The potential reclassification of universities by the Office for National Statistics: some initial thoughts

The ONS forward work plan indicates that it will be considering its classification of UK universities in quarter 4 (October to December) 2023. This follows its decision late last year to reclassify further education corporations, sixth form college corporations and designated FE institutions in England from non-profit institutions serving households (NPISH) to the central government sector.

The reclassification of English FE colleges was not necessarily unexpected, but the consequences arguably were. FE colleges had as recently as 2010 been reclassified from NPISH to central government, on the basis of legislative controls available to the government. At that time, however, the government reacted by legislating to reduce those controls and therefore by 2012, FE colleges were once again classified as NPISH.

The government’s reaction to the 2022 reclassification of colleges was very different. DfE responded immediately by introducing additional controls, notably on the ability of colleges to borrow and to enter into “novel, contentious or repercussive transactions”, but these immediate requirements could be followed by yet more intrusive and demanding controls in the future.

The prospect of similar controls being applied to universities in the future raises significant questions about institutional autonomy and therefore it is worth reflecting on what we know so far and where some of the risks might be, even though at this stage this is necessarily speculative.

What is the basis of ONS classification decisions?

According to its website, classification involves the following considerations:

• whether the institutional unit is a non-profit institution (NPI), or not;
• whether the unit is subject to public sector control, or not;
• whether the unit produces financial services, or not; and
• whether the unit is a “market” or “non-market” producer.

Public sector control can be established in a number of ways. In the case of colleges, a key factor was the power of intervention the Secretary of State has in cases of mismanagement or failure to meet local skills needs, and it was the existence of these rights rather than the exercise of them that was sufficient to meet the relevant threshold for control. However, control via intervention rights is not the only test, for example, excessive regulation, contractual conditions or the right to stop an entity from terminating its relationship with the government are also relevant considerations.

Based on the cases published by the ONS, decisions on public sector control are fact sensitive and involve detailed consideration of the context. For example, the ONS reviewed the classification status of a private company, Celsa Steel (UK) Ltd, following the UK Government’s provision of an emergency loan on 2 July 2020. It concluded that the conditions of the loan, which included commitments to net zero carbon targets and restraints on executive pay and bonuses, meant that Celsa Steel (UK) Ltd was subject to public sector control for the period of the loan.

In the higher education context, there are no intervention powers akin to FE, and so the risk is whether legislation or regulation which constrains the ability of individual institutions to determine their general policies or to make decisions about their day-to-day activities could cross the threshold of control.

What is the rationale for the potential reclassification of universities?

The ONS has previously considered reviewing the status of universities. In January 2017 it announced that it would look at universities as a result of the introduction of substantially higher tuition fees in 2012. Interestingly, at that stage the ONS said the focus was on whether the higher fees affected the classification of universities as market rather than non-market producers. It stated that it was not aware of any legislative or similar changes that called into question the private sector classification of universities at that time and therefore public sector control was not intended to be assessed as part of the review. However, this review was paused in 2018 as a result of the announcement of the Augar Review and the possibility of a different cap on fees.

For completeness, although not directly a review of universities, in December 2018 the ONS reviewed the treatment of student loans in the national accounts and public sector finances. It concluded that the loans should be treated as part financial assets and part government expenditure.

The ONS’ explanation of its current decision to look at universities is curious. It says:

Since the early 2000s, universities have been classified together within the non-profit institutions serving households (S.15) sector in the UK National Accounts. As there have been many changes in the higher education sector since then, including The Post-18 Education and Funding Review in England, the Higher Education Governance (Scotland) Act 2016 and the Higher Education (Wales) Act 2015, ONS will undertake a classification review of the sector in accordance with the latest international statistical guidance

Whilst it is undoubtedly the case that there have been many changes affecting the UK HE sector since the early 2000s, the list of changes referred to by the ONS omits some of the most significant such as the Higher Education and Research Act 2017, or the Tertiary Education and Research Act Wales 2022.  The reference to the Augar Review is also strange as the Review itself did not and could not introduce or amend any controls. As well legislative changes, there have been regulatory and policy changes over that time, different across all four nations, and mapping the impact of these is likely to be complicated.

What are some of the issues raised by the proposed reclassification?

One of the inherent challenges in a four nations exercise is that there is the possibility of different conclusions in each nation which could erode further the idea of a UK higher education system. There are also complexities related to the diversity of forms that universities take. Universities may be chartered corporations, statutory corporations, companies limited by shares or by guarantee and even the odd unincorporated association, so their foundational documents differ. Some are for-profit but most are not. The legal and regulatory framework to which they are subject is the same irrespective of provider form in England, but not in Wales, where, for example, universities that are statutory higher education corporations can be dissolved by the government without their consent, but other universities cannot.

Some of the issues that led to the ONS’s consideration of the classification of universities in 2017 being postponed remain outstanding. The DfE 2022 consultation on proposed higher education reform included measures that, depending on how they are applied,  could potentially be relevant such as minimum entry requirements and student number controls, but we have not yet had the government response to the consultation.

Some aspects of the regulatory framework in England are more intrusive than others. For example, in cases where the OfS considers that there is a material risk of market exit, under Registration Condition C4 it may impose student protection measures that would severely limit the ability of providers to set their own general policy and manage their own day to day activities.

There has also been an increasing amount of ministerial guidance to the OfS and on occasion to the sector direct. The Secretary of State has the power to give directions to the OfS with which it must comply, and institutions themselves have no choice but to comply with any requirement imposed by the OfS, or face losing their place on the register and with it their right to award degrees and maintain university title. Could the existence of these powers, even though they have not been exercised, satisfy the requirement for control?

Perhaps the biggest risk is in the consequences of any reclassification. Looking at the reaction of the DfE to the FE reclassification, in England at least there appears to be little prospect of the government response being to remove or reduce its mechanisms for control and, more likely,  the possibility of similar controls such as those applied to academies and now FE being imposed. These could have a profound impact on the sector. For example, a requirement to seek consent to “novel, contentious or repercussive transactions” would be a significant constraint on institutional autonomy: These terms mean the following:

• Novel payments or other transactions are those of which the institution has no experience, or are outside its range of normal business activity. This could constrain innovation and institutional growth and development.
• Contentious transactions are those which might give rise to criticism by Parliament, and/or the public, and/or the media. Given the extensive and continuous criticism of universities from certain political factions and parts of the media, this could encompass a wide range of university activities.
• Repercussive transactions are those which could cause other providers to take a similar approach and hence have wider implications. Again, this could apply to many types of decisions from admissions and curriculum strategies, to mergers, joint ventures and disposals of campuses or activities. To get a sense of what this might look like in practice it is worth revisiting the OfS’s 2020 consultation on the stability and integrity of the English HE sector.

For all these reasons, it is to be hoped that the ONS concludes there is no basis for reclassification. A higher education sector already buffeted over years by financial challenges, government and regulatory interference, Brexit and Covid could do without yet more disruption and uncertainty.