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

141. As set out in the introduction to this consultation,¹⁸ it is essential that our assessment can identify and refuse applications from providers where there is a material risk of fraud or inappropriate use of public or student funding. We have seen a number of cases where a provider with an unsatisfactory track record of receiving public funds through partnership arrangements seeks registration with the OfS. Our firm view is that a provider in this situation should not be registered because of the risk it poses to the student experience and the interests of taxpayers.
142. At the moment, providers must deliver in practice the public interest governance principles that are applicable to it under initial condition E2. This includes risk management and control arrangements but does not include any specific requirements relating to fraud or the inappropriate use of public money. Additionally, the ‘Regularity, propriety and value for money’ principle requires a provider’s governing body to ensure that there are adequate and effective arrangements in place to ensure public funds are managed appropriately and to protect the interests of taxpayers and other stakeholders. However, this principle applies only to providers in receipt of financial support from the OfS or UKRI. We consider that a more explicit requirement relating to arrangements to prevent, detect and stop fraud and inappropriate use of public funds will help ensure that a provider seeking to register would be prepared to receive public funds if it is successfully registered. Our initial view is that this requirement will therefore, by extension, improve student number reporting, internal control arrangements and management oversight relating to financial management. It is essential that all of these areas are robust before a provider starts to access public or student funding directly.
143. Our initial view is that an explicit requirement for specific arrangements to protect public funds is necessary because of the risks we have observed in the sector. As outlined in the introduction to this consultation,19 we have seen a significant increase in higher education being delivered through some subcontractual partnerships which pose specific risks to students and public funds where there are poor management and governance arrangements.²⁰ It is our view that this requirement will enable the OfS to more effectively assess a provider’s risk at registration and to fulfil its general duty to promote value for money in the provision of higher education.
144. The current method of assessing existing initial condition E1 requires providers to undertake a self-assessment of their governing documents against the relevant public interest governance principles. In our experience, providers seeking registration have often been insufficiently self-critical in their self-assessment, reducing its value. Our initial view is that our proposals (which require the submission of a range of documents that make up a provider’s arrangements to prevent fraud and protect public money) will be a lower burden activity for providers who already have comprehensive arrangements in place and a more effective method of assessing the actual arrangements for the OfS. We think that the proposed test relating to arrangements is the least intrusive way to achieve the aims outlined above.
145. When developing these proposals, we considered that the types of providers that are applying now or in the future are more likely to be small providers that have previously delivered higher education in partnerships with registered providers and therefore have accessed public funds through those partnerships. Accordingly, we are proposing a new requirement that will test a provider’s track record in relation to fraud and receiving public funds as we believe track record to be a strong indicator of a provider’s suitability to be registered.
146. At the moment, there is no clear registration test relating to a provider’s track record in relation to fraud and inappropriate use of public funds and our initial view is that such a test is needed to ensure that this can properly be accounted for in our assessment. If a provider has no prior experience with public funds and no relevant fraud convictions, it only needs to show that it has comprehensive arrangements in place to detect, prevent and stop fraud and the inappropriate use of public funds.

[18] See Introduction to the consultation on new registration conditions.

[19] See Introduction to the consultation on new registration conditions.

[20] See Investigation into student finance for study at franchised higher education providers.

147. We propose to require a provider seeking registration to have:
1. Comprehensive arrangements in place which are adequate and effective for preventing, detecting and stopping fraud and the inappropriate use of public funds.
2. A satisfactory track record of fraud convictions and receiving or accessing public funds.
148. We propose to prevent any provider that has previously been found to have committed misconduct in relation to fraud or the inappropriate use of public funds (within the last 60 months) from registering with the OfS.

Question 6a: Do you agree that initial condition E7 should include the two proposed tests (relating to arrangements a provider would need to have in place and evidence that the provider has a satisfactory track record in relation to fraud and public funds) in its requirements?

149. To demonstrate that it has comprehensive arrangements in place to detect, prevent and stop fraud and the inappropriate use of public funds, we propose that a provider should have a combination of policies, processes, training and designated staff responsible for these processes. We recognise that different providers may need different arrangements because of their individual circumstances and the risks posed by their business models. However, we propose that comprehensive arrangements must include, as a minimum:
1. A conflict of interests policy
2. A risk register and corresponding mitigations relating to the prevention of fraud and protection of public funds
3. Internal control processes relating to the prevention of fraud and protection of public funds, including in relation to the submission of accurate data
4. Whistleblowing policy
5. Anti-bribery policy
6. Fraud awareness and prevention training
7. Provision for staff (and reporting structures) responsible for oversight of the arrangements listed above.
150. Our initial view is that all providers, regardless of size, shape, or complexity should have the arrangements listed above in place to safeguard against fraud and the inappropriate use of public funds. The proposed list of minimum requirements represents the arrangements that are most commonly absent or ineffective in registered providers that have had issues with fraud or inappropriate use of public funds. Where a provider’s business model poses specific risks, for example where it uses recruitment agents, we would expect it to identify those risks and have appropriate mitigations (policies/processes/training/staff) in place to meet the requirement of this test.

Question 6b: Do you have any comments about the proposed requirements for the arrangements that a provider would need to have in place to prevent, detect and stop fraud and the inappropriate use of public funds?

Question 6c: Do you think we have identified the correct minimum requirements to be considered as ‘comprehensive arrangements’? What else should be included?

151. We propose that the arrangements that a provider has in place must be adequate and effective for the purposes of detecting, preventing and stopping fraud and the inappropriate use of public funds.
152. We have defined ‘adequate’ to mean an arrangement is capable of delivering its stated or implied objective.
153. To assess ‘adequacy’, we propose to consider a range of factors such as whether the arrangements are regularly reviewed, whether they are tailored to address specific risks in the provider’s business plan, and whether the provider has the resources and staff to implement its arrangements in practice.
154. We have defined ‘effective’ to mean it is operated so as to deliver its stated or implied objective, and those objectives are delivered as a result.
155. To assess ‘effectiveness’, we propose to consider evidence from our regulatory activity, third party notifications, or publicly available information. For example, where we have evidence that a provider’s operation of its conflict of interests policy has failed, that provider’s arrangements may not be considered as effective.
156. The second test in this proposal is that a provider must have a satisfactory track record of receiving or accessing public funds. We propose that a provider will be deemed not to have a satisfactory track record if one of the following has occurred within the past 60 months:
1. The provider was convicted of the offence provided for in section 199 of the Economic Crime and Corporate Transparency Act 2023 (failure to prevent fraud);
2. A relevant person has made a final decision which directly or indirectly revokes the provider’s access to, or directly or indirectly requires the provider to repay, relevant public funds on grounds relating to a relevant fraud offence and/or the inappropriate use of such funds; and/or
3. A conviction described in E7E.3.a.i, and/or a decision described in E7E.3.a.ii, has been made in relation to another legal entity that the OfS considers to have been operating substantially the same higher education business as the provider.
157. The offence provided for in section 199 of the Economic Crime and Corporate Transparency Act 2023²¹ is related to a failure to prevent fraud. We propose using this offence as an indicator that a provider does not have a satisfactory track record – we consider that a previous failure to prevent fraud is a negative indicator of its ability to prevent fraud in the future.

Question 6d: Do you agree that a provider should have a satisfactory track record in relation to receiving or accessing public funds in order to be registered with the OfS?

158. We propose to consider that a provider does not have a satisfactory track record where it has had its access to public funds revoked or where it has had to repay public funds. We consider that where a provider has previously had access to public funds and has demonstrably failed to protect those public funds, this should be considered as a negative indicator that it is able to prevent fraud and inappropriate use of public funds in the future.
159. A provider may have previously operated as a different legal entity but operated substantially the same higher education business. In this case, we propose that (for the purposes of this requirement) the OfS will judge that the provider does not have a satisfactory track record of receiving public funds if it has been subject to a decision or conviction described in the paragraphs above. This proposal has been designed to ensure that a provider that has previously been subject to a decision or conviction set out in this requirement is not able to circumvent the test by changing its legal form.

Question 6e: Do you agree with the proposed factors that the OfS would use to establish a provider’s track record?

160. Our proposals would apply to all providers seeking to register with the OfS. All a provider’s higher education courses, and the students on those courses, would be within the scope of the condition, irrespective of where or how courses are delivered or who delivers them. The reason for this approach is to ensure that all students, and the associated public funds attached to the course they are studying, benefit from regulatory protection where a registered provider is involved in their higher education course, regardless of the type of course they choose, or who delivers that course. We propose that this principle would apply to the use of fees paid directly by students as well as public funding. Our initial view is that it is not appropriate for a lead or delivery provider to seek to generate income, or gain other benefits, through partnership arrangements while evading responsibility for protecting the public funds or funds received direct from students.
161. Our initial view is that a provider that meets the two requirements set out in the proposed condition would provide us with assurance that there is a low risk of a relevant fraud offence or the inappropriate use of public funds from taking place at the provider.

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

162. We have considered the following alternative options for achieving our overarching aims, which are set out in Annex B. For Proposal 6, these are:
1. Smaller or larger collection of documents to demonstrate arrangements.
2. Use a different time period to assess track record.
3. Automatic assumption of non-compliance or full discretionary approach for the track record requirement.

Question 6f: Do you have any additional comments on this proposal?