The Government must address weaknesses which contributed to fraud and abuse of student loan funding in franchised higher education providers, the spending watchdog has said.

The “inherent risks” associated with using franchised providers – institutions that operate in partnership with registered universities to deliver courses on their behalf – should be considered, the National Audit Office (NAO) urged.

The NAO found that 53% of the £4.1 million fraud detected by the Student Loans Company (SLC) by value was at franchised providers in 2022/23.

The proportion of SLC-detected fraud cases in franchised providers has “increased faster” than the growth in SLC-funded students at those providers since 2020/21, the investigation found.

The NAO called on the Department for Education (DfE) and the Office for Students (OfS), the higher education regulator, to reiterate to higher education providers “as a matter of urgency” that they bear direct responsibility for the governance and management practices of franchised providers.

Weaknesses in the regulatory framework have led to fraud and suspicious patterns of activity within the sector

The DfE should also establish a common anti-fraud and corruption culture following the instances of fraud and abuse, the watchdog has said.

Lead higher education providers in England must be registered with the OfS for their franchised providers’ students to be eligible for student funding. Franchised providers do not need to register with the OfS.

Since 2022, the SLC and OfS became aware of the risks to public funds as a result of potential fraud and abuse involving franchised providers.

The DfE asked the Government Internal Audit Agency (GIAA) to review the regulatory landscape and the GIAA report in August last year concluded there were “weaknesses” in the overall control framework.

The NAO report said: “Investigations have highlighted governance and regulatory weaknesses impacting the payment of publicly funded student loans to those studying at franchised providers. Not addressing these weaknesses will expose the taxpayer to longer term risks.”

Figures show the number of students enrolled at franchised providers more than doubled between 2018/19 and 2021/22 – from 50,440 to 108,600.

The majority (59%) of students at franchised providers in 2021/22 were enrolled on business and management-related courses.

The DfE considers franchising helps “widen access to higher education” as the majority of students at franchised providers come from high deprivation areas, the NAO report said.

More and more higher education students are studying at franchised providers, who provide courses on behalf of other institutions, but there has been disproportionate amounts of fraud and abuse across these providers

Gareth Davies, head of the NAO, said: “Franchised higher education providers can play a role in broadening higher education participation, but weaknesses in the regulatory framework have led to fraud and suspicious patterns of activity within the sector.

“The Department for Education should set out clearly how these weaknesses will be addressed, individually and collectively by different higher education bodies.

“The Department for Education, Student Loans Company and Office for Students should work together to share data to investigate any anomalies and raise awareness among providers of their responsibilities as a matter of urgency.”

Meg Hillier, chair of the Public Accounts Committee, said: “More and more higher education students are studying at franchised providers, who provide courses on behalf of other institutions, but there has been disproportionate amounts of fraud and abuse across these providers.

“In 2022/23, the value of detected fraud involving these providers totalled £2.2million, 53% of total fraud identified by the Student Loans Company.

“Recent fraud has exposed significant gaps, including no clear responsibility for fraud enforcement, across controls designed to protect students and taxpayers’ interests which have been exploited.

“The Department for Education must clarify and strengthen these controls and promote an anti-fraud culture across government.”

A Universities UK (UUK) spokeswoman said: “Franchise provision makes an important contribution to widening participation and promoting access to higher education, and this report highlights the importance of careful management of franchise partnerships to ensure all students receive a high-quality experience.

“While universities already have policies in place to ensure that all partnerships are undertaken responsibly, this report shows that there are significant and serious issues still to be addressed.”

Chris Larmer, chief executive of the SLC, said: “We take financial crime seriously and as noted in the report, we proactively raise issues of concern with the DfE and OfS, taking action to protect public funds wherever possible, within the scope of our powers and remit.

“It is essential that HEPs meet their obligations under the wider regulatory regime, to ensure that student loan funding is protected and can be accessed as intended by regulation.

“We will continue to work closely with DfE and OfS to protect public funds and we acknowledge the recommendations set out in this report.”

Susan Lapworth, chief executive of the OfS, said: “As the report sets out, the OfS has worked with the SLC to address concerns that have been identified in individual cases.

“We will continue to use the regulatory tools available to us to ensure value for money is delivered for students and taxpayers and that institutions are alive to their responsibilities in this area; universities must have adequate and effective control over partner institutions.

“Courses delivered by partners must also meet the OfS’s regulatory requirements for quality.”

Higher education minister Robert Halfon said: “It’s vital that all higher education providers in receipt of Government funding provide value for money for the taxpayer.

“We have already taken action to boost the quality of higher education and are taking immediate steps to ensure providers who use franchising understand their responsibility for protecting public money and the significant investment students make in higher education.

“Franchising can be a good way to support more people from disadvantaged backgrounds into higher education, however I recognise there is more to do to strengthen oversight. We will not hesitate to act if we see malpractice of any kind and we are working closely with the Office for Students and the Student Loans Company to ensure we can identify and prevent any abuses of public funds.”