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

117. If the people responsible for running a provider are not fit and proper, there can be significant risks for students and taxpayers. For example, this could increase the risk that students are not treated fairly, do not receive a high-quality education and that taxpayers and students do not receive value for money from the higher education courses they fund. The introduction to this consultation¹³ explains the reasons why risks in this area are increasing, particularly in relation to the treatment of students and the misuse of public funding.
118. The current initial conditions for management and governance require that a provider upholds the public interest governance principles, both in its governing documents and in practice. These include a principle that those in senior positions in the provider should be fit and proper persons. However, the conditions do not include a direct test of whether relevant individuals are fit and proper.
119. We have seen escalating risks in regard to fraud and misuse of public funds. The recent National Audit Office (NAO) report into student finance for study at franchised providers¹⁴ highlighted growing risks relating to the misuse of public funds. For example, fraud of £4.1 million was detected by the Student Loans Company in 2022-23. The report further highlighted risks of mis-selling of courses and opaque recruitment practices, and the corresponding need for strong management and governance in providers to ensure risks in these areas are managed more effectively for both students and taxpayers.
120. In our experience, a provider seeking registration has normally undertaken fit and proper tests as part of its recruitment to relevant individual roles. However, providers take a subjective view about how to respond to anything flagged by their checks, which means there can be inconsistencies across the sector. For example, there have been instances where we have reason to believe that a provider itself, or people responsible for managing it, have previously been involved in the misuse of public funding. It is essential that our assessment is able to identify such behaviour, so we can refuse applications where the key leaders are not fit and proper.
121. Given these emerging risks, and the profile of the providers now applying for registration, we are proposing to introduce more prescriptive, comprehensive and rules-based requirements in this area. We think this will provide additional assurance that the people responsible for overseeing governance and management will be fit and proper to manage the key responsibilities that arise from registration. This would then reduce risks to students and taxpayers.
122. We have considered the extent to which this proposal would place additional burden on providers. Providers already have obligations relating to fit and proper matters, so a provider seeking registration has normally undertaken relevant tests for its relevant individuals. We therefore think additional burden of undertaking the tests will be low for most providers. We recognise though there will be additional burden in terms of providing information to the OfS in this area. Therefore, we have considered how to limit the information required to that which we consider is strictly necessary to meet our aims, and to require the tests to only be undertaken for specific roles. We have deliberately not proposed to prescribe the manner in which a provider must undertake the tests, to provide flexibility and reduce burden. On balance, our initial view is that the value of this proposal in terms of reduction of risks to students and taxpayers would outweigh any potential increase in burden.

[13] See Introduction.

[14] Available at Investigation into student finance for study at franchised higher education providers - NAO press release.

123. Our proposal is to require a provider seeking registration to ensure that individuals who are its senior managers, leaders or owners have a track record which will give us confidence that they are fit and proper for the purposes of ensuring the provider:
1. is suitable to access and receive public funds;
2. can maintain public trust and confidence in the higher education sector;
3. is suitable to protect the interests of students.

Question 5a: Do you agree that the overarching test should be based on an assessment of relevant individuals’ track record in relation to the protection of public money, the maintenance of the good reputation of the higher education sector and the protection of the interests of students?

If you agree, please explain why. If you disagree, please explain why and any alternative approach you would recommend.

124. For the avoidance of doubt, we are not proposing that the OfS should approve relevant individuals in defined positions as being fit and proper before they are appointed by a provider. As the requirement relates to a provider seeking registration, it would be impractical to expect a provider to delay appointments to such positions until it has applied for registration. We think such an approach would create additional work for providers and delay appointments to key positions. This would create uncertainty for providers when recruiting relevant individuals and thereby cumulatively add risk to ongoing oversight of management and governance at providers. We also consider that placing this obligation on a provider to check a relevant individual is a fit and proper person is more consistent with institutional autonomy.
125. When assessing whether a provider meets the proposed fit and proper requirement, our initial view is that the OfS would review a provider’s policies and processes to assess whether they are robust, as well as testing the credibility of the outcomes of checks completed. This would include running our own checks to validate the outcomes presented by the provider. We would therefore require a provider, as part of its registration application, to submit relevant personal details for all relevant individuals so that we can undertake such checks. This is already our practice, albeit for a smaller number of individuals than are proposed in this condition. We will also require providers to submit a declaration (in a template that will be provided by the OfS) stating whether the provider is aware of any indicative matters as listed in E7D.2 and E7D.4 for relevant individuals.

Question 5b: Do you agree that a provider should retain responsibility for appointing relevant individuals against a published fit and proper test and related criteria?

126. We propose to set out a non-exhaustive list of matters that may lead the OfS to decide that an individual is not a fit and proper person.
127. All matters contained within these paragraphs relate to one or more of the purposes set out in the proposed fit and proper test. They are therefore indicative of behaviour that may indicate a relevant individual does not have a satisfactory track record in relation to these purposes and therefore may not be a fit and proper person.
128. We recognise that there may be mitigating circumstances, so when considering these matters, we are proposing to consider any mitigating information submitted by a provider. This approach is intended to offer a proportionate approach to issues that may have been identified by these checks. Examples of potential mitigating circumstances have been included in the draft guidance under each relevant matter.
129. Table 2 summarises the indicative matters set out in the proposed condition and explains why they are relevant to one or more of the key aims of this requirement.

Table 2: Matters to which the OfS will give particular consideration when assessing this requirement

Question 5c: Do you agree that the non-exhaustive list of matters in the proposed condition are matters which should be considered in the fit and proper test?

If you agree, please explain why. If you disagree, please indicate which matters you believe are not matters that should be considered and why, or which other matters should be included.

130. When considering the weight to give any of the matters listed in the table above, we propose to take context into account in relation to the risks an issue poses to the stated purpose of our test. Our approach to this is explained in the draft guidance underpinning the proposed condition and highlights the following contexts for matters to which we would give additional weight:
• Recent – the closer a matter occurred to the date on which a provider seeks registration, the more relevant that matter is to whether the individual is fit and proper, and the more weight this would be given. Matters that have occurred more recently will be given greater weight by the OfS. We believe that this represents a proportionate approach.
• Serious – matters that the OfS considers to be serious. Such matters include, but are not limited to: criminal convictions; matters of financial mismanagement or impropriety; matters that could be seen as bringing the higher education sector into disrepute; and matters that have had a direct detrimental impact on students studying at a higher education provider.
• Repeated and/or sustained – matters that occurred repeatedly or continuously over a sustained period of time (i.e. over years rather than a one-off incident) are more indicative of a poor track record.
• Indicative of bad or poor conduct – matters that are indicative of dishonesty, negligence, financial mismanagement, criminality or lack of ability to comply with regulations.
131. Under our proposals, these factors would normally weigh against a judgement that a relevant individual is a fit and proper person. We propose to consider these factors in combination. For example, if a serious and relevant matter occurred 72 months ago, although it may not necessarily be ‘recent’, it is ‘serious’ and ‘relevant’ and therefore it would be more likely that we would assess an individual to be not a fit and proper person.

Question 5d: Do you agree with the proposed factors to which we will give weight?

If you agree, please explain why. If you disagree, please indicate which other matters you believe should be included in this approach.

132. There are some matters that we consider to be so serious that we are proposing that these would automatically result in an individual being deemed not to be fit and proper, unless exceptional circumstances apply. These matters are set out in Table 3 below and included in section E7D.4 of the proposed condition. Our proposal is that there would be a high bar in relation to the exceptional circumstances that could enable the OfS to assess a person to be fit and proper in these situations. Table 3 summarises the indicative matters set out in the proposed condition and explains why they are relevant to one or more of the key aims of the requirement.

Table 3: Matters that the OfS will consider indicate that an individual is not fit and proper, unless there are exceptional circumstances

133. We propose that the matters listed above include actions that occur overseas in addition to any that have occurred in the UK. Our initial view is that the location of the matters listed is secondary to the finding itself when assessing whether an individual is fit and proper for the purposes of protecting the interests of students and public funding and continuing to uphold the reputation of the higher education sector.
134. In including matters that occurred in overseas jurisdictions within the requirement, we propose to consider equivalency (for example, to consider if the issue would also have been a breach of UK legislation or relevant similar regulations). We also recognise that, for some overseas jurisdictions, some matters (such as bankruptcy, insolvency and dismissal from previous organisations) may not be easily verifiable by a provider through public sources. As such, the provider may need to rely on self-declarations from key individuals. When assessing the provider’s processes and policies, as well as the outcomes of these, the OfS will consider the availability of reliable data for relevant matters.
135. In proposing this approach, we have been mindful of the need to ensure the matters we would consider are relevant to the key purposes of the fit and proper test, and are also drawing on the formal findings of relevant third party regulatory bodies, courts or tribunals, government bodies and professional bodies. Such an approach means that any findings against an individual or an organisation were made by a responsible body and subject to clear procedures and processes with relevant routes of challenge. This offers a strong indication of an individual’s previous behaviour that may mean they do not meet the fit and proper test.

Question 5e: Do you agree that the list of matters in Table 3 and draft condition E7D.4 are matters which should be considered as meaning an individual is more likely to not meet the fit and proper test, except in exceptional circumstances?

If you agree, please explain why. If you disagree, please indicate which matters you consider should not be considered and why, or which other matters should be included.

136. We propose that the enhanced fit and proper person requirement should apply to the senior governance and managerial positions that would have oversight of the operations of a provider in relation to the protection of the interests of students and use of public funding as well as decisions that may affect compliance with the OfS’s requirements.
137. We are proposing that the fit and proper person requirement should apply to individuals in roles which, in our experience, exercise significant control over the management and governance of providers in the higher education sector. When seeking to define such roles we have been mindful of the need to ensure that these definitions work and are easily understandable for providers with diverse corporate structures and different sizes and shapes. We have therefore considered which roles are subject to the fit and proper persons tests applied by different regulators, and how these might apply to the range of English higher education providers, from more traditional providers through to providers that are businesses with shareholders (as many providers seeking registration now are).
138. This has led to our proposal to set out a list of positions that span the various corporate entities and structures that we see in providers delivering higher education in England and that have significant control over the management and governance of operations affecting the protection of the interests of students, public funds and the continuing good reputation of the English higher education sector. This is intended to provide certainty about the individuals who need to be subject to the checks, while offering breadth and flexibility of application.
139. Table 4 lists the roles to which the fit and proper tests would apply and the reasons for this.

Table 4: Individuals who should be fit and proper for the purposes of the proposed condition

Question 5f: Do you agree that the fit and proper test should be applied to a specific list of relevant individual roles and interests, rather than a more general definition such as ‘beneficial owners’ or ‘senior managers’? Please explain the reasons for your answer.

Question 5g: Do you agree that the list of roles contained in the definition of relevant individuals in the proposed condition is appropriate?

If you agree, please explain why. If you disagree, what roles would you remove or add and why?

[15] See Economic Crime and Corporate Transparency Act 2023.

[16] The post carrying this responsibility will differ between providers. For example, this could be the chief financial officer, Director of Finance, Head of Finance, Head of Corporate Affairs etc. or, in small institutions, be part of the role of the Accountable Officer. Given this, we propose to require each provider to specify the individual that carries these responsibilities.

[17] See Small Business, Enterprise and Employment Act 2015.

140. We have considered the following alternative options for achieving our overarching aims, which are set out in Annex B. For Proposal 5, these are:
1. Retaining current arrangements.
2. Adopting an approach where the OfS is required to approve each appointment of a relevant individual as fit and proper before their appointment by a provider.
3. Adopting the proposed approach but restricting matters to which the OfS will have regard when determining if an individual is fit and proper (sections E7D.2 and E7D.4) to those occurring in the UK only
4. Adopting ‘honesty, integrity and reputation’ as the test, rather than the fit and proper test as proposed.