Governance News Alert: House of Commons Education Committee: Higher Education and Funding: Threat of Insolvency and International Students

The MPs report looks at how the financial foundations of higher education have been steadily eroded and makes a series of recommendations to ameliorate this. MPs heard evidence from institutions and other stakeholders and visited at least one university as part of the inquiry. The report mainly focuses on those aspects of higher education that fall within the Department for Education’s purview. As higher education (HE) is a devolved policy area, the focus is on providers in England, while recognising that similar challenges face institutions across the UK.

The full report can be found here.

At-a-glance:

• An early warning protocol for insolvency needs to be established with urgency. It should be triggered by the Office for Students (OfS) and would address when the Government should intervene and ensure there is a clear process to manage the risk of institutional insolvency (p53)
• Current Student Protection Plans are inadequate and would not provide sufficient protection were a large provider to become insolvent. Plans also need to address the impact on staff, research and the local economy and community. The OfS should apply its strengthened student protection regulation to all providers, not just new ones. Protection for students should ensure a teach-out process and options for transfer (p60)
• In evidence, the committee heard concerns about the quality of governance. There is a need to ensure governing bodies have the capabilities and culture to challenge effectively the assumptions of senior leadership, including on finances, student numbers projections, and plans for restructuring. The OfS should develop a governance improvement programme for HE institutions to ensure that good practice is disseminated, benchmarking tools are available and direct support to strengthen governance is available to institutions when needed (p40)
• As a first step to improve governance, the Government should work with the sector to implement Sir Philip Augar’s proposal to defer some of the financial pay of senior leadership until their term of office is over, as has occurred in the financial services sector (p40)
• Financial pressures and government decisions have driven reliance on international students. Immigration policies have a very significant effect on HE. If the aim is to have fewer international students, the Government must set out how it will support the financial sustainability of HE (p83)
• The government should provide a more detailed impact assessment of the international student levy as concerns have been raised that it will disproportionately affect institutions with high numbers of local students and students from disadvantaged backgrounds (p106)
• The Government should confirm its timetable for its commitment to meet 80 per cent of the full economic costs of research, and its assessment of the long-term sustainability of this model given the reduction in cross-subsidy from fees (p28)
• The Government should support universities to address the financial challenges caused by the requirement for some universities to offer membership of the Teachers’ Pension Scheme. But creating wholly owned subsidiaries to avoid the requirement for TPS membership should be prohibited (p34)
• The drivers of higher employer contributions should be reviewed. If contributions remain a burden the Government could consider providing financial support, as it has provided for state schools and FE colleges, and the Scottish Government has provided for Scottish universities (p34)
• High levels of university borrowing and the covenants which are in force are adding to the financial pressures facing some providers. Expansion followed the removal of borrowing controls in 2018 when the OfS was created. Increases in interest rates in the last few years have impacted negatively on the cost of loans originally taken out in the 2010s (p36)
• Measures should be outlined showing how the government and OfS can ensure the sustainability of HE borrowing, work with creditors, and support institutions that are in particular financial difficulty. This should include consideration of when tuition fee loans are paid to providers, and whether the OfS should have a role in agreeing high levels of borrowing, as occurred with its predecessor and currently occurs in Scotland and Wales (p36)
• Mandatory regulation on franchising is welcome. There remains a major risk for some HE institutions that have become heavily dependent on franchisees that their withdrawal could have a shock effect on finances. The OfS should provide guidance to universities seeking to exit or significantly scale back franchising relationships (p43)
• There is support for shared services. The Department for Education should work with the Treasury and the sector to explore removing VAT on shared services and with the Competition and Markets Authority to clarify the law on collaboration between providers (p71)
• The Government’s reforms to the strategic priorities grant should consider whether to reintroduce the strategically important and vulnerable subjects programme that existed in the 1990s and 2000s to tackle the issue of cold spots of provision (p78)

Implications for governance:

The report’s starting point is the widespread economic, social and research benefits emanating from the higher education sector.

Because of this, action is proposed to try to protect providers from the most serious impact of the unprecedented financial difficulties the sector faces. That does not come in the form of suggestions about wholesale transformation of the funding system or root and branch reforms, but rather how, at the edges, changes can be made to alleviate some of the pressure. This might include, for instance, “support” for universities struggling to meet Teachers’ Pension Scheme contributions, the removal of barriers to more collaboration or playing a role in agreeing high levels of borrowing, as happens in Scotland and Wales

One of the report’s main concerns is the possibility of a major UK university becoming insolvent and the implications for students, staff and the local community. This is a point that will clearly be of great importance for governors. The report calls for the government to urgently establish an early warning protocol, which would categorise an institution as being at risk of insolvency.  This protocol should include costed plans for protecting students, staff and the wider community and details of a range of options to be taken, including restructuring, merging with another institution, direct financial support or orderly exit.

MPs heard conflicting evidence about an institution’s ability to continue operating when insolvent and called for the government to clarify the threshold for government intervention for different kinds of institutions and whether insolvent institutions can continue to operate in the short term.

The committee also voiced support for a special regime to support insolvent universities to try to avoid a disorderly exit. This could mirror the special regime for the further education sector and ensure ‘teach-out’ processes for current students, as well as protecting the sufficiency of sector-critical courses and include mitigations to avoid geographical cold-spots. 

Students’ interests are central and MPs found that current student protection plans were “inadequate”. It welcomed the OfS openness to reform but called for the changes to be further reaching.

Institutional governance is directly addressed in a number of points in the report, which will be of interest to board members. MPs heard criticism of the calibre of university governance at some institutions, alongside a wider critique of management being out-of-touch and over-paid.

Sir Philip Augar, author of the 2019 Review of Post-18 Education and Funding, warned that following the removal of the student number cap and near trebling of tuition fees, there had been “a general dash for growth, which was not very well managed at the governing body level”. He also expressed concern that university governing bodies were part-time, and nobody was “really on the line” were a university to fail. 

Augar proposed following the banking sector and deferring part of senior figures’ financial payment until their term in office is over. The reports cites the recent problems at Dundee University which have been partly attributed to poor governance. The Gillies Report into the university’s challenges found “the single pervasive issue that emerged from the investigation was the extent to which cultural context and values in relation to leadership and governance contributed to the financial difficulties experienced by the University.”

Giving evidence, Susan Lapworth, the former Chief Executive of the OfS who stepped down at Easter, said that during 2026 the OfS would consider whether “we need to extend our regulatory requirements for better governance”.

The committee report recommends that the OfS develop a governance improvement programme for HE institutions to ensure that good practice is disseminated, benchmarking tools are used and direct support to strengthen governance is available to institutions when needed. It also backed the Augar proposal to defer some of the financial pay of senior leadership until their term of office is over. The subject of HE governance could prompt a committee inquiry in its own right, with MPs saying they might “return to this subject later in the Parliament to ensure that the quality of governance is improving”.

On international students, the report points out that stretched finances have forced institutions into a dependence on overseas markets and that these students are effectively cross subsidising home students and other university activity. As a result, any move by the government to restrict international student numbers must be accompanied by a plan explaining how the lost income to universities would be made up.

MPs also recommended a more detailed impact assessment of the international student levy, after hearing evidence that it could disproportionately affect institutions with high numbers of commuter and disadvantaged students, the very cohort who the Government intends will benefit from maintenance grants.