Student loans system wide open to fraud with risks to students and taxpayers

PAC report warns of lack of transparency about student outcomes and teaching quality from franchised providers

A lack of government oversight has left the student finance system open to exploitation from systemic and organised fraud and abuse. In a report published today, the Public Accounts Committee (PAC) warns of a lack of oversight of ‘franchised providers’ – institutions providing courses on behalf of universities as part of a commercial partnership, or franchise.

In 2022/23, detected fraud involving franchised providers totalled £2.2 million, 53% of the £4.1 million fraud identified by the Student Loans Company (SLC). Two-thirds of franchised providers are not registered with the Office for Students (OfS), which sets conditions for registered institutions designed to protect students, assure quality, and ensure good governance. The PAC’s inquiry found that the responsibility to tackle fraud and abuse of student funding is not fully embedded in ways of working at the OfS, SLC, and the Department for Education.

The growing use of franchised providers presents risks to for students. Some higher education providers rely on franchising growing student numbers to remain financially viable. Numbers of students at franchised providers more than doubled between 2018/19 and 2021/22, to 4.7% of all students, The OfS told the PAC’s inquiry that it was shocked by the high amount of tuition fees retained by providers using franchisees (up to 30% in some cases). This raises quality concerns, as if a university takes a fee percentage, and a franchisee generates a profit, the amount spent on students is reduced.

The report further finds that a lack of transparency means students do not have the information they need to make well-informed decisions about their studies. Some franchised providers have course completion rates as low as 60%, compared to 90% across the higher education sector, but OfS does not publish data in a way that distinguishes between lead and franchised providers. Some students may even be unaware that they are at a franchised provider, as well as how much of their tuition fees a franchisee will receive, or which of the main institutions’ services they can use, such as welfare services.

Sir Geoffrey Clifton-Brown MP, Deputy Chair of the Committee, said:

“A back door into the student loan system for organised fraudsters has been left hanging wide open here by the lack of oversight by government. Fraud involving franchised providers now makes up a little over half of all fraud identified by the Student Loans Company. Our Committee’s scrutiny has now long established that tackling fraud cannot be left to the experts, but the fight needs to be prioritised and led from the top.

“These issues must be addressed with some urgency, as the use of franchised providers only looks set to grow. Indeed, concerningly the franchising out of education seems to be viewed by some providers as a way of underpinning their finances. The risk to the taxpayer from unchecked fraud is clear, but the systemic risks to the quality of education provided to students must also be taken in hand. Shockingly, up to 30% is retained from tuition fees by lead providers under the franchise system without students necessarily knowing it’s happening. We hope the recommendations in our report help the Government ensure transparency and robust oversight of the whole sector.”

Conclusions and recommendations

1. Lack of transparency about student outcomes, teaching quality and arrangements with franchised providers does not give students the information they need to make well-informed decisions. Some students may be unaware they are at a franchised provider, how much of their tuition fees the franchised provider receives, or of the lead provider services they can use, such as welfare services or the student union. Provider performance varies with, for example, course completion rates averaging just over 80% for franchised providers, with some as low as 60%, compared to 90% across the higher education sector. However, OfS does not publish data in a way that distinguishes between lead and franchised providers.

Recommendation 1a): DfE should set out requirements for higher education providers to publish summaries of their franchise agreements, including the proportion of funding they retain and for what purpose, so students know what this means for them.

b): Developing information already available, OfS should publish student outcome data for individual franchised providers.

2. To remain financially viable, some providers may be incentivised to increase student numbers through franchising, which creates risks for students and taxpayers. In 2022, the Committee highlighted the risk of providers being financially vulnerable. OfS analysis, published in May 2023, suggests some rely on increases in student numbers to remain viable. Some providers have used franchising to increase their student numbers, depending on this income. A small number of franchised providers have expanded very rapidly. The C&AG’s report explained that lead providers could be taking between 12.5% and 30% of tuition fees paid in respect of students at their franchised providers. OfS cannot access these contracts, but expressed shock at the figures, and voiced concerns about the impact this might have on teaching quality. Some providers use recruitment agents to increase student numbers. Because these recruitment practices are unregulated, agents may not make it clear what students get for their money, and there are incentives to recruit student numbers rather than ensuring students enrol on the most suitable courses. Universities UK has developed a quality framework, that it has now committed to review and update as needed.

Recommendation 2a): Within the next 12 months, OfS should publish a more systematic overview for the higher education sector sharing its insights on where providers have adapted their delivery models, and the emerging risks providers then need to manage.

b) OfS should also set out what proportion of tuition fees lead providers could be seen as reasonably retaining in relation to the student services they remain responsible for, and consider these financial arrangements in the scope of any investigations it carries out into the quality of franchised provision.

3. The current regulatory system does not ensure sufficient oversight over franchised providers. OfS publishes conditions that registered providers must meet, and continue to meet. These are designed to protect students, assure quality, and ensure good governance. But only lead providers need to be registered with OfS, and two-thirds of franchised providers are unregistered. A few lead providers became franchisees after having been refused registration or withdrawing from the process, raising concerns about whether they would meet the conditions. Teaching quality and welfare for students at franchised providers remain the responsibility of lead providers, but we are not convinced that all providers fulfil these responsibilities equally well. DfE and OfS insist that they are reiterating to lead providers their responsibilities for franchisees, and Universities UK is developing a new framework to encourage improvements and consistency. Until recently, OfS has not explicitly considered franchise agreements, or the robustness of lead providers’ oversight of franchisees, when assessing compliance with registration conditions. It will now consider whether a provider has a franchise arrangement when selecting providers for review. DfE says it is actively considering whether franchised providers should be registered, and that it hopes to decide before summer this year.

Recommendation 3: DfE should set out what it will do to strengthen direct and indirect oversight of franchised providers to ensure they meet the standards expected for an organisation receiving taxpayers’ money. This could include requiring all providers to register with the OfS in some form or strengthening the powers of OfS and SLC where they have concerns.

4. DfE, OfS and SLC recognise they have a shared responsibility to tackle fraud and abuse of student funding although this is not yet fully embedded in their ways of working. In our July 2023 report on tackling fraud and corruption across government, we concluded that tackling fraud cannot be left to counter-fraud technical experts. Senior officials across government must demonstrate leadership, set the tone, and build in preventative approaches. DfE, OfS and SLC acknowledge that they missed an opportunity to intervene early for one of the case studies cited in the C&AG’s report. With better information sharing and awareness of the risks, DfE might have acted differently. DfE, OfS and SLC now meet regularly in a newly created group to share intelligence and consider risk.

Recommendation 4: DfE, OfS and SLC should agree a shared risk culture and risk appetite, supported by a formal reporting framework (including targets for fraud prevention and reduction), and write this into each organisation’s risk register.

5. Despite the complex regulatory system, roles and responsibilities for fraud prevention, detection and intervention are undefined. The system for paying loan monies and overseeing providers is complicated, involving multiple bodies. The Government Internal Audit Agency (GIAA) and C&AG both found that there were gaps between DfE, OfS and SLC responsibilities, that the boundaries between bodies were unclear, and that bodies had different interpretations about where the boundaries lay. OfS has a general responsibility for protecting public funds, but no explicit responsibility in respect of student loan fraud. SLC says that it has good information to tackle individual level fraud, which has been enhanced by membership of the National Economic Crime, but acknowledges that it has less knowledge, and can intervene less, with providers. SLC also has limited power to suspend payments, even where fraud suspected, without clear direction from DfE.

Recommendation 5: DfE, OfS, SLC’s roles and responsibilities should be clearly articulated and written into organisational system statements and operating protocols.

6. Although SLC uses data on attendance to show student’s course engagement, and therefore pay loans, there remains no agreed definition of what constitutes attendance or engagement. SLC requires providers to confirm that students are attending their courses before it will make tuition fee and maintenance payments. However, DfE, SLC, OfS and providers have no commonly agreed definition of what constitutes student attendance or engagement, or how it should be evidenced. The NAO recommended that DfE should develop guidance for providers explaining what constitutes meaningful student engagement and how it expects providers to self-assure data. Higher education relies heavily on self-directed learning, and DfE recognises that attendance might mean different things, at different institutions or for different courses. Universities UK has nonetheless recognised the need to revisit the definition of attendance and engagement, and recommended DfE engage with the sector to take this forward. DfE accepts the need to develop guidance, and hopes this will be introduced before summer this year.

Recommendation 6: DfE should work quickly to clarify what constitutes student attendance and meaningful engagement with courses, ensuring sufficient engagement with providers, and publish guidance as soon as possible.