Financial sustainability and regulation in HE

In a recently published report on financial sustainability, the OfS found that providers are facing a deterioration in the shorter-term financial outlook in the sector.

40% of providers are expected to be in deficit, and a large number anticipate low net cashflow. The OfS stated that in its view providers’ financial forecasts were based on predictions that were too optimistic on student recruitment, and the short to medium term outlook is likely to be even more challenging than first expected from initial forecasts. Undergraduate entrants for the year 2024/2025 are 10% lower than forecasted, and non-UK entrants are 23% lower than forecasted.

The OfS states that they expect more institutions to encounter financial challenges as a result of this data, and, based on modelling, this could result in up to 72% of providers facing a deficit in 2025/26. The analysis suggested a financial weakening which continues up to 2026/2027, where the financial outlook for the sector is then expected to improve.

The OfS set out that it is doing the following to assist providers at this time:

• Engaging providers who are at financial risk;
• Taking additional steps where necessary if a provider plans to deliver complex or extensive changes;
• Working with leaders of providers facing financial difficulties to understand how these are being addressed and protecting student interests; and
• Ensuring that the interests of students are paramount in the event of provider closures.

At the same time, the accompanying press release included an exhortation by the OfS chief executive to providers to take bold, transformative action.

The difficulty is that there are a number of aspects of the current regulatory environment that make transformative action difficult to take, certainly at pace and to the extent necessary to make any serious impact on the financial difficulties ahead.

There are three areas where the regulator could make a meaningful difference to the ability of the sector to act boldly and transformatively.

Firstly, by supporting good governance. In many institutions, governing bodies are entering unprecedented waters in terms of the extent of financial challenge their institutions are facing. Even if they have experienced similar challenges in their day jobs, implementing change programmes within HE institutions is a wholly different ball game. The regulator has in its business plan already identified the management and governance condition as requiring review, and it should accelerate that work so that governing bodies are clear about what is expected. In addition, the OfS should consider procuring the development of good practice guidance or insights briefing on what good governance looks like in the current climate.

Secondly, a realistic assessment of how the OfS will gauge compliance with its quality and standards conditions when institutions are undergoing transformational change. A number of the quality assessment reports it has published have been critical of the way in which changes have been implemented and their impact on existing students. There is a risk that this may lead institutions to believe that they are expected to make omelettes without breaking any eggs, and this in turn could lead to paralysis. Protecting existing students is undoubtedly vital, but the regulator needs to find and communicate a way of requiring that which does not preclude the immediate and necessary changes necessary to secure the sustainability of the provider as a whole.

This leads to the third point – the consumer protection registration condition. This may be one more for institutions to ensure they have robust arrangements in place that give them as much flexibility as is consistent with consumer protection law, but there is also a role for the regulator in shaping the discourse. Just as an example, the recently published financial analysis was modelled on the proposed increase in regulated undergraduate fees being passed on to existing students across the sector. However, whether or not fees can actually be passed on will depend on compliance with consumer protection law, which is restrictive and difficult to apply in the context of the institution-student relationship. The same applies to making changes, let alone radical changes, to service delivery. At the same time, institutions slipping into decline because they cannot increase fees or make sensible modifications to how they deliver things is not in the individual or collective student interest or indeed the national interest.

The OfS has a role to play in supporting the sector in facing these challenges and it can do so while still respecting institutional autonomy and avoiding the charge that it is propping up failing institutions or has been captured. Perhaps it too should consider bold and transformative action to meet the challenge of regulating effectively in the current climate.