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Farrer & Co | OfS fining regime: what lies ahead

In December 2017 the Department for Education published the Government consultation, Office for Students: monetary and financial penalties. This set out various proposals in respect of the OFS’s power to impose fines for a breach of an ongoing registration condition. The Government subsequently received responses from a range of institutions and in March 2018 it published its Consultation Response. For those who had read the initial consultation document back in December, the decisions published by the Government in the March response may not be particularly surprising. However, they are a stark reminder that from August 2019 higher education providers will want to have their house in order if they wish to avoid the hefty fining powers of the new regulator.

Under the Higher Education and Research Act 2017 (HERA), a provider must register with the OFS. In order to be registered it must meet various conditions and continue to comply with those ongoing registration conditions whilst on the register. HERA endows the OFS with enforcement powers to deal with breaches of a provider’s ongoing registration conditions. Examples given by the Government of potential breaches punishable by fine include a provider breaching a quality condition due to student outcomes dipping below the acceptable baseline or the breach of a financial sustainability condition by failing to notify the OFS of changes that impact a provider’s financial position.

What will be of most concern to providers is the level of fines which the Government has decided it is appropriate for the OFS to be able to impose. The decisions set out in the consultation response mark a significant escalation from the current regulatory regimes. By way of example, under the current regime if a HEFCE funded provider breaches a condition of its financial support, HEFCE may be able to claw back some of the funds up to a maximum of the whole amount paid by HEFCE. Under the new regime, the government has decided that “the maximum penalty amount should be 2% of qualifying income or £500,000 (whichever is the higher amount)”. Given the numbers at stake, it is worth deconstructing that decision to see what it means for providers in practical terms.

What is “qualifying income”?

Qualifying income means the income that a registered provider receives through direct OFS grant funding (through grants, loans or other payments) together with the income the provider receives through tuition fees. The Government points out that the use of this metric is a “fairer way to calculate the penalty”. This is on the basis that many higher education providers generate income from non higher education activities. The Government takes the view that it would not be right to charge such institutions a higher penalty which would cover such non-higher education activities.

2% or £500,000 (whichever is the higher amount)

The Government’s view is that this measure will allow the OFS to have a “large enough maximum penalty but one which is not excessive”. The best way to understand what this approach might mean for providers is to consider the worked examples which the Government sets out in the consultation document:

  • "Provider A has tuition fees from 20,000 students and grants from the OFS. Its qualifying income is £400 million, which means 2% would be £8 million."

  • "Provider B has tuition fees from 1,600 students, but no OFS grants. Its qualifying income is £10,000,000 which means 2% would be £200,000. However, they could be subject to a higher penalty amount of £500,000 if deemed appropriate and necessary by the OFS."

Institutions may take comfort from the fact that the Government has confirmed that the proposal of applying a maximum of 5% of qualifying income or £500,000 has been axed on the basis that it was felt that such fines would be “overly punitive”. It should also be pointed out that the 2% or £500,000 measure represents the maximum penalty to be used in the most exceptional circumstances. Even so, figures such as those in the examples above may be an unwelcome surprise to providers.

The Government, however, is unapologetic, maintaining that the maximum penalty amount needs to be set at a level that is "high enough to ensure sufficient visibility and impact". It points out that the 2% is “considerably lower than the 10% of turnover many [other regulators] use”.

Procedure

The new fining powers are intended to come into force on 1 August 2019. The Government has confirmed that before that happens the OFS will publish guidance on how it will take decisions to impose penalties and the amount of penalty to be imposed. This guidance should include the procedure for decision making and will presumably expand on the procedure set out in HERA.

Pursuant to HERA the OFS will have to give the provider notice of the proposed penalty along with reasons for proposing to impose a penalty. The provider will then have the right to make representations which the OFS will have to consider when making its final decision.

In reaching any decision the Government will have to take into account the following "mandatory factors":

  1. the seriousness, impact and nature of the breach;

  2. any gain (financial or otherwise) made by the provider as a result of the breach and, if so, the amount of the gain (if it can be quantified);

  3. the OFS's assessment of the risk of a provider failing in the future to comply with OFS regulation; and

  4. the impact of the monetary penalty on students.

The OFS will also have the discretion to consider other factors which it feels appropriate and relevant.

Finally, it seems that "pour encourager les autres", the OFS intends to publish on its register information about any sanctions applied to a provider. Such information will be published after the provider has completed any appeal process and will remain available until the sanction is withdrawn. Providers should therefore be aware of the reputational risk as well as any financial risk of falling foul of the new regulatory regime.

Conclusion

Institutions responding to the December consultation expressed concern that using 2% of qualifying income or £500,000 as the maximum penalty could result in financial sustainability issues for the provider. They also pointed out that the use of monetary penalties takes away income that could be used for the benefit of students. The Government on the other hand takes the view that a fining regime of this nature will encourage provider compliance with the new framework. Such compliance, they say, is in the interests of students and "vital to the OFS's student focussed approach".

There is clearly a balance to be struck if the OFS is to meet its objectives of protecting students' interests as consumers and ensuring they receive value for money. HERA provides that OFS must have regard to relevant principles of best regulatory practice including that regulatory activities should be transparent, accountable and proportionate. The hope is that when the new regulations come into force the OFS will recognise that its discretion is subject to these constraints and that it will act proportionately when deciding whether to impose a penalty and what the amount should be.

If you require further information please contact William Charrington, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2018

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