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The Higher Education Funding Council for England, the funder and regulator of the higher education sector, has overseen the financial sustainability of the sector through a period of growth in income and student numbers, according to a report published today by the National Audit Office. The Funding Council has taken a cost-efficient approach and has delivered value for money in the context in which it has operated to date. However, the sector is facing a period of transition to a very different financial environment.

The Funding Council has contained the cost of its own regulatory activities and has sought to minimise the burden of its activities on higher education institutions. It has focused on supporting those institutions at highest risk, whilst managing to maintain the confidence of the sector.

The new funding framework for the sector is, however, likely to increase the level of risk. There is already wide variation in the financial performance of institutions.

The Funding Council's current assessment of financial sustainability of institutions provides effective coverage of medium-term risks. To detect short term risks the Funding Council draws upon its contacts with the sector but it also relies on universities themselves reporting potential problems - something which the Funding Council needs to reinforce.

The Funding Council does not routinely publish its assessments of individual institutions as part of its annual assessment of risk within the sector, and delays its naming of "at higher risk" institutions by at least three years to give them time to rectify their problems. As a greater proportion of funding begins to follow the student, the Funding Council needs to consider the balance between protecting institutions and their students and enabling prospective students to take more informed decisions on where to study.

Some institutions in difficulty can take a long time to resolve their weaknesses, even with close support from the Funding Council.

Amyas Morse, head of the National Audit Office, said today:

"The Funding Council has performed well during a benign environment for higher education. However, the sector is now facing a period of transition to a very different financial environment, increasing financial and management pressures on our higher education institutions. In light of this, the Department for Business, Innovation and Skills needs to be ready to re-think fully the Funding Council's regulatory framework in the future."

Notes for Editors

1. The Higher Education Funding Council regulates the sector's financial sustainability and is accountable to the Department for Business, Innovation and Skills. There are 129 higher education institutions in England in receipt of funding from the Higher Education Funding Council for England.
2. The sector's income grew by six per cent per year in real terms in the four years ending 2009-10. The sector's income totaled £22.2 billion in the academic year 2009-10, including £5.1 billion teaching grant from the Funding Council, £2.7 billion from full time undergraduate tuition fees (supportable by student loans) and £5.3 billion of public and private funding for research.
3. Press notices and reports are available from the date of publication on the NAO website, which is at www.nao.org.uk. Hard copies can be obtained from The Stationery Office on 0845 702 3474.
4. The Comptroller and Auditor General, Amyas Morse, is the head of the National Audit Office which employs some 900 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

• Full report - Regulating financial sustainability in higher education

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