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Office of Qualifications and Examinations Regulation (Determination of Turnover for Monetary Penalties) Order 2012

Volume 738: debated on Monday 25 June 2012

Considered in Grand Committee

Moved by

That the Grand Committee do report to the House that it has considered the Office of Qualifications and Examinations Regulation (Determination of Turnover for Monetary Penalties) Order 2012.

Relevant document: 2nd Report from the Joint Committee on Statutory Instruments.

My Lords, I am grateful to the Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee for their careful consideration of this order. Noble Lords will be aware that neither committee commented or thought that the House’s attention should be drawn to the order.

First, I shall give a little bit of history. Noble Lords will recall that it was as a result of concerns raised by Members of this House that we introduced a provision into the Education Act 2011 giving Ofqual new powers to impose financial penalties. That was against the backdrop of the errors in exam papers during last summer’s exam season. That power was commenced in May this year. It addresses the gap in Ofqual’s range of sanctions, as previously there was nothing between a power to direct and the ultimate sanction of withdrawing the awarding organisation’s recognition. This change brings Ofqual into line with similar regulators and is consistent with the Regulatory Enforcement and Sanctions Act 2008.

At the time, last year, the Government accepted the argument that a strong regulator needs a range of powers, including the ability to impose financial penalties. Fining is a flexible sanction which we expect to act as a deterrent to awarding organisations breaching regulatory requirements. In many circumstances it would provide a more proportionate response than the most severe sanction of withdrawing recognition. At the other end of the spectrum, as we have seen with other regulators, fines give a stronger public signal about the significance of the breach than giving a direction to take corrective action or public censure.

It is of course important that there should be limits on any fine. For that reason, we agreed that Ofqual’s power to fine should be subject to a cap of no more than 10% of the awarding organisation’s turnover. We also agreed that the definition of turnover for these purposes would be set out in an order made by the Secretary of State and subject to the affirmative procedure.

A wide range of awarding organisations operate in England: Ofqual currently recognises 179. They possess very different characteristics, including in relation to the way in which they derive income and the relationship between their regulated activity and any other activities that they undertake. In order to gauge the balance of views on this issue, we undertook a 12-week consultation on the draft statutory instrument, which ran from December to March this year. Parallel consultations were carried out by Ofqual and by the Welsh Government in respect of a similar power that has been introduced in Wales.

When we discussed this matter last year, I explained that it was our intention to define turnover in relation to activity that Ofqual regulates, rather than using a broader definition based on all an awarding organisation’s activity, which could include unregulated activity and activities beyond the United Kingdom. However, when it came to drafting the statutory instrument, it was clear that this would prove difficult to achieve, because in fact a number of awarding organisations have no income from regulated activity. Sticking to our original proposals would have resulted in those awarding organisations being able to operate without threat of this sanction. That could have led, for example, to an awarding organisation that charges for proprietary qualifications being treated differently from an employer awarding body that awards its own, very similar, qualifications to its employees without charging. For that reason, we consulted on an order that defined turnover in relation to all an awarding organisation’s activity in the United Kingdom.

The 35 responses that we received to the consultation were broadly in favour of the power to fine in principle, of the geographical scope of the power and of the proposal to calculate turnover on the basis of a business year. However, concerns were expressed over the inclusion of all income in the definition of turnover, rather than limiting the definition to income from regulated activity.

We understand the concerns of both large organisations and small charities, especially those that generate none or very little income from regulated activity. We have considered those concerns carefully and looked at a number of different options, including one proposed by Pearson that we should adopt a two-tiered approach, using one definition based on regulated activity where appropriate and a second based on all activity when an organisation does not derive income from regulated activity.

Set against these concerns, we have had to take account of the importance of establishing a regulatory regime that is simple, fair and consistent in its treatment of awarding organisations. Having considered the alternative options, we were not persuaded that any of them met this test. We think that calculating turnover must be done in a way that treats all awarding organisations equally. As the scope of regulated activity is narrow, being concerned only with the award or authentication of qualifications to which Part 7 of the ASCL Act applies, income from related activity, such as the publication of textbooks, would have been excluded from any definition that uses regulated activity as its basis. A differential approach could therefore have the effect of limiting the exposure of an awarding organisation that derives income from regulated activity, while placing no such limits on one that does not.

The order that is before us for consideration today defines turnover in relation to all of an awarding organisation’s activity in the United Kingdom. That approach mirrors the one already agreed by Welsh Ministers, following consultation and debate. If agreed by Parliament, this order will provide a consistent framework for awarding organisations operating across England, Wales and Northern Ireland. That matter was important for respondents to the consultation.

Alongside the consultation on the statutory instrument, Ofqual consulted on its policy on fining. That policy was published in May and makes clear the factors that Ofqual will consider in determining whether an awarding organisation should be subject to a fine. It will consider the harm done and whether a fine is likely to improve compliance with regulatory conditions in the future. It will also consider whether another regulatory body, such as the Welsh Government, has already imposed a financial sanction in relation to the breach.

Having decided that a fine is appropriate, Ofqual will take account of a range of factors in determining the amount of that fine, to ensure that it represents a proportionate penalty. This includes the likely impact of the fine on the awarding organisation’s provision of regulated qualifications and its turnover from regulated activities in relation to its total turnover, to avoid a disproportionate impact on awarding organisations with multiple business interests. Ofqual is required to give notice of its intention to fine, setting out reasons, and then to have regard to any representations received in response. Should Ofqual decide following any such representations to confirm the fine, the awarding organisation has a right of appeal to the First-tier Tribunal. Appeals may be made on the basis of the imposition of the fine and on the level of the fine imposed. While the independent appeals arrangements are in train, any fine is suspended.

There is no financial incentive for Ofqual to impose a monetary penalty. All money received in the payment of a fine will be paid into the Government’s Consolidated Fund. The definition set out in the order allows Ofqual to have a flexible monetary penalty policy that can take into account the diverse nature of the qualifications market. We set out to define turnover in a way that is fair, transparent, relatively easy to administer and consistent with the approach taken by the Welsh regulator. I believe that that is what we have done. I also believe that Ofqual’s commitment to act in a way that is proportionate, accountable, consistent, transparent and targeted, and the safeguards that are in place, should reassure awarding organisations that the fining power will be used proportionately and appropriately. I therefore commend this order to the Committee.

My Lords, I support the order and commend the Government for bringing such a sensible conclusion to a complex inquiry. In doing so, I declare an interest as being currently and for the next month chair of one of the bodies mentioned in the supporting papers, the Associated Board of the Royal Schools of Music. I mention that body also to illustrate how complex the measure is, because it probably means that the department, or certainly Ofqual, would have to check reasonably regularly that the way in which it had constructed the annual turnover figure was accurate. The figures for ABRSM given in the supporting paper show the turnover as being just over £31 million, which was probably the figure for two years ago. That turnover is based not simply on the 300,000 candidates in this country but on 300,000 candidates overseas and shows the complexity involved in determining turnover for activity in the UK. I know that it is simply an illustrative figure in an illustrative paper, but it makes the point that there would have to be accurate checks and agreement with the organisations in question. I do not think that the eventuality will arise, but, if it did, one would need to know in advance on what figure the 10% cap was based. Another slight complexity, again illustrated by the case of ABRSM, is that the figures are to be examined in Scotland as well as in the other three jurisdictions named in the paper. I am not sure whether that makes a difference, but it is the kind of detail that should be checked out. However, I support warmly the direction in which we are now moving.

As noble Lords will remember, I brought up this issue during the passage of the Education Bill, so I shall not rehearse the list of difficulties that we all saw in the newspapers during 2011 and in previous years—the noble Lord, Lord Sutherland, told us a lot about those, too. The principle of giving Ofqual powers to fine awarding bodies that have been in dereliction of their duty seems entirely proper and necessary, which is why I support the Government. Their proposals seem entirely fair. The awarding bodies are a disparate group and it was always going to be difficult to devise a scheme that coped with all the differences, but the decision to limit turnover for the purposes of Ofqual regulation to all activity within the UK seems appropriate. Sufficient safeguards are built in: there will be an appeal mechanism; Ofqual will be required to state its reasons for using its powers, as the Minister has told us; and there will be a review of the order and Ofqual’s activities. Those are enough. A great deal of needless distress was caused to pupils and their parents, and a lot of difficulties were created for colleges, schools and universities. I hope that the order will be used to alleviate those problems. We shall see whether it does, because it can be reviewed.

My Lords, I thank the Minister for his explanation of the reasoning behind the order and for his earlier letter to the noble Lord, Lord Lingfield, providing an update on the steps taken since we last discussed this matter during scrutiny of the Education Bill.

We share the Government’s determination to drive up standards in the conduct of examinations and to ensure that Ofqual has the suite of tools necessary to hold awarding organisations to account for any mistakes made, particularly if they have a wider impact on overall public confidence in the exam system. We therefore approach scrutiny of this order with the positive view that it is in our interests for Ofqual to demand, and ensure, the highest possible standards in the administration of the exam system.

I could of course begin by questioning whether this order is already out of date given the Secretary of State’s apparent decision, leaked last week, that from autumn 2014 O-levels will be revived and the current exam board free-for-all replaced by a single exam board for each subject. Yet I realise that however short-lived this order turns out to be, we have a responsibility to deal with it as best we can. However, in one sense the Secretary of State’s announcement has a common cause with the order here today because the fact that there are so many different awarding organisations of every shape, size and constitution, as we have heard, is the central cause of the headache for Ofqual about how to regulate them fairly and consistently. I suppose that it begs the question as to whether we have allowed too many bodies to spring up to enable consistent marking and proper qualification comparisons to be achieved. In this context, however, I have a few specific questions.

First, as has been said, the enormous disparity in size between some of the awarding bodies poses a central challenge: how can we ensure that the proposed fines are proportionate, particularly when we are comparing large commercial companies with charities or not-for-profit providers? Our concern is whether there is a danger of unforeseen consequences, with some of the smaller niche providers being driven out of the sector by the threat or reality of fines. In applying the rules of proportionality, even when limited to a 10% cap, can Ofqual assure us that it will not use these powers to squeeze the smaller players out of the market?

Secondly, on how the scope of a fine should be determined, we accept that the dilemma of the 10% cap being on regulated or total turnover is real. I know that some awarding organisations were concerned about this, as has been commented on, but on balance we share the view expressed by noble Lords around the Committee that the latter—the total turnover—should be accepted as the fairest way to proceed, in all the circumstances that have already been discussed.

Thirdly, does the Minister agree with one of the sample comments in the Ofqual consultation? It made the point that,

“Ofqual should … publish full and clear guidance about fines, its fining procedure and what specific listed breaches of conditions of recognition will attract fines”.

Will Ofqual have clear procedures in place to address another of the consultation concerns: the danger of double counting, or being penalised for the same breach more than once?

Fourthly, these steps we are taking today do not fundamentally address the causes of the recent high-profile errors that have occurred. I realise that these are the subject of a separate investigation, but can the Minister assure me that as well as putting in place measures to punish failure in quality we are, in parallel, putting in place the drivers for improved standards? For example, the training of senior examiners needs to be improved. It should no longer be possible for exam papers to be set by individual examiners and not then checked by others. The pre-testing of exam papers should be encouraged and more rigorous cross-referencing of marking schemes introduced. These are the kinds of actions that would re-establish faith in the UK’s exam system, which has become battered and discredited in recent years.

Finally, can we be assured that protections will be put in place to ensure that any fines to awarding organisations are not simply passed on to schools and pupils in the form of higher exam costs but instead will impact on the profits of the organisations concerned? It would be an irony if the pupils and schools that had been disadvantaged by the mistakes of an awarding body simply ended up passing on the cost of the mistakes to the next generation of pupils within that school. Those are my only questions this afternoon and I look forward to hearing the Minister’s response.

I am grateful for the brief comments that have been given in support of the steps we are taking. I am particularly grateful to my noble friend Lord Lingfield for originally raising this issue. We are glad to have been able to address it. I am also grateful for the support from the noble Lord, Lord Sutherland of Houndwood, who rightly pointed out the complexity and disparate nature of these organisations, to which the noble Baroness, Lady Jones of Whitchurch, also referred. That is what has driven us to the conclusion that we have reached.

The noble Baroness, Lady Jones of Whitchurch, raised specific questions. First, I was grateful for her general support of these moves, and I agree that the desire behind them is to raise standards and confidence in our exam system. I know she shares that goal. I also agree with her concern that we need to guard against the unforeseen consequences of some of these moves. I shall try to respond to her specific questions.

Her first question was about the concern that smaller awarding organisations might inadvertently be driven out. I said earlier that the safeguards that Ofqual has put in place, on which it has consulted, are designed to ensure that the power is used in a way that will, I believe, be both appropriate and proportionate. In particular, Ofqual will exercise its discretion regarding whether to impose a fine and the level at which to do so. If the imposition of a fine would be likely to render the awarding organisation unable to provide regulated qualifications in future, I do not believe that Ofqual would use its fining powers. The case that she raised of the small or charitable organisation is guarded against in Ofqual’s discretion. At the other end of the spectrum, it is also the case that larger organisations might be concerned about the danger of a disproportionately large fine. As has already been said, the 10% figure is there as a cap; it is not a guide to the appropriate level of fine.

The Ofqual guidance makes clear the factors that it will take into account. Ofqual will certainly take into account the relationship between an organisation’s total turnover and its turnover from regulated activities, thereby protecting awarding organisations with multiple business interests. The noble Baroness, Lady Jones, asked whether Ofqual will publish its policies so that we can see that in black and white. It published Taking Regulatory Action last month, section 6 of which sets out its policy on fining. I will make sure that a copy is sent to the noble Baroness. The document sets out all the various stages and processes in a very open way. She also raised the important question of safeguards against passing on fines. In its enforcement policy, Ofqual has set an expectation on awarding organisations that the cost of fines must not be passed on to users. If an awarding organisation’s fees do not represent value for money following the issue of a fine, Ofqual has a power to cap them, so I agree with her.

The noble Baroness raised concerns about potential double-counting and the need to guard against an awarding organisation being penalised twice for the same breach. One of the factors that Ofqual will have to consider when deciding whether a fine is the appropriate sanction is whether another regulatory body, such as the Welsh Government, has already imposed a financial sanction in relation to the same breach. It has a duty to be proportionate and will look at the circumstances in each case but this sanction is intended primarily for serious and persistent breaches. If all is going well, it will not need to apply these sanctions at all so awarding organisations should not fear being penalised twice for the same breach.

The noble Lord, Lord Sutherland of Houndwood, asked specifically in passing about Scottish qualifications. The order covers turnover based on all activity in the United Kingdom so it is the case that qualifications awarded in Scotland would count.

I certainly take the point on which the noble Baroness, Lady Jones, ended, that fining punishes failure and does not in itself improve standards, which is the key issue that we want to address. Ofqual has a range of measures in place to drive up standards and qualifications. It set these out in its published approach Taking Regulatory Action, which includes imposing general conditions of recognition on all awarding organisations and employing a risk-based approach to regulation. That has been set out and was published in the same document in May. I shall ensure that the noble Baroness has it.

I hope that that addresses the main concerns that were raised. I am grateful for the support for this measure and particularly to noble Lords who first brought it to the Government’s attention and urged us to move on it. I am happy to have done so.

Motion agreed.