Oral evidence: Investigation into financial support for students at alternative higher education providers, HC 811

Oral evidence, 15 December 2014.

Witnesses

Professor Madeleine Atkins, Chief Executive, Higher Education Funding Council for England; Rod Bristow, President, UK and Core Markets, Pearson; Martin Donnelly, Permanent Secretary, Department for Business, Innovation and Skills; and Mick Laverty, Chief Executive, Student Loans Company, gave evidence.

Chair

Welcome, thank you very much indeed for coming. I have a copy of an e-mail, Mr Donnelly, which was sent out from your Department, I think. Apparently, you were asking private providers to help to prepare the Government for a key hearing on private higher education. It was an urgent request for information from BIS on widening access and alternative providers. BIS has a Public Accounts Committee hearing next week looking at alternative providers. It is seeking evidence that supports the contribution alternative providers are making to widening access and they wanted the information—I think you gave people only a day. Any good news for us?

Martin Donnelly

I visited several alternative providers as part of the preparation for this hearing and I know that many of my colleagues do as well. I was struck by the diversity of the sector and the range of things that it does. I am sure you will want to discuss quite a lot of them, as we go through.

Chair

Any good news for us? Did they come back with good news for you?

Martin Donnelly

Well, yes. Briefly, I went to one of the music specialised providers, which does an exceptionally good job preparing people for the UK music industry and has had successes from Sugababes to various groups I have never heard of but which have been very successful.

Chair

Do they receive public money?

Martin Donnelly

The students receive money. The Greenwich School of Management is clearly accessing a group of relatively disadvantaged students who have not always been well served by the system in the past and were very aware of some of the issues that the report describes. I found that encouraging.

Stephen Phillips

Mr Donnelly, if your visits were so successful, why did this e-mail need to be sent out from the Department very recently on 14 December?

Martin Donnelly

I cannot comment on individual e-mails that I do not know about, but I certainly expect the Department and our teams to gather as much relevant information as possible. One of the challenges in this area is getting hold of assessable and accurate information that we can compare, particularly with the HEFCE-funded sector. That is one of the challenges that we have been working on.

Stephen Phillips

Can we try to avoid acronyms, please?

Martin Donnelly

That is the Higher Education Funding Council for England.

Chair

That is your job, Mr Donnelly. I have to say that this is one of the most shocking Reports that I have come across, and we will come back to it before the general election. What was most depressing was that it reminded me a lot of the lessons we ought to have learned—or that you should have learned—from individual learning accounts, but have failed to learn. I want to start with a very general question. How much taxpayers’ money has gone to a purpose that was not intended by Parliament in the way that you and your Department have run this scheme? How much in total?

Martin Donnelly

I find that a difficult question to answer, because we need to define what we mean. We are running a funding system for students.

Chair

It is quite simple. This money was supposed to help students in private colleges to get a higher education qualification. For all sorts of reasons which we will go into—both Chris and I have questions on a lot of aspects of this—that has not happened all too often. How much public money, taxpayers’ money and our money has gone into a purpose that was not intended?

Martin Donnelly

We need to be clear what we are talking about here. If you are talking about students who have dropped out having received funding—

Chair

No, in totality. Some are students who have dropped out. Some are students who never came. Some are students who came and there was never a qualification for them to take. There are all sorts of aspects. I would think that you ought to know, as the accounting officer, how much public money we have lost in totality because it was not used for the purpose for which it was intended.

Martin Donnelly

It is difficult to add up those different categories.

Chair

Why? That is your job. Why is it difficult to add up?

Martin Donnelly

We do know that there have been issues of incorrect or fraudulent applications to the SLC by some EU students without a right of residence. We have a precise figure for that.

Chair

Mr Donnelly, why have you not added it up? This is a scandal; it is a complete scandal. It has been around for a few months now, certainly since I first read about it and people came to talk to me about it. I understand that there have been warnings in the Department—Peter Gray can help with this—since 2010 of the potential leaks that could happen in the way you set this scheme up. HEFCE, I gather, warned in 2010. Am I right?

Professor Atkins

We gave advice to the Minister, yes.

Chair

The unions, I understand—this is a responsible group of unions—gave you warnings. I have copies of their letters from about 2010. I do not know who else warned you. You went ahead and a lot of public money—taxpayers’ money—has gone in all sorts of ways to institutions and individuals, but it has gone to a purpose that was not intended. I think that the public have a right to know how much. For you to tell me that it is too difficult to calculate is simply not acceptable.

Mick Laverty

Chair, if I may, perhaps I could help with an answer to that question. I can provide a figure at a global level. The Student Loans Company calculates its error rate every year, and that figure is audited by the National Audit Office. The error rate for student loan payments last year, 2013-14, was 0.43%. The year before, 2012-13, it was 1.29%.

Chair

That is only one aspect of it.

Stephen Phillips

This is across the entire loan book though, Mr Laverty, isn’t it?

Mick Laverty

This is across loan payments.

Stephen Phillips

So in fact, you cannot help. It is a very simple question to Mr Donnelly, who is the Permanent Secretary in the Department. As is apparent from this Report, a large quantity of taxpayer money has been misused. It has not been used for the purposes for which either the Government or Parliament intended it. Do you not find it extraordinary that you come to this Committee today and you cannot tell us how large that sum is?

Martin Donnelly

I think that we have to be clear what we are talking about.

Stephen Phillips

Answer my question please.

Martin Donnelly

I cannot answer it until I am clearer about what we are talking about. If, for example, we are talking about people who have failed to finish a course or have dropped out, aspects of the funding of that—

Chair

Add it all up. It is quite simple. One group is the people who never arrived, another is the colleges that never provided, and a third is the people who did not enter a qualification. What have I forgotten?

Chris Heaton-Harris

People who did not have the language qualifications to do the course.

Chair

There are all sorts of things. You sit down, ruddy well do an exercise—this is public money—and tot it up.

Mr Bacon

Have you done that for each of those categories?

Stephen Phillips

And if not, why not?

Mr Bacon

Have you done that exercise for each of those categories?

Martin Donnelly

We should probably discuss each of the categories.

Mr Bacon

Please, Mr Donnelly because I would like to know. The exercise that the Chair describes will be of varying degrees of ease or difficulty depending on the categories—I appreciate that. My question was whether you have done that exercise—trying to ascribe a number to the people who did not have the required language qualification, and to the people who started a course but did not finish it and so on. Have you done that?

Martin Donnelly

We need to take those one by one because they are separate.

Mr Bacon

No. Right now, for the series of categories that the Chair went through, I am asking whether you have gone through each of those categories and tried to ascribe a number to each of them.

Martin Donnelly

No, because the categories do not work like that.

Mr Bacon

Did you say no?

Martin Donnelly

No, because the categories do not work in that way.

Stephen Hammond

If you can describe the categories but not the totality, you can give us the number for each category and that will be the totality so we will know what the totality is in the end. Perhaps you could go through the categories and we will tot it up as you go.

Chair

I accept that. We will try that but I do not think we are going to get where we want to.

Stephen Hammond

It was worth a try.

Chair

We will want you back with a much more detailed assessment of the moneys lost to the public purse.

Stephen Phillips

If I may say so, Chair, I think it goes beyond that. I find it extraordinary, Mr Donnelly, that you come to this Committee today, given the nature of the investigation by the NAO and the purposes of this hearing, and you cannot tell us as, indeed, you are apparently unable to tell your Secretary of State, how much taxpayer money has been mis-spent. You should write to us in short order, even if you have to make estimations within some of these categories, and give us a number.

Martin Donnelly

I hope that the definition of “mis-spent” will become clearer as we are discussing it. The point that I am trying to make is that it is not straightforward. There is not, for example, a category of people who do not have language requirements. Language—I speak under control here—is one of the reasonable expectations that a student can complete the course. This is not a binary issue; language will feed into the question of whether people are capable of completing their course.

Chair

Listen, you’ve got to do some work around the issue if people are cheating. There is no way that somebody who cannot speak English can do a higher education degree—that is absolutely simple—which is why level 4, 5 or whatever is the minimum level that should be expected. You know that. You’ve got to go away and do some detailed work. You are the accounting officer, Mr Donnelly; you are accountable for this money not being spent to the purpose that was intended. Because we had the experience of the individual learning accounts, which some of us around the table remember, it is appalling that you allowed all this policy to start without putting the right checks and balances in place. That is what is so shocking. It is just awful. You will have to come back to us; write to us and come back to see us. Let us go through categories. I don’t know where to start. Paragraph 3.13 on page 22 of the NAO Report states that 20% of students in alternative provider colleges were not registered with a qualification for 2012-13. Those students were in a course, having presumably had some fees paid to the colleges. Some 20% of 53,000 students were in a college course doing something, getting the grant, and maybe getting the loans—both the maintenance and whatever it is. The college was getting paid and the students were not on a course.

Martin Donnelly

They were not, at that stage, registered on the course. That is an issue that we have been pursuing with Edexcel.

Chair

They cheating. Somebody or other was cheating. They were in a college, having got public money, both to the college—yes? You are nodding. The college would have got money?

Rod Bristow

The college would, yes.

Chair

The student would have got money—yes? And they were not registered on a qualification.

Meg Hillier

Without straying into policy, if any student goes to a public institution there are checks and balances and data that are supposed to be collected. There is no requirement on that in the private sector, so, to set aside policy for a moment, in terms of financial management, how could the Department allow that to happen—because there is no control?

Martin Donnelly

There are controls, and they have been progressively strengthened, but if I can deal with the specific point, first, of the 20%, this is an issue that we pursued, because most of the people involved, though not all of them, were actually on the HND and HNC courses supervised by Edexcel. The question was whether they were not following the dates for actually signing up or whether there was anything else going on. Rod, I will ask you to comment, but we have no evidence of any fraud in this area, as I understand it.

Rod Bristow

So the situation is that we were made aware by the National Audit Office that there was a gap between the enrolments and the registrations with us. Of course, we do not have direct visibility into the—

Mr Bacon

Can you define for us—I am sorry to stop you, but what is the difference between an enrolment and a registration? In common parlance they seem like the same thing.

Rod Bristow

I am sorry. The student will enrol at the college and having enrolled at the college the college will then register the students with us. So the student enrolling with the college and their registration with us, as the awarding body, are two separate things.

Mr Bacon

And that latter part—what you call the registration—is done by the college on behalf of the student?

Rod Bristow

That is correct—with us, directly, so we understand, as the awarding body, the students that have been registered, but we do not see the enrolment data. We were made aware of this disconnect between the enrolment data and the registration data that we have by the NAO, and—

Mr Bacon

Do colleges sometimes enrol students because they know that that is the trigger for getting the money, and then not register them for conscious reasons? Rather than, as it were, they have not got round to it yet, they decide consciously not to register a student because if they are not registered they can then say a higher percentage of their registered students have achieved x level in examinations. Is that a possible reason?

Rod Bristow

Of course it is possible, but I think the best way to answer the question is that as soon as we were made aware of the disconnect between those two pieces of data—

Austin Mitchell

How long ago was that?

Rod Bristow

During the summer.

Austin Mitchell

But how long had you being doing it until you were made aware of this disconnect?

Rod Bristow

We were not doing it. We were registering our own students. Our role is to register the students on our qualification. We are not responsible for the enrolments in—

Chair

Who should have known this?

Austin Mitchell

How long had you been going on before the NAO made you aware of the disconnect?

Rod Bristow

We register students. We have always registered students.

Chair

The answer to that has to be you don’t know.

Rod Bristow

I do not know how long the gap had been there for, no. I do not know the answer to that, but I can say that we have written to all of the colleges where the gap between the enrolment date and the registration data exists.

Chair

Mr Donnelly, why didn’t you know?

Martin Donnelly

When we found out that—

Chair

Why didn’t you know? You found out because the NAO told you.

Martin Donnelly

We did have concerns about this area and we were in touch with Edexcel and we have asked them to tighten their processes.

Mr Bacon

Hang on, you are blaming Edexcel now. Mr Bristow has given a fairly—you are Edexcel, aren’t you, Mr Bristow?

Rod Bristow

Yes, I am.

Mr Bacon

Mr Bristow has given a fairly vanilla and straightforward account of his role in this, which is when the college says, “Please register this student,” Mr Bristow does so. It sounded to me in your last sentence like you were trying to blame Edexcel. What I want to know is why you are spending public money without people being registered.

Martin Donnelly

The position was—and I think this is correct, Rod—that Edexcel expected people to be registered within a 30-day period and it turned out that this was not always happening. Now some alternative providers did not have to do it—if they were doing their own degrees or they were validated by another university—but in terms of HND and HNC, they did have to do it with Edexcel.

Stephen Phillips

Hold on one moment. Can I ask the NAO, does your conclusion in paragraph 3.13 take into account late registrations as well? Is it simply that there is a 20% difference looking at a 30-day period after enrolment, or is there a 20% difference, period? That would wholly undermine Mr Donnelly’s answer.

Peter Gray

No, this is about the aggregate figures.

Stephen Phillips

So it is the total?

Peter Gray

It is the total.

Mr Bacon

Okay, back to my question, Mr Donnelly, because you answered a different question that I didn’t ask. My question is: why were you spending public money on student support for people who were not registered?

Martin Donnelly

Students were, as far as we can ascertain, registered eventually and—

Mr Bacon

Hang on. Mr Donnelly, that is directly contrary to what paragraph 3.13 says. I will read it out for you. It says that “the total number of registrations is 2,963 (20%) lower than the number of students accessing student support at the year-end.” My question was: why were you spending public money on student support for people who were not registered? Have another go at answering the question.

Martin Donnelly

The key words there are “at the year-end”. The question is: how many of these students were actually registered subsequent to the year-end? They do begin courses at various points during the year, and the problem we have is that not everyone was being registered in time. We have now changed that system—

Mr Bacon

Surely an effective piece of design—a good piece of design—would be that until they show that they are registered, you don’t give them their student support. You have a gateway. The question is really quite binary: are you registered—yes or no? If the answer is no, you cannot get student support; if it’s yes, you can access student support. What is wrong with that gateway?

Martin Donnelly

There is nothing wrong with it—

Mr Bacon

Well why didn’t you do that then?

Martin Donnelly

And that is what we now do.

Mr Bacon

Why didn’t you do it in the first place?

Martin Donnelly

It had never actually been an issue in the past. There is no evidence that either we or the NAO have discovered that there is any fraud in this area.

Chair

Can I ask HEFCE: what is the system you use? Could this happen in a HEFCE-run—you don’t run anything. Could it happen in the HEFCE family? Could it happen in HEFCE?

Professor Atkins

Students are enrolled in universities by the institution concerned, not by us; we don’t give money to individual students.

Chair

Yes, which is what happened with the private provider, but could you have a student enrolled without having a course or qualification?

Professor Atkins

The student would be enrolled on a course at the registration point.

Chair

So how do you manage it that every student enrolled in a university is working towards a qualification, whereas in a private provider 20% aren’t? What do you do that they are not doing?

Professor Atkins

It is nothing that we do as HEFCE, but universities have in place their processes that check students. It would be conceivable, I suppose, that where universities are using HND from Pearson Edexcel, that might have occurred, but I am not aware of anything and I am not sure that any evidence has been brought to our attention.

Mr Bacon

Mr Donnelly, you said, “That is what we now do.” On what date did you start doing that which you now do?

Martin Donnelly

I will give you a more detailed answer first to your other question and come back to that one. We did first learn about this issue when we were investigating the ICE Academy in November of 2013. That is no longer designated, and we did pick up on this issue. We also checked whether in fact there had been any fraudulent use of it, and I don’t think we found any in that case. We have been pursuing it since then. Edexcel have written and tightened their processes, and we have made it clear that no payments will be made from January unless there is explicit registration.

Mr Bacon

Hang on. So it hasn’t started yet? The gateway that I described—

Martin Donnelly

It is starting for the next—

Mr Bacon

It is starting for January 2015?

Martin Donnelly

That’s correct.

Mr Bacon

So even now, the system, the gateway, that I just described is not yet in place and active. That’s right, isn’t it?

Martin Donnelly

Edexcel have been policing the 30-day rule more rigorously, I think it is fair to say.

Stephen Phillips

Hold on a moment. Mr Donnelly, we picked up on this issue when you were investigating one of the providers that is no longer registered. When was that?

Martin Donnelly

That was November 2013.

Stephen Phillips

Right. So no change between November 2013 and January 2015?

Martin Donnelly

Yes. We were in touch with Edexcel about tightening up their processes.

Stephen Phillips

For goodness’ sake, Mr Donnelly, a 13-month period that has yet to come to an end, during which, if one takes the NAO conclusion at face value, as many as 20% of students have been in receipt of public money to which they were not entitled!

Martin Donnelly

There is no evidence that anyone did not subsequently register. It was a question of timing, and immediately after we wrote to Pearson’s, Pearson’s wrote to all alternative providers, over a year ago, in November 2013, to reinforce the 30-day rule.

Chair

Right. Peter and Amyas want to come in, and then I am going to Stephen.

Sir Amyas Morse

I just want to be clear about something. We have presented very straightforward information—this is the investigation. We simply present the data, which here shows that there was an overhang at the year end. It would be really instructive to see a reconciliation that showed what happened to that overrun, because then we could speak with confidence about what happened. I do not think that that reconciliation is currently to hand. If we had that reconciliation, we would all know whether anyone had received any money that they should not have, or if it was simply a timing difference, which I accept must be a significant part of it. My recommendation is that it would be great to have that, because we would then know for certain what had happened to public money. We are not presenting that difference as being more conclusive than that, but I hope that you agree that it must be fully understood.

Rod Bristow

That is absolutely what must happen next. We need to take our latest registration data, as well as the accounts we have received from colleges about why this gap exists, and sit down and reconcile that to verify whether the data now tells us that there has or has not been a fraud.

Chair

Chris has usefully directed me to the information on the ICE Academy in figure 12 of the Report, which is an example of what we could be talking about. It says that the Student Loans Company “informed us that £1.5 million in tuition fees and £5.4 million in maintenance loans was overpaid.” That is, give or take, £7 million—£7 million. It goes on: “To date, £35,000 of maintenance support has been recovered”.

Stephen Phillips

And that is for one institution that is no longer registered.

Chair

This is scandalous, Mr Donnelly.

Stephen Phillips

The truth of the matter is, Mr Donnelly, that you have had 13 months within which to investigate this question. You appear to have done it only in relation to one institution. The Department does not appear to have said, “Hold on, there might be a much broader problem here,” and gone and looked at whether or not there was a much more significant fraud that has cost the taxpayers tens of millions of pounds, rather than £7 million.

Martin Donnelly

The issue at ICE was different. They were submitting attendance confirmations for students who were studying at undesignated campuses, which I absolutely agree is a serious issue and an extremely serious issue in terms of the misuse of public funds, and we took immediate action on that.

Stephen Phillips

Okay, I understand that. Let us now go back to my question. You have had this 13-month period; given the 20% disparity between enrolment and registration, what investigations have been conducted to see whether or not there is a significant amount of fraud across the system? What has the Department done?

Martin Donnelly

We have, as I say, ensured with Edexcel that the system was tightened.

Chair

No, you are going to do that from January.

Martin Donnelly

But Edexcel also wrote to every provider more than a year ago to remind them of the 30-day limit, and I think that, from January 2014, you made clear that any enrolments that were longer than 30 days would require a special approval process. So we have done that, but I think that you are right—

Stephen Phillips

You are now talking about things going forward, starting from January of next year. I asked you a different question. Given that the problem first revealed itself in the context of your investigations into ICE, which you de-registered for another purpose, and that that was apparently in November 2013, what has the Department done in the intervening 13 months, given that it was aware of the problem, to investigate whether or not the problem is actually one of fraud across the system that has led to 20% of this budget of public money being wasted? What has been done during that 13-month period?

Martin Donnelly

As I say, we have strengthened the designation system. We have not found any evidence of actual fraud—

Stephen Phillips

What investigation have you conducted in order to draw that conclusion and make that finding?

Martin Donnelly

We have a series of sets of information on colleges, including from individuals in them, and as far as I know, I am not aware of any suggestion of actual fraud in this particular area.

Stephen Phillips

Mr Donnelly, I am going to ask my question again: what investigations has the Department conducted in the intervening 13 months to check that widespread fraud is not going on here?

Martin Donnelly

We have not focused on this specific area in that time because we did not have evidence to do so.

Stephen Phillips

Answer: none. Correct?

Martin Donnelly

Not beyond what we have discussed.

Stephen Phillips

None.

Martin Donnelly

Because we did not have evidence of fraud.

Chair

Can I tell you my crude calculation, for what it’s worth? I have probably taken the wrong basis, but 20% of 53,000 could be £140 million, at the levels we are talking about.

Stephen Phillips

Even if it is 10% of £140 million—

Stephen Hammond

I was going to ask a broadly similar question to that of the Comptroller and Auditor General. In your answer to him, you did not address his point about the time delay and when that time delay might be sorted out. I have a number of questions that will come up later, but I would like to know about the time delay. If it really is, as you are trying to suggest, a time delay between registration and enrolment, what investigation has been done into that?

Martin Donnelly

I’m sorry, but I am not sure I fully understand your point.

Stephen Hammond

You suggested in one of your answers earlier on that some of this might just be a timing delay between pick-up. What investigation have you done to substantiate that point? That was the point that the Comptroller and Auditor General was broadly asking you about. He asked you a couple of other questions about amounts and other things, but I am asking you about the time delay. Can you really have worked out what the time delay is? What analysis have you done to show that that might be a substantial explanation for the problem?

Martin Donnelly

No, we have not done any specific work on that beyond asking Edexcel to look into it, and now seeking to do what the Comptroller and Auditor General has reminded us needs to be done, which is to reconcile the data, but I emphasise that we have had no evidence in this area of any actual—

Stephen Hammond

You cannot possibly say that there is not any evidence at this stage because you have not done the investigation. Without being unbelievably unkind to you in this period of Christmas good will, you cannot possibly make that statement without having done the investigation.

Martin Donnelly

It is the case that in other areas we have had individuals in colleges come to us and say, “We are not happy with this, that or the other aspect of process,” and we have used that to undertake fraud and other investigations.

Stephen Hammond

So if you knew that then, why have you not done that more quickly in this process?

Martin Donnelly

Because we did not have any evidence in this area that there was any fraud going on. That is the short answer. I accept that it is something that we need to do.

Chris Heaton-Harris

I’m afraid my point is related. As the Chair pointed out at the beginning, when we started to enact this policy, you had a whole host of flags being waved in front of you as a Department. Then, as graphs in this Report show, you had an explosion in student figures for certain colleges and, as the appendices show, interesting adverts trying to attract the sorts of student that you were not necessarily expecting to attract into these courses on to them. Also, as figure 12 shows, you have had a number of investigations into providers incorrectly recording student courses. There have been one or two flags for you. Why didn’t you see them? You knew this was a risky policy at the start.

Martin Donnelly

Yes. There are several points I would like to make, because it is a good question, but a rather complicated one. Ministers were clear that they wanted to offer the alternative provider sector space in which to grow and there was funding available to do that. In order to do that, we had to give that sector space, to not just develop the very specialised courses—music, dance or whatever—and the traditional courses such as law and accountancy, but to move into wider areas including lower-than-degree provision where there are issues about the age of students, their socio-economic status—

Chair

Can you answer the question? I am giving you a long leeway, but we have a lot to go through. Just answer Chris’s question, please.

Martin Donnelly

So the first point is that we had to allow this to take place. We did not know what was going to happen. What we did do—and we did further measures—was to tighten the, frankly, relatively loose processes around alternative providers from 2011 onwards. We used HEFCE in an advisory role to help us pull together information, we tightened information on financial sustainability, management and governance of alternative providers, and we had a tougher designation process from 2012 for courses, including a successful QAA—quality assurance—review. We were taking a lot of steps to manage that process. The increase in student numbers was, frankly, much greater than we had expected. We did not know what to expect, but it was greater. When it became clear that it was likely to get to a level that was financially difficult to sustain, we took further measures, including asking the top 23 recruiters to freeze their recruitment and making it clear that there would be student number controls in the sector this year, based on 2012-13. We were concerned to maintain a cap on the overall numbers while improving the control processes around them, without—there was a balance here—trying to over-regulate the sector, which was designed to have space for innovation and to serve students.

Mr Bacon

God, this sounds so like individual learning accounts, which came out in 2001 and were specifically about leaving space for innovation. The numbers were much higher than anticipated. The DFE, which was then responsible for that, saw the very high growth in numbers and thought that it was evidence of success. They were surprised, but they thought it was evidence of success, rather than evidence of the fact that there had been fraud.

Chair

Chris, may I draw out something from yours, or do you want to keep going?

Chris Heaton-Harris

I have lots detailed questions on the Report, but there seems to be a lack of capability in identifying risk within your Department. That is what comes out of this Report—that there is an amazingly laissez-faire, hands-off attitude. I just wonder whether you really do feel that you have the capability to identify risk in this area going forward.

Martin Donnelly

That is a fair challenge. We progressively responded to risks as we saw them developing, and you can rightly challenge us as to whether we should have seen those earlier. In hindsight, I am not sure that we did everything perfectly, but we are talking about 5% of the total number of students in a very wide delivery of options for students, and many of these courses were providing for rather marginal students who did not previously have access to higher education, and that was a good thing.

Chris Heaton-Harris

Romanians and Bulgarians.

Chair

There are three things here that I draw from Chris. You get this massive expansion, and we are told in an agreed Report that there are five providers that are responsible for 50% of the expansion. Anyone looking at that stat will see that it is a complete red flag. It is at the bottom of page 8: “St Patrick’s International College; London School of Business & Finance”—I think they are part of the same thing—“Greenwich School of Management; British Institute of Technology & E-commerce; and UK College of Business & Computing.” You get that, and you then move over the figure 6 and—surprise, surprise!—the same ruddy colleges appear again on the list of providers with ineligible students. St Patrick’s International College is top of the list, but they are all there, including London School of Business & Finance. Greenwich School of Management is perhaps not in there, but they all reappear on that list, which is another red flag. You then move to a third thing with the drop-out rate, and you find the same ruddy colleges again: London School of Science & Technology and London School of Business & Finance. It is the same ones again and again. You allowed this to happen, and you allowed public money to be spent without understanding it. That really does leave me gobsmacked, because there are so many indicators, and you ignored the ruddy lot of them.

Martin Donnelly

No, I don’t think that is fair. It was not necessarily the case that rapid growth in a provider was a bad thing. One of those you mentioned, the Greenwich School of Management, was making a perfectly reasonable point that, by growing, they were able to manage their overheads more effectively and provide a more cost-effective service. That is not, of course, the only explanation.

Chair

You accepted that, did you? Did you look at all the figures?

Stephen Phillips

Was it the sort of cost-effective service that permitted them to have, as of May 2014, 160 ineligible applicants funded by taxpayers’ money?

Martin Donnelly

I am not suggesting that any single college did not have issues. I am saying that we were looking at them in terms of the structures and the systems that we put in place and progressively tightened.

Chair

Why don’t you accept what I said? Why don’t you accept that growing at that rate should have been a red flag; the ineligible students were a second red flag; and the 20%-plus drop-out rate was a third red flag? Why do you not accept that those were red flags about which, if you had been doing the sort of risk analysis that Chris is talking about, you would have done something?

Martin Donnelly

Well, they were matters of concern. I am merely trying to avoid saying that they should automatically have been taken as a reason for seeking not to designate. What we had to do was look at those colleges very closely.

Chair

This is public money, Mr Donnelly.

Mr Bacon

You have already said to Mr Phillips that you did not do an investigation in those 13 months. If they were matters of concern, why did you not do an investigation?

Martin Donnelly

There were different investigations into various of these colleges. That was merely on the question of late registration of students.

Stephen Phillips

Well, identify for us the other investigations that you did conduct as a result of these red flags, Mr Donnelly.

Martin Donnelly

On the London School of Science & Technology, for example, we suspended all fee payments when we were concerned—

Stephen Phillips

I am sorry, we are at cross-purposes. I am not asking you about individual institutions; I am asking you about the problems that we now know from the NAO Report were inherent across the sector. What investigations did you do in relation to the problems that had been identified by the NAO in its key findings?

Martin Donnelly

Shall we take the issue of the drop-out rates?

Stephen Phillips

Yes, go on—the drop-out rates.

Martin Donnelly

This does fall into the “red flag” area, but it requires us, as we are trying to do, to look at what lies underneath it. The truth is that when you take students who are over 21, they tend to drop out—

Stephen Phillips

Mr Donnelly, this is going to be a very long hearing lasting into the early hours if you are not going to answer the question. The question I am asking you—you can answer it specifically by reference to each of the matters identified by the NAO—is what investigation was conducted within BIS in relation to the drop-out rates at these nine providers that were responsible for 20% of the drop-outs? What investigation was conducted in the Department? It is a very simple question.

Martin Donnelly

There wasn’t an investigation in the Department—

Stephen Phillips

Right, the answer is—

Martin Donnelly

If I may continue, I think you will find it helpful.

Stephen Phillips

Yes, go on.

Martin Donnelly

We saw this as part of the work that the QAA was doing in terms of looking at the quality of providers, but as is also true in the HEFCE-funded sector, drop-out rates themselves have to be—

Chair

How does this get us to what investigation you were doing?

Martin Donnelly

I am trying to make the point that drop-out rates are one signal that have to be looked at against the background of the student body—

Chair

You clearly did not relate one signal to the other.

Q74Stephen Phillips

Let us take another one then: EU students at some alternative providers were claiming or attempting to claim student support, and in fact, we know, because the SLC has told us, that it was at least £5.4 million. What investigation was conducted within BIS in relation to that issue across the sector?

Martin Donnelly

On EU students seeking support, as soon as we had information that—

Stephen Phillips

No, Mr Donnelly. What investigation was conducted within BIS in relation to the issue that I have just identified?

Martin Donnelly

Of EU students seeking—

Stephen Phillips

Yes, of EU students receiving money that they were not entitled to.

Martin Donnelly

We immediately contacted the SLC, which is responsible for checking whether students are eligible, and it took very rapid action, in about three weeks.

Mick Laverty

We were instructed by BIS to suspend payments—

Stephen Phillips

This is October 2014, when Mr Donnelly says, “immediately”.

Mick Laverty

It was September 2013 when we were instructed to suspend all payments to—

Chair

Can I ask you about EU students, because I am quite interested? EU students are the least likely of everyone to pay back the money you lend them, aren’t they?

Mick Laverty

That is correct.

Chair

And what money comes back? What is the percentage that comes back? My recollection is about 15% or 20%, but that is off the top of my head. If EU students take a loan or get support, because they are so difficult to trace, only about 15% or 20% of that comes back—that is my recollection.

Mick Laverty

I have the figures here. Your recollection is correct; it is more difficult to get money back from EU students. EU students overseas represent something like 11% of the student population—sorry, in terms of loans value outstanding, it is 12% of all loans outstanding. In terms of arrears, the figure is 26% of all outstanding arrears—

Chair

So they are 12% of outstanding, but 26% of arrears.

Mick Laverty

If you take the population of UK and EU overseas students—both from the EU and the UK—by numbers, the loans outstanding on the EU overseas is £145 million, and for the total population, it is £1.245 billion, so that is 12%. The number of arrears outstanding: 26% of the total overseas is EU overseas, the remainder being UK overseas. The number of borrowers: 21% of the total overseas is EU overseas.

Chair

Okay, and am I right in thinking that 40% of the students going to these private alternative providers are from the EU?

Mick Laverty

I think that’s correct.

Chair

That’s correct?

Stephen Phillips

Sorry, what was the percentage?

Chair

Forty per cent. That’s interesting. You are talking about how much money is being wasted. Some 40% of the students going to these private colleges are from the EU; they get money, and their propensity to pay it back is much lower.

Stephen Phillips

It’s worse than that, isn’t it? Paragraph 2.11 of the NAO Report says that the Department became aware that “at some providers more than 80% of new students were of Romanian or Bulgarian origin…multiple applications were made from individual households…applications were submitted after the course start dates; and applications” were “submitted in bulk, with up to 50 applications per day from the same internet location.” When, Mr Donnelly—this is a very simple question, and if you can’t answer it, we will draw our own conclusions—did the Department become aware of those features of the way in which the policy was operating?

Martin Donnelly

We got this information from the SLC, who collect the actual applications. That was, I think, in the spring.

Stephen Phillips

In the spring of when?

Mick Laverty

2013.

Stephen Phillips

What was done as a result of that information being provided?

Mick Laverty

We noticed some irregular patterns in the spring of 2013—the high number of Romanian students at various institutions. We did quite a large sampling exercise that bore out the fact that 85% of them could not prove residency. At the same time, the DWP, in parallel, were doing a similar sample check of the number of EU A2 students who could prove residency for national insurance purposes.

Stephen Phillips

Well done the SLC. So you got straight on to it once that information about ineligible students became available.

Stephen Hammond

What did you actually do?

Stephen Phillips

As Mr Hammond says, what did you actually do?

Mick Laverty

We discussed it with the Department, who asked us to immediately suspend the payments.

Chair

How much did you lose on that little number?

Mr Bacon

Could you just repeat your previous sentence, because I didn’t hear it? Did you say you stopped payments?

Mick Laverty

All payments were suspended. BIS instructed us to suspend all payments in September.

Chair

How much did you lose?

Mick Laverty

The figure moves all the time, Chairman, as students—

Stephen Phillips

Roughly.

Mick Laverty

At the moment, it is £3.84 million.

Stephen Phillips

Of public money, which has just had to be written off as a result of what is, essentially, fraud.

Mick Laverty

No, it is £3.84 million of public money that we are still pursuing.

Stephen Phillips

Well, help us with that, Mr Laverty. How are you going to recover that money?

Mick Laverty

Well, £442,000 will automatically be recovered from the next round of payments to these alternative providers. The balance will be recovered—or we will try and recover the balance—from the individuals concerned who have had maintenance support.

Stephen Phillips

So you are going to be sending investigators off to Romania and Bulgaria, are you?

Mick Laverty

We will be using our overseas debt collection agencies, as we do for all overseas borrowers.

Mr Bacon

When you say the payments will be automatically recovered, do you mean you are deducting the amounts from subsequent payments?

Mick Laverty

Yes. To date we have—

Mr Bacon

So you are not actually getting cash back. That’s right, isn’t it?

Mick Laverty

It amounts to the same, I believe.

Mr Bacon

No, it doesn’t, actually. There is a difference between paying money out, not paying money out and getting cash in—they are all different things. You are no longer paying out money that you would otherwise have been paying, so you are assuming that, in the absence of the money the provider would otherwise have been getting, they are, as it were, going to provide a free service for what are presumably legitimate students. Is that right?

Mick Laverty

We’ve collected £951,000 to date from the £3.84 million that is currently outstanding. Some £751,000 has been clawed back from future payments to alternative suppliers.

Mr Bacon

I would really be grateful if you could just answer my question.

Mick Laverty

Sorry, could you repeat it?

Mr Bacon

You said that you are stopping some payments to these alternative providers and that the payments that are due will be clawed back from future payments that you would otherwise have made to those providers. Is that right?

Mick Laverty

Correct.

Mr Bacon

Okay. So my question is this: the future payments that you would otherwise have made to those providers are, you assume, legitimate payments for legitimate students. That is correct, isn’t it?

Mick Laverty

That’s correct.

Mr Bacon

Okay, thank you. That was my question.

Sir Amyas Morse

There are two different elements, aren’t there?

Peter Gray

In respect of these ineligible students, there is the tuition fee element that would have been paid to those providers. As I understand it, the Student Loans Company is reclaiming those moneys off those providers. There is a remaining element, the maintenance element, which would have been paid to the student.

Chair

That is the bigger element.

Peter Gray

Action has to be taken to pursue those students for that money.

Sir Amyas Morse

You cannot take that bit back from the provider, obviously.

Chair

What is this £3.8 million—is that just the Romanian scam?

Mick Laverty

This is the EU A2 exercise, which, at the time of the Report, was 992 students owing £5.4 million—

Chair

Is that the 5,000?

Mick Laverty

The £5.4 million in the Report and in the headline key finding—

Chair

So that is a finite period.

Mick Laverty

It reduces, literally on a weekly basis as more of those students provide evidence that they are eligible.

Chair

So does the Romanian scam go into that?

Mick Laverty

Yes. As we sit here at the moment, 832 students from the original 1,333 still have not provided evidence of eligibility. They owe a remaining £3.84 million. As the NAO quite rightly say, we are clawing back some from the providers themselves and the remainder, the bigger part, from the individual students in the normal way that we do collections: by chasing people using debt collection agencies.

Chair

And these are just people who did not meet the eligibility criteria.

Mick Laverty

There are two possible scenarios. There are people who applied for a student loan and chose not to carry on with their studies who need to repay us the money. Or, if they applied for a student loan but could not produce evidence on their eligibility, that is fraudulent and they need to pay us the money.

Chair

You see, Mr Donnelly, what is so shocking is that this is another element—the second or third element—and the idea that BIS and you, the accounting officer, have not made an attempt to bring this together in a coherent whole so that the public have some idea of how much money has been lost is totally not on. This is public money and you have got to account for it.

Austin Mitchell

It baffles me that the private sector is not subject to the same regulations and requirement to be open and register its qualifications as the public sector. Is the assumption that the public sector is full of racketeers and it will rob the students while the private sector is virtuous and we want to encourage 100 colleges to blossom? Why was it not regulated? Was there a policy to encourage it to blossom?

Martin Donnelly

That is a very reasonable question. The short answer is: originally, legislation was envisaged which would have put a structure around this, but the Government chose not to legislate at that point. I think they wanted in part to see how things would develop. In my view as an accounting officer, it would be very helpful to have such legislation as early as possible in the new Parliament to set out a structure which allowed for proportionate risk-based analysis across all of the sector—the APs are a very diverse group and, actually, HEFCE-supervised institutions are increasingly as well—so that we do have that in place. We are moving towards it in terms of quality assurance—

Chair

Mr Donnelly, this is outrageous. This is such an abrogation of duty.

Mr Jackson

It is a lot of old flannel, frankly.

Martin Donnelly

No it is not; it is very clear.

Mr Jackson

It is a lot of old flannel—what is “proportionate risk-based analysis”?

Chair

This is after the horse has bolted.

Mr Jackson

You should have been pulling your finger out a bit earlier than this. Everyone else in alternative providers knew that there was a problem with fraud with these particular people, but you did not, so do not give us a lot of old flannel and gobbledegook because I am not as generous and charitable, as a Christian gentleman coming up to Christmas, as Mr Hammond is. So speak clearly, please.

Martin Donnelly

Can I just say—actually, this is a serious point on which I would like to ask HEFCE to comment—I do agree about the appalling fraud from some Romanians and others. That was shocking. That was a loss of public money. As soon as it happened, we moved very quickly to deal with it and to check all the other EU students, which we did.

Mr Burrowes

It is not just the fraud, but the incompetence of not even requiring proof of residency that is shocking for the taxpayer. Even when suspicions were raised about the numbers coming in back in 2013, there was not a requirement of residency. That happened only after the horse had bolted.

Martin Donnelly

The issue was not the requirement; it was the evidence.

Mr Burrowes

Of course it was the evidence.

Chris Heaton-Harris

It is in the Report at paragraph 2.4, which you have agreed to. There are all sorts of points in there, such as that the SLC did not routinely require supporting evidence to residency checks—it was a tick-box requirement. I struggle to believe that that is all that was required, that the Department was happy with it and that the SLC would allow such an easy process for a known risk group—it was not a known risk group according to BIS, but it was according to just about everybody else. First, why was the SLC so slack on this when it knew it was a problem and, secondly, why was BIS so slow to react to it?

Chair

Mr Laverty, you go first. Give him a breather.

Mick Laverty

We were following the settled processes that had been in place for a number of years. We inherited the process when we took over the processing of applications, which had previously been done by the local authorities.

Mr Burrowes

Weren’t you previously alerted by DWP that a bunch of non-UK nationals were doing this kind of action?

Mick Laverty

We weren’t alerted by DWP. We were alerted by our own counter-fraud team.

Mr Burrowes

“In July 2013, the Department for Work & Pensions… separately alerted BIS to a group of 48 non-UK nationals that DWP was investigating who had applied for National Insurance numbers to claim student support for courses at alternative providers.”

Mick Laverty

That is absolutely correct, but we spotted it ourselves in March 2013 and did our own sampling exercise. We were onto it before the DWP’s sampling exercise, which confirmed what we found and investigated. If I can finish, please, Chair. We were following the settled processes that we were commissioned and funded to carry on with.

Chair

Didn’t you understand? You are sitting there saying, “We were following a process”—

Stephen Phillips

Maybe we should hear Mr Donnelly’s answer to Chris’s question.

Chair

I will come to him in a minute. What astonishes me is that you were following a process and your guys were responsible for it, but nobody put up their hand up and said, “I’m not just going to follow the process. There might be something wrong in this that might just lead to a little bit of fraud. Shouldn’t we think of a more sensible way of doing it?”

Mick Laverty

With respect, Chair, that is exactly what happened. The counter-fraud activity that we uncovered in March and the larger sampling exercise in the summer bore out the fact that the settled process was not robust enough. We have gone back subsequently and looked at EU students at all public providers. We did a sampling exercise of 1,361 of those students, and only 11 of them may be ineligible for student finance and only one is definitely fraudulent. That bears out the fact that the original process was fit for purpose at that point in time. When we discovered that there were issues, we moved swiftly and tightened up the process, and we got additional funding from BIS to do so.

Austin Mitchell

Let me come back to Mr Donnelly. As I understand his answer to my question about why it wasn’t regulated, he is saying, “We intended to, we thought about it, we decided not to and somehow we didn’t. It is all too difficult.” That is more or less what you said. I just want to read you some correspondence from the University and College Union, whose general secretary is Sally Hunt. Her correspondence with the Department and your Minister makes very interesting reading. They wrote asking for an appointment on 25 June 2010, and they got it in September 2010. Hunt pointed to a series of high-profile public scandals involving for-profit companies. She asked that further moves be made to regulate them. In response, in April 2011, the Minister announced that the amount of student loan available to students studying with private providers would be doubled—so nothing was done, and you showered more money on them. Sally Hunt is clearly a determined woman from this correspondence; I am very respectful of her. She wrote again in May 2011, and said that private providers are under no obligation to provide public information, comparable to public institutions. She got a reply from the Minister in June 2011, which said that the forthcoming White Paper would deal with those issues. Well, it didn’t. It appeared in September 2011 and didn’t deal with the issues of concern. In January 2012, Hunt asked for another meeting and again raised the issue. She was told again that action was on the way. In April 2012, she had another meeting with the Minister to raise the issue of private providers accessing public subsidies. She pointed to a number of specific points in a long letter on 8 May 2012. The Minister wrote back in June 2012 to note his concerns and state that the Government would take steps soon. Well, they didn’t. They took none of the measures, as she points out. In fact, the number of students going to those institutions has trebled—sorry, the cost to providers has trebled to £100 million. In desperation, getting no action from the Department, Hunt wrote to the Public Accounts Committee to set out the problem. Why was nothing done about all these representations that you were getting pointing to fraud and problems in the system?

Martin Donnelly

I would have to separate specific issues about fraud, which we did aim to follow up, from wider issues about legislation, the system and a ministerial decision to raise the fee cap to £6,000, which are obviously policy issues. When we knew we were not going to get legislation, we progressively tightened the way in which we controlled the colleges through looking at their finances, through ensuring students were on a designated course, through using the QAA to look at the quality of provision, to fill that space. Can I just return to the point—

Chair

No, don’t return. Answer the question.

Martin Donnelly

I think I have answered the question.

Chair

I don’t think you have answered the question. Why did you start the system without the proper regulatory framework in place? Why did you start? Didn’t you know about individual learning accounts? That was so well known as a big, big issue that was got wrong. Why did you start the whole ruddy thing?

Martin Donnelly

I’m not an expert on individual learning accounts.

Chair

Well, you should have been. Government knew about it.

Martin Donnelly

The regulatory structure was very different.

Mr Bacon

Hang on. First, you should have been an expert on individual learning accounts. I remember it at the time and I was on this Committee when it happened. One of the first things that happened to me when I became a Member of Parliament in 2001, was that I was prompted by some Opposition Whips to apply for an Adjournment debate on this thing called individual learning accounts, about which at the time I knew almost nothing. They said, “Don’t worry, you won’t get it.” I did immediately. I therefore assumed wrongly that that was how Adjournment debate applications worked. I then boned up on it considerably over many days. That was in the autumn of 2001. Then there was a report by this Committee following a Report by the NAO, and there was also a report from the Education Committee. You say that the design and structure are different. I can tell you, Mr Donnelly, these things—multiple applications from individual addresses, applications submitted in bulk—are extraordinarily familiar and very similar to the individual learning accounts. You did not need to be an expert on it; you just needed to know that this type of thing, very similar, had happened before. You are basically saying that you did not know. Is that right?

Martin Donnelly

No. We are saying the case of the Romanian and the Bulgarian—

Mr Bacon

Mr Donnelly, I am really asking about you. You said you were not an expert on the individual learning accounts. Are you saying that you did not know about the individual learning accounts episode?

Martin Donnelly

I did not know in detail.

Mr Bacon

Did you know anything about it at all?

Martin Donnelly

I knew that there had been problems of financial control.

Mr Bacon

Did you know anything about it at all?

Martin Donnelly

I don’t know a huge amount about it, no.

Mr Bacon

Did you know anything about it?

Martin Donnelly

I knew that there had been issues about how effectively money had been spent.

Mr Bacon

Did you know there were bulk applications trading in the secondary market?

Martin Donnelly

No.

Mr Bacon

Did you know it was a website-based application? All you had to do was provide your name, address and the bank account where you wanted the money sent, and then the computer sent out the money without any checks. Did you know?

Martin Donnelly

That is a very significant difference from our system.

Mr Bacon

I know—I understand that that is now different. It is probably tighter than it was then. It seems to me that it is your job to know about these things. Surely, when some new proposal for expenditure comes along, the first question an accounting officer should ask is, “What do we already know?” In the words of Michael Scheuer, “Check the checkables.” What do we already know? Why did you not check what you—or Government—already knew?

Martin Donnelly

We were starting from a different place. We had a stable system of fairly light supervision for alternative providers, which had lasted for some years, decades in many cases.

Chair

But you went from £50 million in 2010-11, to £675 million in 2013-14, to £900 million in 2014-15.