Economic regulation

Introduction

20.1We propose that the steps we take to fulfil the efficiency objective should be informed by an understanding of:

• how choices are made between regulated qualifications
• how efficient purchasing and funding decisions can be encouraged
• the impact on awarding organisations’ costs of our own activities and the decisions of policy makers; and
• the competitiveness of the qualifications markets.

20.2A fee-capping condition will be used only where we are satisfied this is necessary to ensure value for money. Such a decision would be evidence based.

Promoting efficient purchasing decisions

20.3We propose that centres and employers should have ready access to information on the costs they would incur and the services they would receive in respect of a qualification awarded by a particular awarding organisation. We have commissioned a study on the costs and benefits of requiring awarding organisations to provide information on prices and services in a specified format and to a specified timetable. If the benefits of awarding organisations providing transparent information on fees and other charges outweigh the costs we propose that we should make this a general condition of the recognition of an awarding organisation. We will publish the report of this study.

The impact of regulatory requirements and policy decisions

20.4The requirements we place on an awarding organisation could have an impact on its costs. Where our requirements could significantly change an awarding organisation’s costs we propose that a regulatory impact assessment should be undertaken.

20.5Similarly, we propose that we should explore and comment on the impact of Government policy decisions on the efficiency of the qualifications market.

Monitoring the market for signs of a lack of competition

20.6Recent guidance¹ from the Office of Fair Trading sets out the principle that effective competition in properly regulated markets can deliver lower prices, better quality goods and services and greater choice for consumers. We start from the presumption that a competitive market is more likely to be efficient and one in which fees and other charges are fair and reasonable. We will therefore monitor the market for signs of a lack of competition.

20.7We will use a range of information to inform this monitoring, including publicly available information, complaints and expressions of concerns. We will consider other information where we are satisfied that the costs of providing the information will not outweigh the benefits of collecting it.

20.8We propose to monitor the market shares of individual awarding organisations, as this is an important factor in assessing dominance. Data that will inform this monitoring is already being collected by us. In order to work out market shares it is first necessary to define the market. This is not a simple matter. We have engaged consultants to investigate the definition of the qualifications market and hope to use their work in our future market reports and calculations of market shares.

20.9The level of fees and charges might be an indicator of an uncompetitive market, for example if fees or charges increased markedly or if they changed up or down in response to entry into or exit from the market. We will therefore monitor fees and charges and how they change.

20.10High profits sustained over a lengthy period might also signal a lack of competition. Many awarding organisations do not seek to maximise their profits. It does not necessarily follow that they will be offering value for money, as they might not be operating efficiently and their costs might therefore be high. We propose to review awarding organisations’ published accounts or the published accounts of the entities of which an awarding organisation is part. These accounts might not always reveal the costs or profitability of providing qualifications. Where this is the case for a large or potentially dominant organisation we may require the provision of disaggregated accounting data.

20.11We have commissioned a study into the costs and benefits of the provision of disaggregated accounting data. This study will be published and will inform our decision about the information we require awarding organisations to provide.

20.12The behaviour of those who are deciding which qualifications to purchase might also affect the degree of competition. Compared with many other markets, purchasers of qualifications may be less price sensitive and more concerned about perceived and actual quality. This may be partly because the choice of qualification may be taken by a person who is not directly linked to the purchasing organisation’s system of financial control. The competitiveness of a market might also be affected by the costs of switching awarding organisations, for example because of the need to buy new teaching and learning resources.

Further analysis of the market

20.13If we have concerns about the operation of the market we propose that we should undertake a detailed economic analysis, or market study. We would either undertake the study ourselves or appoint an external and appropriately qualified body to do so.

20.14Before deciding to undertake a market study we would consider:

• the likely costs of doing so, to awarding organisations, ourselves and others
• the possible benefits that we might obtain
• the extent to which the outcome of the study might promote our ability to achieve the efficiency objective.

20.15We propose that any awarding organisation that would be affected by a decision to undertake a market study should be notified of our intention to do so. We propose that we would publish our reasons. Any representations made would be considered before a final decision was taken.

20.16We would give notice to the awarding organisation of the information we would need and the timetable for its provision. This would be backed up by conditions if necessary.

20.17The market study would involve an evidence-based investigation to determine whether there was sufficient competition in the market and whether the fees and other charges in question were fair and reasonable. Fees and charges would be judged to be fair and reasonable if they enabled the awarding organisation(s) to recover the efficiently incurred costs of providing the qualifications, including the cost of capital.

20.18We propose that market study reports should be published.

Promoting competition

20.19If we found evidence of a lack of competition within the market we would seek to implement the least intrusive regulatory mechanism to achieve our objectives.

20.20We could attempt to promote competition; this could take a number of forms. We could make efforts to make purchasers more aware of the options open to them and highlight the benefits of encouraging those responsible for purchasing decisions to be more responsive to costs. Associated with this would be the improvements we could require to enhance the quality and accessibility of information available to centres and training providers.

20.21Barriers to entry to the market could be assessed and, where possible, removed. This may involve consideration of issues such as the cost of regulation, the impact of cross subsidy or the existence of anti-competitive practices.

20.22A dominant organisation could be restricted by further conditions which would limit its actions or place on it new obligations. For example, Ofqual could require it to provide more detailed accounting information or financially to ring-fence its awarding activities, or a sub-set of them, in areas in which it was dominant. We could also refer it to the Office of Fair Trading, if appropriate.

Fee-capping

20.23A fee-cap condition can only be used if we are satisfied this is necessary to secure value for money. We propose that we should consider the use of a fee-cap condition if we have evidence that an awarding organisation’s fees are not ‘fair and reasonable’ for the service provided. The power to cap fees is the type of power other regulators have in markets where there is a potential for market failure.

20.24We will take into account:

• the competitiveness of the market
• the trend in fee levels over time
• an assessment of the efficient costs of providing the qualification on offer, including the cost of capital
• how the awarding organisation allocates its common costs to its range of qualifications
• the models an awarding organisation might adopt for recovering costs across a range of subjects.

20.25We propose that if we were concerned that an awarding organisation was not delivering value for money we would conduct an investigation to inform a decision on the level, form and term of the fee-cap(s) to be applied. The investigation would consider, for example:

• whether fees should be capped for individual qualifications or components of qualifications
• whether there should be a cap on the rate of increase (or decrease) in a weighted basket of fees for qualifications or components of qualifications
• for what period fees should be capped
• other approaches on the form of the fee-cap to the extent permitted under the legislation.

20.26We would also consider the time for which the cap would apply.

The proposed process for fee-capping

20.27Where our market studies suggest that a fee-cap is the appropriate remedy to address a concern about value for money we must comply with the provisions of the Act which require us to:

• give notice to an awarding organisation of our proposals and explain our reasons
• allow a period for representations from the awarding organisation
• have regard to those representations
• arrange for the review of the decision by an independent and suitably skilled person, should the awarding organisation request one; and
• have regard to any guidance published by the Secretary of State.

20.28A detailed timetable would be given to the awarding organisation when notice was given. A decision to impose a fee-cap could not take effect until the expiry of the period in which a review could be requested and any review had been undertaken.

Independent review of a decision to apply a fee-capping decision

20.29If an awarding organisation requests a review of a decision to impose a fee capping condition we must appoint an independent person, who has the appropriate skills, to undertake the review.

20.30It is proposed that the independent reviewer should consider the evidence that informed the original decision and any representations made by the awarding organisation. The independent reviewer may also seek advice from experts, but the decision would be taken by the reviewer alone.

20.31We propose that a request for a review would have to be submitted in writing no more than 30 working days after receipt of the decision to impose a fee-capping condition. The review of the decision would normally be completed within 60 working days of receipt from the awarding organisation of a request for a review of the decision.

20.32We propose that the independent reviewer would consider whether:

• the process used to make the original decision to impose a fee-cap was fair and reasonable
• the decision was unreasonable in light of the information available at the time the decision was taken.

20.33We propose that the independent reviewer should be able to:

• confirm that the process by which the original decisions was taken was fair and reasonable
• direct that the matter be reconsidered by Ofqual and make any specific directions to Ofqual to consider particular evidence or remedy any defects in its process.

Next steps

20.34We are building on previous work undertaken by the QCA to develop our understanding of the qualifications market(s). This preparatory work will enable the Ofqual Board to give early consideration to the efficiency of the market(s) and whether there is a need to take regulatory action to secure value for money.

Questions:

Loading...

1. Government in markets: Why competition matters – a guide for policy makers September 2009. [↩]