Universities are not like banks: why Sir Michael Barber is wrong

Sir Michael Barber, head of the Office for Students, has said that the regulator will not come to the aid of failing universities. It’s a policy that could have disastrous consequences for students, argues Professor DVM Bishop


In a much-publicised speech on November 6, Sir Michael Barber, head of the Office for Students (Ofs), said:

In the early months of our existence, we have heard a number of times from university leaders that if they fail to adapt to a changing environment or misjudge decisions – for example about student numbers, courses offered and facilities built – and get into financial trouble, “ultimately it will be OK because the OfS will bail them out”.

This is wrong. The OfS will not bail out providers in financial difficulty.

He went on to draw a parallel with the banking sector, where the notion that a bank was ‘too big to fail’ led to arrogant and irresponsible institutions showing a lack of financial discipline.

Sir Michael was backed up by the Minister, Sam Gyimah, who was quoted as saying:

We do not see it as the government’s role to bail universities out when they make reckless financial decisions.’


Universities are spending money to stay competitive

On the surface, the parallels between universities and banking may seem clear. Just as bankers have been criticised for awarding their top executives huge bonuses, even when the bank has failed, universities have been increasingly criticised for the high salaries of vice-chancellors. Just as banks allowed themselves to be seduced into relying on flawed investment schemes that nobody understood, we hear that some universities have embarked on building schemes that may, in hindsight, appear rash.

But push it further, and the comparison breaks down completely. For a start, we all need banks, but they exist to make a profit for their shareholders. Universities, at least those that are publicly funded, exist to provide higher education and do research. Insofar as universities have got themselves into financial difficulties, it is because to fulfil their mission they need students, and so they need to carefully balance how far they spend funds on people to do the work, or facilities to attract the students and create a suitable environment for teaching and research. Although the media are fond of the idea that all the student fees go directly into the pocket of the vice-chancellor, this is not the reason for increased fees. (I write as one who disapproves of massive pay-checks for VCs, but who can also do arithmetic). Any ‘reckless financial decisions’ are not made to enrich university staff, but rather to compete effectively in what is becoming, through deliberate government policy, an intensely competitive sector.

The second unfortunate consequence of comparing universities with the banking sector is that the government did bail out* the banks. Bad as this was, the consequences of not doing so would have been far worse. But is it any different for universities?

We were, of course, prepared for the stance taken by Sir Michael by the Green Paper that preceded the Higher Education and Research Bill. This had an entire chapter devoted to ‘Provider Exit and student protection’, in which it was stated:

Continuing to support providers that are struggling is undesirable for various reasons. Difficulty attracting students or poor quality provision would not be in the long term interest of students, and could damage the reputation of the sector. Removing provision may indeed lead to it being replaced by higher quality provision. It will also not be in the taxpayer’s interest to offer ongoing financial support (whether via grants or loans) to sustain institutions in difficulty, or where there is a failure to comply with regulatory requirements, including a Tier 4 sponsor licence. However, there may be limited circumstances where it might make sense to support an institution on a temporary basis, for example in a location where there are no other higher education providers in the area, and to give time for an orderly exit.’

Financial failure or bankruptcy were specifically mentioned as possible reasons for ‘exit from the sector’.


What about the students?

We can only agree that it would not be desirable to shell out funds on those delivering poor quality courses, but the quotes from Sir Michael seem to be taking a firmer line by indicating that failure to remain solvent is reason enough to close the institution, regardless of the quality of its courses. But what about the students, you may ask. Well, this is all for their own good, according to Sir Michael:

Should a university or other higher education provider find themselves at risk of closure, our role will be to protect students’ interests, and we will not hesitate to intervene to do so. We will not step in to prop up a failing provider.

‘Every registered provider must have a student protection plan approved by the OfS which sets out what actions it will take to protect all its students in the event that they are unable to continue their studies. We require providers to publish their approved plan, ensure it remains up to date and implement it if necessary.’

But how realistic is this? Suppose you are in the middle of your degree when your university goes bankrupt. Even if there was another university nearby offering the same subject, the course content is likely to differ, and there is unlikely to be spare capacity for a sudden influx of new students.

Liz Morrish noted on Twitter that if you Google for published student protection plans, they are simply not realistic (that is assuming they even exist). As Liz said: ‘One or two take a position of supercilious incredulity about market exit. Others think they can just ship students to another HEI with no apparent bilateral agreement in place.’

She continued: in effect, the student is told: ‘Dear student. You live in XTown. Your family, friends, job and domicile are there. But sorry. We’re closing your university while you’re on your year abroad. But you can finish your course at a university 200 miles away where you can’t afford to live.

Then there are other considerations: suppose you already have a degree from University X, but it then goes out of business. Will that devalue your degree in the eyes of employers? If so, what compensation would students receive? And how about all the people employed by the university? In many towns, the university is a major employer.


Reckless timing

Finally, we have to consider the impact of Sir Michael’s speech coming at the time it does, just when the sector is getting twitchy about the decline in overseas students, exodus of EU staff, and uncertainties about future fee structures. The speech was particularly timely because the previous week there had been rumours in the media that some universities were indeed about to go bankrupt. They were not named, but the impression was these might include some long-standing publicly-funded institutions. When the Royal Bank of Scotland was in difficulties, things were kept very quiet to avoid creating a run on the banks. If anyone is being reckless, it is Sir Michael who should be aware that if a rumour gets out about a university in financial difficulties, then his speech will ensure there will be a catastrophic drop in future admissions, sealing its fate.

I don’t believe in giving financial rewards for failure. However, I do see our universities as a key component of a civilised society, rather than a set of commercial organisations that sell degrees to customers. The main reason why CDBU has been sceptical about making it easier for new private providers to enter the sector is because there is a real risk of failure, which is potentially damaging to students. If our existing higher education institutions are in financial difficulties, by all means bring in rigorous regulations and oversight to ensure they can recover. We are not perfect, and should not expect to receive public money without any scrutiny. But to have the chair of the Office for Students continue to depict universities as institutions that are at odds with the best interests of students is both unhelpful and disingenuous.

*The academic in me cannot resist noting that the word ‘bail out’, which apparently has a subtly different meaning from ‘bale out’, does not seem a very apt metaphor for financial rescue of either banks or universities. According to this website, ‘bale out’ is what a pilot does when parachuting out of a crashing plane, whereas ‘bail out’ refers to removing water from a sinking boat. I suspect that the meaning has mutated to incorporate the idea of offering bail to get someone out of jail.