Regulating Provider Failure & Exit in HE in England

One of the “regulatory gaps” identified by the OFT in its recently published report on its call for information into higher education in England was the lack of a proper exit regime from the market.

There have been market exits before in higher and further education, some more orderly than others. There have been numerous failures of commercial providers, some where the students were left effectively high and dry, others where universities and colleges stepped in to help the affected students. We have seen universities pull out of FE provision they themselves acquired from FE colleges that were considered unsustainable some years previously. Provision and courses have been transferred between institutions when one no longer felt able to continue. Institutions have closed campuses and consolidated. And of course many, particularly in FE, have simply merged with other institutions when they could no longer survive alone.  Historically there were even financial incentives to sweep up an ailing provider in the form of additional grants and transitional funding. More recently, federations have been created to help shelter providers in trouble, although the long-term efficacy of these has yet to be tested.

So market exit has been happening, but the OFT is right to identify a regulatory gap for two reasons. Firstly, the market is increasingly volatile, making the risk of provider failure greater and perhaps diminishing the appetite or capacity of others to take on failing provision. Secondly, funders no longer have the money to sweeten the pill to incentivise other providers to take on the stricken.  So the prospect of a disorderly exit from the market is increasing.

The OFT has suggested that an exit regime could be based on its experience on the design of market oversight in other “public” markets.

Three aspects stood out to me from this guidance. The first is that in order for any market to be competitive, and to be perceived as competitive, there has to be a possibility that poor quality providers will be forced out. The second was that low barriers to entry and a diverse supply side were key to ensuring the consequence of provider failure was as painless as possible. The third is that although a continuity regime will be essential to safeguard students and the reputation of “UK HE” as a whole, the continuity arrangements must not be so restrictive that they themselves diminish competition. This could occur in two ways:

  • As the disruption caused by provider failure is potentially very serious, there might be a temptation only to allow providers in to the market who posed no risk of failure, thus preventing the desired diversity of supply by creating unnecessarily high barriers to entry; or alternatively
  • There might be a temptation to create a system where no provider who had entered the market could such that there was no need for exit, stultifying competition and innovation.

Applying the OFT’s principles to HE will not be easy.  For example, in renewable degree awarding powers, do we already have a regime where the consequences of provider failure are so severe we will find it difficult to allow it? Is the sector ready to guard against service disruption by agreeing a Special Administration Regime, or risk sharing pools in the vein of ATOL? There are practical and operational challenges too. It is not straightforward to move students from one institution to another. There are difficult credit transfer, course compatibility, geographical, social and cultural considerations at play that may not apply to, say, a failure in a waste services contract to a community. It will be fascinating to see how these problematic questions are answered as the regulatory framework evolves.

Smita Jamdar
Partner and Head of Education
For and on behalf of SGH Martineau LLP
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Comments -
  1. Gravatar

    Good analysis, Smita. Of course, a properly competitive market would allow for competiton on quality not only on price. A market for overt 'value' higher education - ie, 'we know that it isnlt as good as you could get elsewhere, but look how affordable it is' - is quite conceivable, even within the QAA's framework. So it may not be the poor providers which have to exit, simply the unsustainable. Anf that adds an extra layer of regulatory complexity

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