What happens when providers run out of money?

One of the initial goals of the Office for Students was to normalise the process of market exit.

If you take the hyper-simplified model of a higher education marketplace that has dominated policymaking in England since the mid-00s, providers exiting higher education is the sign of a healthy sector.

With funding following (in the main) applicant choice, financial failure can be seen as a reification of the invisible hand – the consequence of an unattractive offer. The regulatory systems and tools around this part of the institutional life cycle – student protection plans, and later student protection directions – exist only to safeguard students studying at a college or university at the point of failure.

Too big to fail?

Former OfS chair Michael Barber set this out at Wonkfest in 2018:

Should a university or other higher education provider find themselves at risk of closure, our role will be to protect students’ interests, and we will not hesitate to intervene to do so. We will not step in to prop up a failing provider.

Despite this, ratings agencies still assume that larger providers would not be permitted to fail. Moody’s, for example, grants De Montfort University an investment grade (A1) rating and the University of Cambridge an Aa1 rating in part because:

high likelihood of extraordinary support from the Government of United Kingdom (Aa3) in the event that the issuer faced acute liquidity stress

Back when I spoke to sector finance experts about this I was assured that this was just one consideration among many for lenders, and that the “extraordinary support” could equally include forced mergers (under Section 128 of the Education Reform Act 1988) and things like the Covid restructuring regime.

There is – as there always tends to be – a political angle to all this too. A larger university as a clear impact on a locality, often as the largest employer, and nearly always as a significant contributor of income (from staff, students, contracts) and wider benefit (upskilling, spin-outs). Any MP worth their salt would be quick to complain about the loss of such a significant contribution. For smaller providers these may be less compelling arguments, but civic pride and local need do have a tendency to appeal to politicians.

Can governments close universities?

Back in the Gavin Williamson golden years, you did get the impression that he’d have quite fancied closing the odd higher education provider for culture wars reasons. Indeed, some of the “no bailouts” language we hear from government is a way to make ministers feel like they have the power of life and death over universities.

A while back, Dennis Farringdon took us through the law as it relates to struggling higher education providers and the interventions available. We quickly get into issues around the legal structures of specific providers – but one key takeaway is:

there is no power in today’s legislation for the government to give “extraordinary support” to a particular HEC. On the contrary – if an HEC is experiencing “acute liquidity stress”, i.e. going bankrupt, ministers have no powers to intervene at all in the absence of mismanagement

If you are wondering how that squares with the Moody’s expectation that the government would step in if a provider was struggling, that’s our path into understanding the middle route taken in some recent sector exits. There is, in other words, intervention in an autonomous provider – and intervention that safeguards some of the work and responsibilities of a provider without safeguarding the provider itself.

Would government look silly if a situation arose where multiple providers collapsed due to an ill-considered policy decision? Absolutely. Through the Covid-19 pandemic, we didn’t see the general bailout that Universities UK called for, but we did see a number of other measures designed specifically to prevent that kind of mass failure. It was not a well designed set of interventions – it favoured particular kinds of providers, and particular potential problems, and started with particular assumptions not necessarily suited to the sector – but it is illustrative of the kind of ways government could step in if it felt it needed to.

The role of information

Covid was – hopefully – a very rare situation. What we tend to see is a single provider gradually becoming less viable over time. It will likely try some restructuring and cost-saving measures to start with (either without or with the support of the regulator), but if these do not work we get to a stage where managers cannot see a way in which a university or college can continue teaching, researching, and (indeed) paying people.

Though OfS talks a lot about transparency and information sharing, announcements or even rumours that a provider is circling the drain can become a self-fulfilling prophecy. Existing and prospective students – existing and prospective staff members, and other stakeholders – clearly have an interest in knowing if their contracts might not be honoured. But if a provider starts looking unviable, none of these groups would want to take a risk on it – meaning that looking unviable soon becomes being unviable.

Think back to the thirteen providers the Institute for Fiscal Studies predicted would be at risk of insolvency as a result of Covid-19. If you know sector data, and if you read the report carefully, you could very easily identify those at risk. I did it – I know the names – and many others did it too. But IfS chose not to out providers, and I made the same choice, for the reasons outlined above. “Some higher education providers are at risk of insolvency” helps encourage government and regulators to take action. “These higher education providers are at risk of insolvency” also damages the providers in question.

Some worked examples

All this makes more sense when you consider what actually happened during some recent market exits in England.

Heythrop College

In late June 2015 the governing body of Heythrop met to discuss the future of the college. Heythrop was a constituent college of the University of London since 1971, and was established by the Jesuit order to teach theology, philosophy, and divinity. It entered the state funded sector in August 2006 – gaining access to capital funding and the various funding competitions that HEFCE offered at the time.

The 2015 decision to close – based on a reduction in student enrollments following the rise in home undergraduate fees – represented the first major provider to exit the sector in England since the original University of Northampton in 1265. The original plan was to merge provision with St Mary’s University in Twickenham – a former Catholic teacher training college that became the first Catholic University in England in 2014.

You might expect this to have been a match made in heaven, but the differing ethos of the two providers and concerns about deeper structural issues at Heythrop meant that this was not meant to be. The Tablet also reports on an attempt to merge with the University of Roehampton that also failed to happen.

College leaders were always clear that their intention was to “teach out” existing courses before closure – so HEFCE’s role in terms of the student interest was comparatively minimal. Heythrop had to notify HEFCE of their decisions, but there was never an active role for the regulator.

LCCM

The London College of Contemporary Media was a private provider, and entered administration in January 2018. With 250 students studying courses validated by the Open University there was significant external and regulatory interest in what would happen to them. The Open University initially established an agreement with the Academy of Contemporary Music to take on LCCM students, but this was before Global University Systems (GUS) purchased LCCM from the administrator.

We wrote about this at the time, and the comment we got from HEFCE was instructive. The former regulator told us:

We have no regulatory locus in relation to details of provider ownership or purchase – our overriding concern is the protection of students within the terms of our remit.

At the time, we speculated whether the Office for Students would take a more active role – and indeed would have more information available to it earlier on in the process. Indeed, HEFCE only became aware of the insolvency the day before it was announced – financial sustainability, management, and governance checks had been carried out (with the situation deemed satisfactory) as recently as November 2016.

GSM

The former Greenwich School of Management (GSM) ended administration in August 2019 – with teaching ceasing in September of that year. Again, it simply did not recruit in accordance with expectations. Attempts to identify a buyer failed, so the board chose to “seek the protection afforded by a formal insolvency procedure”.

As my colleague Jim Dickinson explained for Wonkhe, GSM never appeared on the OfS register – it applied, but was not successful, and it is possible that a lack of financial strength was the reason for refusal. Because GSM didn’t operate as a registered provider, affordances designed to protect students in situations like this – such as a student protection plan – did not exist. The University of Plymouth, which validated GSM courses, included GSM students within its own student protection plan.

Instead the provider itself, with some support from the University of Plymouth as validation partner, sought discussions with other providers in London in order to secure continued provision for students. The Office for Students and the Department for Education were party to these discussions, and the Office for the Independent Adjudicator offered a useful commentary. Some students were offered a bursary on transferring to Coventry University London, though this route wasn’t available in all cases.

ALRA

The Academy of Live and Recorded Arts announced an intention to close on 5 April 2022, announcing mass staff redundancies and locking students out of buildings at the two locations (Wandsworth and Wigan) it offered courses at. ALRA was a registered (“approved”) provider at the Office for Students – and had reported emerging concerns about finances to the regulator as far back as November 2021.

OfS worked with ALRA and other organisations to ensure that student interests were protected – announcing that students would be offered a place at Rose Bruford Colleges to continue their studies. Questions remain about the fate of term 3 fees paid by students – as an “approved” provider ALRA charged fees above those which could be covered by SLC fee loans.

As Jim noted on the site the whole saga raised serious questions about the ways in which OfS managed the situation. The regulator should have been informed of the various failed attempts to seek savings via reconfiguration, the early notification of concerns (as a reportable event) should have prompted a rewrite of the ALRA student protection plan, and it remains unclear whether a student protection direction was issued.

In a peculiar echo of similar situations, OfS was not aware about the decision to close the provider a matter of days before it was announced – meaning it was unable to address the interests of students (who were at the point of paying term 3 fees) and applicants (who were making decisions about where to study) in informing them that “their” provider would no longer exist.

What we have learned

The balance between transparency for students, and confidentiality to allow providers and regulators to work behind the scenes to serve student interests, is a difficult one to get right. Though regulators and ministers are often keen to talk about processes and principles, the actuality of negotiating sector exit has tended to fall on the providers (and their validators). Innovations like student protection plans and student protection directions have still not proven their worth. Every situation seems to come as a surprise, and a shift to a system of regulation based on data, notification, and risk-based interventions appears not to have changed this.

Until a large, recognisable, university provider faces insolvency we will never know exactly how any of this will work. We still have a two-tier system, and one which is still subject to political intervention. Would a minister keen to score points with certain tendencies within their party want to make an example of a struggling large modern provider, but not want to face the public opprobrium of seeing a “traditional” university fail on their watch? It all seems possible.

Market exit, in other words, has still not been normalised. As much as we might pretend that the invisible hand makes the decisions – provider monitoring, insolvency, and student support – the actuality of the process remains as messy and human as it ever was. The pre-OfS strategy – of selectively limiting provider borrowing, loosely controlling provider growth and shrinkage, and (yes!) selectively bailing out providers if this was needed to protect the interests of students or applicants – feels like a more honest approach.