Fraud, organised crime and TikTok – the NAO on franchising

When the Public Accounts Committee (PAC) announced on January 10th that it was to open an investigation into student loans issued to students studying at franchised providers, it was obvious that something was up.

Back in 2018, it had warned that serious allegations of fraudulent practices at alternative providers showed that the Department for Education (DfE) had not done enough to close down opportunities to “play the system”.

It also argued that the then new Office for Students (OfS) should learn those lessons when it took over responsibility for the alternative provider sector from DfE.

Now we know why the PAC is so concerned.

The National Audit Office (NAO) has published its Investigation into student finance for study at franchised higher education providers. We’ve heard hints of this from OfS – but the essence is that since early 2022, it turns out that the Student Loans Company (SLC) and OfS have detected several instances of potential fraud and abuse at franchised providers.

On hearing about it, DfE involved the Government Internal Audit Agency (GIAA) to review the regulatory landscape, which duly rolled its sleeves up to seek independent assurance over the effectiveness of the system – including assessing, in many cases, whether students actually existed and/or and attended courses.

What it effectively found was a mess of varying accountabilities, “risk appetites” and approaches to fraud – a sort of circular blame game between OfS, SLC and DfE over what looks like serious failures to detect, recognise and mitigate systemic fraud risks.

We’ve discussed before the major reputational risks to the sector – given that universities themselves are placed in the primary position of taking responsibility for what’s going in inside franchised provision, the aggressive sales tactics, astonishingly rapid expansion and significant profits will do nothing to quell the disquiet that swirls around universities.

But as well as taxpayers, caught in the middle are potentially tens of thousands of students, none the wiser to the prospect that the provider(s) they’ve enrolled into are caught up in relationships who don’t do nearly enough to protect their interests.

I’m looking for a partner, someone who gets things fixed

The story starts with quite a stark stat – the number of students enrolled at franchised providers more than doubled from 50,440 in 2018/19 to 108,600 in 2021/22 (and by the looks of HESES, grew even further in 2022/23 and likely further again into this academic year). UCAS data also suggests that it’s still growing.

Remarkably, much of the expansion to end of 2021/22 had been in a relatively small number of providers – eight of the 114 lead providers were responsible for 91 per cent of the growth.

That doesn’t make it what’s going on automatically bad – as DfE points out to the NAO in the report, franchising can help widen access to higher education, and the NAO makes it 6 in 10 of those studying at franchised providers in 2021/22 were from neighbourhoods classed as high deprivation, compared with 40 per cent of students at all providers.

But if anything, that heightens the need the step up protection – students whose families have little experience of HE, or are likely to not have the cultural capital to challenge what they experience or question what’s being advertised, are likely to be the sorts of students that universities and regulators should focus on – especially when clustered together in remote, franchised out providers who are operating for profit.

The money thing matters. While much of the sector is complaining about fees not covering costs, in these arrangements the university makes money (taking, according to the NAO between 12.5 per cent and 30 per cent of the tuition fee), sales agents who do the recruitment make money, in some cases students themselves make money for “referring a friend” (or relative), and the unregistered providers themselves make money – quite considerable sums, as we see below. In some cases, it’s a wonder there’s any money left for teaching or student support.

Formal fraud is always good at finding weaknesses in regulatory systems – and the key thing here is that it’s on the increase. The NAO says that over the past five years of OfS existence, trend data show that at franchised providers, detected fraud cases have increased faster than the proportion of SLC-funded students – in 2022/23, 53 per cent of the £4.1 million worth of fraud detected by SLC was at franchised providers.

Ask yourself this question, do you want to be rich?

To illustrate the issue, the report pulls out two specific instances of potential fraud and abuse. Back in the first half of 2022, SLC’s analysis detected instances of fraud potentially associated with organised crime across 10 lead providers, which led to DfE instructing SLC to suspend payment of tuition fees while cases under suspicion were investigated. That led to SLC identifying and challenging 3,563 suspicious applications associated with £59.8 million of student funding, with a quarter of that money still withheld as at January 2023.

Separately in May 2022, a lead provider raised a reportable event to OfS that it suspected widespread academic misconduct at one of its franchised providers and was undertaking investigations. That found evidence that the “majority” of students were not producing their own assignments, and when asked just 6 per cent of students responded to a call for info – with the university suspecting they had been coached in their responses.

It then (unilaterally?) withdrew “the majority” of the then 1,389 students enrolled at the franchised provider – and while SLC has recovered £6.1 million in respect of the tuition funding provided, and OfS has clawed back £172,600 of its grant funding, to date, DfE and OfS have not imposed other sanctions on providers.

Of course students weighing up whether to enrol either with those lead providers and/or their franchise partners who might want to know about this sort of thing have been kept in the dark – because even now, we don’t know which universities or alternative, unregistered providers that the NAO is using as examples.

It’s not clear whether an independent audit report that NAO says OfS shared with DfE and SLC into one franchised provider is related to either of the above examples – but it apparently does show poor management of recruitment agents, weak controls to assess students’ English skills and course suitability, a lack of an independent review of coursework and instances of plagiarism, inconsistent student enrolment processes, and inconsistent monitoring of student attendance.

We also learn that one university confirmed to OfS in August 2022 that it had ended a franchise arrangement, with “no further recruitment, enrolment, or progression for current or new students and no further teaching taking place.”

We don’t know if the provider was then free to carry on recruiting or teaching others being franchised from other universities, what happened to students whose teaching was just “stopped”, whether there was any sort of proper process, whether other universities who might have been in bed with that provider were warned, and whether those students are still in “debt” for the fee and maintenance loans they did incur. We should.

I can program a computer, choose the perfect time

The report goes on to describe what it says are “systemic weaknesses” in the control framework, which really ought to have been obvious to anyone who remembers the “cashpoint colleges” scandals of the middle of the last decade.

It notes that nobody seems to have any oversight of recruitment practices – which we know (the NAO noted both our work and the NYT’s work on this) can involve domestic agents, adverts focussed almost exclusively on maintenance cash or how “easy” the course will be (often on TikTok), door to door sales and a particular penchant for scooping up students with pre-settled status.

It also notes that there is insufficient evidence that students, once enrolled, are attending and engaging with their courses – SLC trusts what universities tell them, and universities appear to have been trusting what their partners tell them too. And even if the student “exists”, the NAO berates a system which has no effective standard against which to measure ongoing student engagement, nor any legal or generally accepted definition of attendance.

Of course even “ghost” students would presumably show up in continuation stats unless those involved were bold enough to pretend they were around for the full three years (plus, usually the foundation year) – but as it stands OfS has been monitoring those stats over four aggregated years, and still doesn’t publish the “view” that would enable us to see continuation by franchised-to provider, despite promising to do so last year.

You end up with a sort of regulatory bermuda triangle. DfE seems to have been at best naive – its dataset on the outcomes of courses with a foundation year, for example, doesn’t seem to have noticed that a huge chunk of what it’s seeing is almost certainly franchised provision, despite us pointing that out to DfE officials when it was published last October to what felt like indifference.

Neither SLC nor OfS has a formal fraud enforcement role – at a provider or system level SLC doesn’t regulate, launch investigations, request additional data, or apply sanctions. And while OfS’ conditions do cover management and governance, its powers don’t directly relate to tackling fraud.

As the NAO says in the report, franchising universities benefit financially from increasing student numbers and have few incentives to detect abuse of the student loans system – and OfS has no automatic sight of the contractual arrangements between lead providers and franchised providers. Meanwhile, various players make money.

I’ve had enough of scheming and messing around with jerks

There are some recommendations here. Better data sharing between DfE, SLC and OfS, additional oversight or regulation (some of which might need primary legislation or statutory instruments to implement), better comms to governing bodies, and a look at whether the benefits re WP are worth the risks involved in this way of delivering it are all mooted – as well as advice on handling (domestic) sales agents and putting some standards in what we mean by engagement.

None of those are bad ideas per se, but if I was on the Public Accounts Committee, I’d have more questions to ask and potentially better recommendations to make to avoid any further disasters.

I think I’d first want to know why this is the first we’ve heard of the scale and specifics of the issue, and why even now we don’t know which universities and providers have been found wanting. This is partly public money and partly student loan debt we’re talking about here – and OfS’ regulatory design is supposed to support both information and choice, and making clear examples of some to warn others.

I’d then want some clear answers on the “maintenance loans but not fee loans” issue that my colleague David Kernohan has been spotting in SLC data for a couple of years now. The NAO report doesn’t really cover it, and there are some plausible explanations – but nothing that properly explains how some providers are drawing down such large sums in student support when compared to such low sums in fee loans.

I’d be keen to interrogate why DfE and OfS have neither learned the lessons from the mid 2010s, nor apparently learned the lessons from any number of franchising scandals in FE. The regime in colleges is much stricter as we noted here – and while some of the circumstances in HE are different, those arrangements would be a helpful start.

Think about it seriously, you know it makes sense

I’d want to know why OfS has seemingly been asleep at the wheel on very rapid expansion. There was a time when it explicitly suggested that providers should phone in “a substantial increase in the number of new students registering at a provider”- because it could affect the provider’s ability to satisfy condition E2 (management and governance) in the short term, and conditions B2 and B3 (quality and standards) in the longer term, especially where the increase “raises concerns about whether such growth was effectively planned and managed, or whether the quality of student support or student outcomes will be maintained for larger numbers of students”.

That was framed around a provider itself rapidly expanding – let alone doing so through arm’s length agreements with a profit motive attached. Did reportable events to that end come in? Did OfS do anything with them? I’d also want to know why we still can’t see the outcomes by franchised provider – OfS must have the data.

I’d be wanting to ask serious questions both of DfE and OfS over its monitoring regime – which at design included “random sampling” but was then scaled back at DfE’s behest to depend on notifications, (lagged) data and “other intel” like student surveys. If one of the findings here was that even when asked about cheating, students were coached by the provider to provide answers back, I’m not sure hoping that NSS results throw up a problem or depending on a non-existent SU to whisteblow is a sensible way forward.

On that, one particular thing that strikes me about many of these relationships is the almost total absence of decent, local, independent student representation. Even if everyone involved, from agent, to provider, to university is minded to look after the money, putting proper student representation – in these cases probably involving the franchising university’s SU – on a more statutory footing would help encourage this sort of thing to manifest externally.

Instead of viewing such bodies through the lens of cancel culture, assuming that they are capable of assessing when something is wrong and giving them duties to signal as such in return would help protect students out on these limbs in all sorts of ways. Quality assurance depends on independence on the inside.

I’d be asking about the sorts of controls that Wales and Scotland have over loans issued to students in England – neither are mentioned in the report, but in some cases English students are studying in England when the regulation over the provider is elsewhere. I’d also be asking about OfS’ ditching of its work on recruitment of students back when everyone seemed to have an admissions review on, and why enforcement over consumer protection law has been repeatedly promised for over years to pretty much no avail – especially when one of its now former board members (albeit in a personal capacity) says:

The consumer protection regime fails utterly to do its job in relation to the massive HE industry. The CMA issues ‘guidance’ in 2015 and 2023 that Us blithely ignore; the OfS belatedly gets Trading Standards to act in a few cases and we await the OfS naming & shaming the Us concerned; the OIA can’t hope to process the 150,000 student & ex-students signed up for the putative group litigation; the NUS is silent; the UUK has for decades ducked addressing the need for a fair, comprehensive, standardised U-S B2C contract; and Which? seems to have given up thinking about HE. CRA15 might as well not exist as far as HE is concerned! The only agency with credibility is the ASA which has repeatedly called out Us’ egregious misleading claims in adverts. The student deserves better.

I’d also want someone to do some proper research on culture in the current context. When a university becomes dependent on this sort of money, it becomes very easy to set a tone where nobody asks too many questions, where agreements are commercially confidential, and where the norms of quality assurance and its checks and balances in a large university go out of the window.

I’ve got the brains, you’ve got the looks

As such, most of all, if I was the PAC I’d be asking about profit. Missing from the NAO report is any look, even at a surface level, at the astonishing surpluses and dividends being made by some of the players involved.

In one of the providers that has agreements with multiple universities, the most recent accounts show what we must assume is mainly tuition fee income (presumably after the university franchising fee) of £72m, and a profit before tax of £39m – with the highest paid director on £420k, and a £2m dividend paid out.

In another the accounts show a turnover of £160m and a profit before tax of £36m, and a third shows a £5m profit before tax on a turnover of £13m.

Even if you’re relaxed about private providers in HE in principle, I doubt anyone thinks that the purpose of the student loan scheme is to enable anyone to generate profits of this sort out of what DfE says are students at the sharpest end of WP – regardless of their outcomes.

Once it’s possible and normal to make those sorts of profits, and hand out money that both universities and agents can come to depend on too, be sure that more fraud will be finding its way around whatever safeguards are in place.

___________________

Commenting on the NAO report, the Office for Students said:

We are grateful to the NAO for its work on this important issue. It is essential that student loan funding provided by taxpayers is properly protected. Higher education institutions have obligations to comply with the rules that underpin the student loans system and to meet the OfS’s wider regulatory requirements. As the report sets out, the OfS has worked with the Student Loans Company (SLC) to address concerns that have been identified in individual cases. We will continue to use the regulatory tools available to us to ensure value for money is delivered for students and taxpayers and that institutions are alive to their responsibilities in this area; universities must have adequate and effective control over partner institutions.

Courses delivered by partners must also meet the OfS’s regulatory requirements for quality. We are reinforcing this point by placing a particular emphasis this year on the outcomes for courses delivered through franchise arrangements – because all students, wherever they study, are entitled to a high quality academic experience that leads to positive outcomes. We will continue to work closely with the Department for Education and the SLC to ensure that public funds are protected as we take forward the recommendations set out in this report.

Commenting on the report, the SLC said:

SLC is grateful to the NAO for its work, which in part, builds upon the investigatory work of our Financial Crime Prevention Unit. We routinely perform monitoring activity to detect suspicious activity and have robust controls in place to ensure all payments are made, as stipulated by the student finance regulations. This includes ensuring that we have confirmation of registration and attendance from Higher Education Providers (HEPs) before any payment is released.

We take financial crime seriously and as noted in the report, we proactively raise issues of concern with the Department for Education (DfE) and Office for Students (OfS), taking action to protect public funds wherever possible, within the scope of our powers and remit. It is essential that HEPs meet their obligations under the wider regulatory regime, to ensure that student loan funding is protected and can be accessed as intended by regulation. We will continue to work closely with DfE and OfS to protect public funds and we acknowledge the recommendations set out in this report.

Commenting on the report, the Public Accounts Committee said:

More and more higher education students are studying at franchised providers, who provide courses on behalf of other institutions, but there has been disproportionate amounts of fraud and abuse across these providers. In 2022/23, the value of detected fraud involving these providers totalled £2.2million, 53% of total fraud identified by the Student Loans Company.

Recent fraud has exposed significant gaps, including no clear responsibility for fraud enforcement, across controls designed to protect students and taxpayers’ interests which have been exploited. The Department for Education must clarify and strengthen these controls and promote an anti-fraud culture across government.