
73. Many providers applying for registration have knowledgeable and experienced leaders in place. However, some providers are not well prepared. Even after registration, we have seen situations where individuals in key leadership positions do not adequately understand the business, student cohort or the regulatory obligations – which causes significant concern. We are therefore proposing a more targeted and focused test of the knowledge and expertise of key individuals.
74. Providers often engage the services of external consultants or other temporary third party support to help them complete their registration application (for example, help with pulling together governing documents or a business plan). While this may be an efficient use of the provider’s resources, we have seen situations where this can mask a lack of knowledge and experience of key leaders. This can then lead to problems post-registration which can harm students. We have, for example, seen a single person trying to fill multiple key roles themselves where the complexity or size of provision means this is not appropriate, and situations where individual are appointed to a position without having the knowledge or skills necessary to perform the relevant duties.
75. Our proposals in this area are designed to ensure a provider has appointed individuals to senior roles who are sufficiently prepared to comply with regulatory requirements and are properly equipped with the knowledge and skills to perform the duties of their role, at the point of registration. Our initial view is that the proposals will achieve this by introducing clear tests which set out more explicitly defined expectations, targeted at the most common issues seen in recent registration applications. We propose to apply these tests to a narrow group of individuals holding key roles.
76. We also consider there to be benefits from setting clear, explicit expectations for knowledge and expertise for specific individuals upfront. It is our initial view that the effect of this proposal would be to provide greater certainty on our knowledge and expertise expectations for providers and for individuals in key roles. We expect that this approach will reduce any ambiguity around what is required, and therefore reduce the need for clarifications during the assessment process, improving efficiency for applicants and assessors.
77. We have considered the extent to which these proposals are likely to require additional work from applicants compared to our current requirements. Our proposals are intended to be proportionate and to reflect reasonable expectations. We think that the requirements we are proposing in these areas do not go above and beyond the knowledge and expertise that senior leaders of a provider seeking registration need to run and manage effectively, a registered higher education provider. We recognise that an interview would require preparation by the individuals involved but we think it is reasonable for key leaders of an organisation to engage directly and openly with us as part of the application process. Where a provider is not sufficiently prepared, these proposals may require significant upskilling and learning by key individuals. Our initial view is this would result in a benefit to students by improving the effectiveness and resilience of the provider. It will also enable us to refuse registration applicants for providers that do not have sufficiently skilled and knowledgeable leaders in place; this would be likely to protect students and reduce risks for taxpayers.
78. We have considered the potential for discrimination against people with protected characteristics arising from the proposal that we would use an interview, conducted in English, to assess aspects of a provider’s compliance with proposed initial condition E7. In particular, we have considered the potential for this proposal to disadvantage individuals from minority ethnic backgrounds if they are non-native English speakers or individuals with disabilities that could affect their participation. We consider that this proposed approach is similar to other activities undertaken by the OfS, including interviews conducted as part of recruitment exercises. We therefore intend to take a similar approach to our duty to make reasonable adjustments when interviewing key individuals at a provider, including (but not limited to):
• ensuring the interview space is physically accessible for all individuals including those who have impaired mobility or use a wheelchair
• providing a sign language interpreter for the interview if needed
• allowing individuals to bring notes and refer to these
• giving individuals more time to complete interviews if needed.

79. We propose to:
1. Introduce a new substantive requirement that key individuals must have sufficient knowledge and expertise to facilitate regulatory compliance, and to enable delivery of the provider’s plans in practice.
2. Apply this requirement to a limited list of ‘key individuals’ that fulfil specific roles at the provider – the chair of the governing body, accountable officer, and where applicable, the person with overarching responsibility for financial management and an independent member of the governing body – recognising that in some providers, it may be appropriate for more than one of these roles to be filled by the same person.
3. For each ‘key individual’, set out explicitly what matters we expect them to demonstrate knowledge and expertise in, and whether they should be able to demonstrate in-depth understanding, or higher-level awareness of those matters.
4. Normally, assess whether these requirements have been met by undertaking interviews with each ‘key individual’.

Requirement for individuals to have sufficient knowledge and expertise

80. We propose that key individuals within a provider must demonstrate their knowledge and expertise are ‘sufficient’ for three purposes:
1. To facilitate delivery of a provider’s business plan.
2. To facilitate the provider’s ongoing compliance with the OfS’s conditions of registration that will apply to it, once registered.
3. To facilitate delivery of a provider’s fraud and public fund arrangements.
81. We propose that these individuals should be required to demonstrate a mixture of knowledge of key subject matters and, where relevant, practical expertise in particular areas. We propose relevant knowledge to include, in particular:
1. Knowledge of what the provider has set out in its application about how it will be run, particularly in its business plan, set of governing documents submitted at registration and policies and processes for preventing fraud and protecting public funds. We consider that demonstration of knowledge in these areas by key individuals will provide assurances that these individuals are sufficiently knowledgeable to facilitate ongoing compliance.
2. Knowledge of the requirements and expectations associated with OfS registration, such as the ongoing conditions to which the provider will be subject, including the need to make required data returns. We consider that demonstration of knowledge in these areas by key individuals will provide assurances that these individuals are sufficiently knowledgeable to facilitate ongoing compliance.

Question 4a: Do you agree with the proposal that initial condition E7 should include a requirement for key individuals to have sufficient knowledge and expertise to ensure the provider, if registered, would be able to:

• deliver its business plan,
• comply with the OfS’s conditions of registration, and
• deliver its arrangements for preventing fraud and protecting public money?

Please give reasons for your answer.

82. In addition to the knowledge requirements above, we propose minimum requirements for expertise of certain individuals as set out in the sections below.

Key individuals

83. We propose that knowledge and expertise requirements should be assessed in relation to the following ‘key individuals’:
1. The chair of the governing body, as the person responsible for leading the board (or equivalent) and ensuring it functions effectively.
2. The accountable officer, as normally the most senior officer of the provider, with overall responsibility for operational matters.
3. The person with overarching responsibility for managing the provider’s finances.
4. The independent member of the governing body (for a provider applying in Approved (fee cap)), as the person who, by virtue of their role, is intended to provide challenge to the governing body and offer assurance about the adequacy and effectiveness of governance arrangements for providers in receipt of financial support from the OfS or from UKRI.
84. Our proposals recognise that not all of these roles will exist in every provider, or that more than one of these roles may be filled by the same person.
85. A diversity of skills and experience among a provider’s senior management and governing body is important, and we don’t consider that it would be proportionate to expect all individuals to have an in-depth understanding of all these issues. However, we do think the individuals above, due to the responsibilities of their role, must be able to demonstrate a level of understanding and expertise in these areas.
86. Where a provider intends to have one of these roles but has not yet recruited an individual to fill it, the provider would be required to set out how it will ensure the individual appointed will meet these requirements.

Specific requirements for each key individual

87. The draft condition proposes specific requirements that should apply to each of these roles. This level of specificity is intended to provide certainty to providers about our requirements, how they will be assessed, and what is expected of individuals fulfilling those roles.
88. To avoid placing unrealistic or disproportionate expectations on individuals, we have sought to limit the knowledge requirements to the minimum necessary to fulfil key functions. The requirements therefore recognise that while there are some elements of our regulation, or of the provider’s own arrangements, about which these individuals should have a sound understanding there are others where only sufficient awareness is necessary, and expectations should reflect the knowledge and expertise which is most relevant to that individual’s particular role. Our requirements for each key individual therefore separate expectations into these two levels of knowledge, requiring individuals to demonstrate either:
1. Sufficient awareness of a subject matter; or
2. A sound understanding of a subject matter.
89. Sufficient awareness represents a lower threshold of knowledge. The exact expectations are likely to vary depending on the context of the subject matter, but ‘sufficient awareness’ is likely to be limited to either:
1. Awareness of the existence of the regulatory requirements, plans, or arrangements in question rather than active, continued engagement with them; or
2. Broad, high-level knowledge of the content of requirements, plans or policies, rather than detailed knowledge of the specifics.
90. We have proposed that an individual should be required to have ‘sufficient awareness’ of a subject in cases where we do not consider it a subject which their role necessarily requires them to directly engage with on a practical level, and for which operational matters of compliance are more likely to be undertaken by others. However, we require the individual to have at least some broad knowledge of the subject as a minimum.
91. ‘A sound understanding’ represents a higher threshold which is likely to encompass the points above, plus either:
1. A demonstrable ability to more actively engage with the subject matter, including an ability to explain the contents, purpose and practical implications of relevant documents, requirements or policies; or
2. More detailed, though not necessarily exhaustive, knowledge of the specifics of a document, requirement or policy.
92. We have proposed an individual is required to have ‘a sound understanding’ of a subject in cases where we expect that it will be central to the individual’s role, and something they will need to be engage with on a practical level. It is a higher threshold, representing an expectation of more in-depth understanding at the point of registration, than ‘sufficient awareness’.
93. The following paragraphs set out the specific requirements we propose for each ‘key individual’.

Chair of the governing body

94. The central responsibility of this role will be to lead the governing body and ensure that in exercising its oversight responsibilities and making decisions, it follows the agreed rules and procedures which are set out in the provider’s governing documents. We therefore propose the chair should demonstrate a sound understanding of the provider’s set of governing documents submitted in its registration application, and how they authorise or obligate the chair to act.
95. The governing body will also have a role in ensuring that the provider’s arrangements for preventing fraud and protecting public money are adhered to and have accountability for the conflict of interests policy. However, as some of the detailed responsibilities in this area are likely to be shared, and a higher level of knowledge is expected to be demonstrated by other key individuals, we propose that the chair should demonstrate sufficient awareness of these arrangements.
96. A provider’s governing body should be responsible for setting and implementing the institution’s direction and strategy. We therefore propose that the chair of the governing body should demonstrate a detailed understanding of the elements of the provider’s business plan which set out the provider’s business objectives and targets and its strategy for achieving those objectives and targets.
97. The governing body should also retain overall oversight of risk, so we also propose that the chair should demonstrate a sound understanding of the related content of the business plan which describes any risks which could limit the provider’s ability to achieve the identified objectives and targets and how the provider plans to manage those risks. There are some related areas of a provider’s business plan that we do not consider it proportionate to require the chair to have a detailed knowledge of, but nonetheless consider it important for the chair to demonstrate a broad awareness of in order to support a rounded understanding of the provider’s strategic approach. We therefore propose the chair should demonstrate sufficient awareness of: the characteristics of the cohort students the provider has recruited, or will recruit, and their academic needs; and the higher education sector and the context in which the provider plans to operate.
98. The regulatory framework places specific compliance responsibilities on a provider’s governing body. Ongoing condition of registration E3 requires the provider’s governing body to accept responsibility for the interactions between the provider and the OfS and its designated bodies, and to ensure the provider’s compliance with all of its conditions of registration and with the OfS’s accounts direction. We therefore propose that the chair should demonstrate a sound understanding of the regulatory requirements imposed by ongoing condition E3 and associated guidance. We recognise that the delivery of these obligations may be undertaken by others within the organisation but consider the Chair would need to understand this enough to be assured that the arrangements are effective. We also propose that the chair of the governing body should demonstrate sufficient awareness of other regulatory requirements imposed by the OfS and the potential regulatory consequences that could arise from a breach of the ongoing conditions.
99. In addition to the knowledge requirements above, we propose the individual proposed as the chair of the governing body requires expertise to enable them to effectively lead the governing body. The draft condition guidance provides examples of the sorts of evidence which might help demonstrate an individual holds this expertise including, but not limited to, prior experience of similar positions on governing bodies or chairing committees, business leadership experience or specialist knowledge and understanding of the provider’s business activities and the external environment.

Accountable officer

100. As normally the most senior officer of the provider, with overall responsibility for operational matters including delivery of the provider’s business plan, we propose the accountable officer should demonstrate sound understanding of the content set out in the provider’s business plan, and of the higher education sector and the context in which the provider plans to operate.
101. As is the case for the chair of the governing body, we consider it necessary for the accountable officer to have a broad awareness of the OfS’s wider regulatory requirements, although we recognise that responsibilities for delivering the associated activities are likely to be distributed across different individuals in practice. We have set slightly different expectations for the accountable officer than have been set for the chair of the governing body, reflecting the greater responsibility of the accountable officer for operational matters. We therefore propose that the accountable officer should demonstrate sufficient awareness of:
• regulatory requirements imposed by the OfS and associated guidance
• the role of any other Public Authority or government body with which the provider may interact if registered.
102. Regulatory advice 10 sets out that an accountable officer is responsible for ensuring that the governing body understands its regulatory responsibilities and acts on them.¹¹ The accountable officer will have an important role in ensuring arrangements between the board and the executive work effectively and so we consider that this individual should have a sound understanding of relevant provisions in the provider’s set of governing documents.
103. Regulatory advice 10 also sets out that an accountable officer is personally responsible for the taxpayer-backed student loans received on behalf of the provider’s students to cover their tuition fee payments. We consider that this level of personal responsibility warrants a higher level of knowledge of the provider’s fraud and public money arrangements. We therefore propose that an accountable officer should demonstrate sound understanding of these arrangements.
104. In addition to the knowledge requirements above, we propose the individual proposed as the accountable officer requires expertise to enable them to effectively lead and manage the provider and its activities. The draft condition guidance provides examples of the sorts of evidence which might help demonstrate an individual holds this expertise including, but not limited to, previous business or non-profit leadership experience and understanding of how organisations run.

The individual with responsibility for the management of a provider’s financial affairs¹²

105. We have sought to limit the knowledge and expertise requirements placed on the person fulfilling this role to those which relate to financial matters, but we would generally expect a sound understanding of such financial matters to be demonstrated.
106. In terms of the provider’s business plan, we would expect this person to have detailed knowledge of the elements of a provider’s plans on which its ongoing financial sustainability may depend. We therefore propose that the financial officer should demonstrate sound understanding of the financial elements of the provider’s business plan, of any business objectives and targets relating to financial matters, and the provider’s strategy for achieving those objectives and targets. We also consider it important that this detailed understanding is supported by some broader contextual knowledge of the sector. Financial targets and strategies for achieving them are unlikely to be credible if they are not informed by an awareness of the context in which a provider will be operating. We therefore propose the financial officer should demonstrate sufficient awareness of the higher education sector and the context in which the provider plans to operate.
107. This individual will also be responsible for managing the provider’s financial affairs in a way that ensures regularity, propriety and value for money. We therefore consider this individual will play a significant role in preventing fraud and protecting public money. As such, we propose that they should demonstrate a detailed understanding of the provider’s fraud and public money arrangements.
108. This individual will also be responsible for providing the accountable officer and governing body with expert advice relating to financial matters which ensures compliance with the OfS’s requirements in these areas. We consider that this will require more a detailed, in-depth knowledge of regulatory requirements in relation to financial matters, and also a broad awareness of how the governance of the provider operates. We therefore propose that the financial officer should demonstrate:
• sufficient awareness of the relevant provisions in provider’s set of governing documents
• sound understanding of the OfS’s regulatory requirements and associated guidance on financial matters (including, but not limited to, requirements for reportable events and financial reporting and data returns).

Independent member of the provider’s governing body (where applicable)

109. We propose that some of the knowledge requirements placed on the chair of the governing body are equally applicable to this individual. We therefore propose that the independent member should demonstrate:
• sound understanding of the provider’s set of governing documents
• sound understanding of the provider’s business objectives and targets, its strategy for achieving those objectives and targets, and any associated risks
• sufficient awareness of the characteristics of the cohort of students the provider has recruited and/or intends to recruit and their academic needs.
110. As a member of the governing body, this person also shares the responsibilities under condition E3. However, we consider this individual to hold less personal responsibility for ensuring the governing body fulfils these responsibilities than is the case for the chair of the governing body. We therefore propose that the independent member should demonstrate sufficient awareness of the regulatory requirements imposed by ongoing condition E3 and associated guidance, rather than detailed understanding.
111. In addition to the knowledge requirements above, we propose this role requires some minimum level of expertise in relation to governance experience. The draft condition guidance sets out that this could be demonstrated by previous board experience, or other experience at the senior levels of an organisation that will allow them to effectively provide external perspectives and scrutiny to the board’s decision making.

Question 4b: Do you agree with the proposed knowledge and expertise requirement for each of the individuals that would be covered by this test?

If you think there are any requirements that should be added or removed, please explain your reasons.

Assessment by interview

112. We propose that, where possible, we would assess these requirements through interviews with ‘key individuals’.
113. Each individual responsible for one or more of the key roles defined in the condition would be interviewed by OfS officers. These interviews could be undertaken in-person or virtually; would likely last between 30 to 60 minutes (depending on the number of roles held by each individual being interviewed); and would be based on a set of questions aimed at testing whether the individual could demonstrate the knowledge and expertise requirements set out in the condition. If we decided to take this proposal forward, we would expect to publish more detailed operational information about the interview format and process to help individuals understand what to expect, and how to prepare. We would make any reasonable adjustments that need to be made in respect of people with disabilities.
114. As well as providing evidence of an individual’s knowledge and expertise, we consider that interviews could reassure us that documents submitted (such as the provider’s business plan and governing documents) were credible. They would be more likely to be delivered in practice where the individuals responsible for implementing them could demonstrate a sound understanding of the content. The interview would therefore also be used as evidence in assessing whether the provider had submitted a set of governing documents, and business plan, which met our requirements. We consider that using the interview as a means of triangulation between the knowledge and expertise requirements, and the credibility of a provider’s governing documents and business plan, means that interviews would represent an efficient use of OfS resources.
115. An assessment of knowledge and expertise which relied solely on the submission of additional paper documents would be possible, but could be subject to some of the same issues as the current arrangements. For example, where key individuals rely heavily on consultants to support production of relevant documentation, it is more likely that the provider does not have sufficient expertise and knowledge in key leadership positions. Testing this through interviews would mitigate this risk. Although we would accept other forms of evidence, for example, paper-based evidence, we consider this would be very burdensome for the provider to prepare as it would need to be able to evidence each criterion clearly for each individual.

Question 4c: Do you agree that holding interviews with key individuals would be the most efficient and effective way of testing this requirement?

[11] See Regulatory advice 10: Accountable officers. Guidance for providers on the responsibilities of accountable officers.

[12] Referred to in this document as ‘the financial officer’.

116. We have considered alternative options for achieving our overarching aims, which are set out in Annex B. For Proposal 4, these are:
1. Retaining current arrangements.
2. Applying knowledge and expertise requirements to a different set of individuals.
3. Using alternative means of testing the knowledge and expertise of key individuals.

Question 4d: Do you have any additional comments in relation to this proposal?