Reading the small print – OfS terms and conditions of funding

David Kernohan can’t resist a look into the updated terms and conditions from OfS, released just before Easter.
This article is more than 2 years old

Take out the trash day – as well as being the name of a West Wing episode – is also used as a more general phrase for the release of stories and documents by a government on a day and at a time likely to garner the least possible press coverage.

Maundy Thursday (29th March) would feel like a great example of a take out the trash day – the last sitting day of the parliamentary term, the eve of a four day public holiday, and (excuse us) eleven days in advance of the next scheduled Wonkhe briefing email. And yet, it was the day chosen for the launch of the new Office for Students website, accompanied by the publication of six documents.

Those six documents in full

DfE and BEIS also got in on the act, with Guidance for higher education providers: criteria and process for applying for university title and university college title, and guidance on taught and research degree awarding powers, all released that Thursday.

And it doesn’t end there. One week later we got a letter from Nicola Dandridge to OfS-funded higher education providers, concerning teaching funding in the period from April 2018 to July 2019 (savings of £22m, primarily from cuts to support for PGT, if you are interested).

Reading the terms

None of these documents had particularly enticing titles, but the most boring sounding one was the “Terms and Conditions of Funding for Higher Education Institutions” (T&Cs). On the face of it, you’d expect this to be a near duplicate of the most recent HEFCE “Memorandum of Assurance and Accountability” (MAA) – it outlines what is expected of institutions during the interim period while OfS regulates the sector using the old HEFCE rules.

One obvious change is that the MAA also covers functions that are now within the remit of Research England, as well as OfS. Research England is yet to publish its own terms and conditions, but it is to be sincerely hoped that these will at least generally align with the OfS ones – early signs (the fact this is at least mentioned in the OfS T&Cs) are promising. The risk of regulatory divergence between teaching and research was raised repeatedly in the Lords’ HERA debates and at our recent “It’s Alive!” event – the way in which OfS and Research England interact will be closely watched.

Regulatory Notice 2 – another Maundy Thursday publication – also has a bearing here. Though largely acting as a wrapper for the T&Cs, it had to be laid before parliament. You’ll find a few delights therein:

  • Quality Review Visits (QRVs) scheduled during the interim period will go ahead…
  • … as will Assurance Reviews.
  • Institutions will receive their next risk letter (which have previously contained the private risk rating granted to an institution) in Spring 2019.
  • All this will run parallel to the establishment of OfS’s own risk management procedures.

Permission to borrow

Under previous HEFCE rules if you were attempting to borrow a load of money, say to pay for a new campus – and that load of money would mean your total borrowing was more than six times your annual cash flow – you had to write and ask the regulator.

This was one of the ways in which HEFCE managed institutional risk – and it was this very management of risk that offered institutions the ability to borrow large amounts of money. Because HEFCE wasn’t about to let an institution go under without serious support and intervention first – and was not going to let them borrow when they couldn’t afford to, goes the argument, lending to an English HEI is a safe bet.

But as of these new T&Cs, the need for written regulator permission before agreeing to new provider commitments where total financial commitment will increase to above six times average adjusted net operating cash flow (ANOC) is gone!

Interestingly, OfS does still have the ability to control institutional borrowing during the interim year, where either the OfS has informed the HEI that it is considered to be ‘at higher risk’ or the OfS has informed the HEI that it wishes to engage with it on the basis of ‘focused dialogue’. This mirrors earlier HEFCE requirements for at risk institutions – but with the general rule gone the temptation to borrow more will be felt by all institutions.

Of course, when we get to the actual Regulatory Framework it appears such safeguards around borrowing may (or may not) be managed via the idea of a “Reportable Event”, alongside OfS examining annual audited financial statements, and financial forecasts (usually annual). This is, effectively, self-regulation – as long as a provider can make a convincing strategic case for borrowing there does not appear to be anything like the ANOC-times-six rule of thumb. Only where an institution’s own forecasts are not being met would the OfS take a serious interest – responsive rather than preventative regulation.

Let’s talk about exchequer interest

Imagine you are a large public HEI. Recruitment is down, debts are mounting, and you are at the stage that you’re not sure where next month’s salary bill is coming from. The campus is still in decent nick, built up over many years by – among other resources – the careful use of capital grants from HEFCE. But that, plus your degree awarding powers, and your reputation, represent the sum total of your assets, against debts that include a huge bond you issued a few years back. You could end up insolvent, or accept the offer of purchase from a private provider. Or indeed, both.

In these cases HM Treasury has an interest in assets that it has paid for – investments made for the public good that are no longer being used in ways that benefit the public good, for the purpose originally granted. The value of these assets is calculated – including an accounting for depreciation – and are described as exchequer interest.

HEFCE performed this calculation annually, based on an up-to-date register of public grants received. A figure was sent, each year, to every institution in receipt of funding. We’ve no way of knowing how many institutions made the decision not to go private – or, less dramatically, other investment or strategic decisions – as a result of this.

But OfS has dispensed with the register and the annual calculations, starting in the interim year. The new terms and conditions (which remember, cover the interim year – ahead of the move to the auspices of a regulatory framework that contains no mention of exchequer interest at all) suggest that they will calculate an exchequer interest balance for an institution only after a trigger (insolvency or similar, cessation of designation) is activated.

I would have thought it might have been much simpler to continue with the same set-up, at least for the transitional year. The HEFCE staff responsible will have (mostly) joined the OfS, the procedures exist and have done so for years, the data exists. Deviation from this practice has to be a deliberate policy decision – but why?

I asked the OfS and they told me that the annual calculations were burdensome, and very few providers actually used this information. They said triggers aren’t changing, and OfS will still use the same calculation method as HEFCE did if a provider triggered the exchequer interest process at any point. They said they’ll share the workings of their calculations in the (so far, rare) event that things come to this point.

Easing in to a new regime

What both of these unexpected moves suggest is that we are already moving into the world of light-touch, risk-based regulation. This is an approach that trades aspects of oversight for a reduction in regulatory burden, and whether the line has been drawn at the right place will clearly be kept under review.

The easy way to manage the interim year would have been to directly roll over the existing HEFCE agreements – though much of the text of those agreements remains intact, these changes indicate a regulator that is itching to make the regulatory changes that policy and legislation mandate.

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