Developing a framework for economic regulation

Tuesday, 06 July 2010 17:24

Ofqual has published three studies on aspects of its role as the economic regulator. It will use these studies to inform its development of a framework for economic regulation and fee capping process that Ofqual will be issuing for consultation in October 2010.

The Frontier Economics report - "The markets for regulated qualifications in England, Wales and Northern Ireland" proposes a starting point for market-wide analysis and identifies some of the salient features of the qualifications market that could inform more detailed market definition exercises in the future.

The Grant Thornton report - "Collection of Economic and Financial Information" recommends that Ofqual routinely collects data on fees, revenue, costs and key financial ratios from each awarding organisations for the UK regulated qualifications business only. This is for monitoring purposes and to assess the financial viability of the awarding organisations. This information would also supplement already collected data on achievements.

The Reckon report – "Increasing the Transparency of Qualification Fees" looks at different standardised methods of comparing prices that could be introduced. It also investigates the advantages and disadvantages of advanced publication of fees a minimum of a year ahead of when they come into force.

1. Economic regulation studies

Ofqual commissioned three economic regulation studies in November 2009. The three studies are:

• "The markets for regulated qualifications in England, Wales and Northern Ireland" - Frontier Economics
• "Collection of Economic and Financial Information" - Grant Thornton
• "Increasing the Transparency of Qualification Fees" - Reckon LLP

The aim of these studies is to inform aspects of Ofqual’s approach to economic regulation i.e market definition, monitoring and price transparency.

The reports and high level feedback on the studies have informed the detail of a proposed overall framework for economic regulation and fee capping process that Ofqual will be issued for consultation in October 2010.

2. What do the reports say?

Grant Thorton

The Grant Thornton report on data collection identifies five purposes for which Ofqual might legitimately collect economic and financial data:

• To monitor the market;
• To undertake high level investigative studies;
• As part of any formal market study;
• To develop an industry evidence base;
• To assess financial viability.

Grant Thornton recommends that Ofqual routinely collects data on fees, revenue, costs and key financial ratios from each awarding organisations for the UK regulated qualifications business only. This is for monitoring purposes and to assess the financial viability of the awarding organisations. This information would also supplement already collected data on achievements and other volume indicators to provide transparency on the characteristics of the industry and how they are changing over time. For larger organisations and those that have been identified as financially stressed Grant Thornton recommends that Ofqual also collects a simple business plan.

Grant Thornton recommend that any more detailed breakdown of revenue and costs, for example disaggregated for a particular qualification or group of qualifications should only be collected at the point Ofqual launched either a high level or detailed investigative study. They suggest that a greater granularity of cost data could be justified at the point of undertaking a detailed investigative study.

Ofqual has sought high level feedback from those that participated in the study on the findings. The feedback is generally supportive of the conclusion for now that we should collect revenue and cost information at the level of the UK regulated business but not disaggregated data by qualification. Thos that provided feedback do not object to Ofqual collecting information in fees.

Frontier Economics

The Frontier Economics report sets out a starting point for market-wide analysis and identifies some of the salient features of the qualifications market that could inform more detailed market definition exercises in the future.

Frontier identified a range of possible hypothesis to define the product dimension of the qualifications market which they then sought to test against the standard economic framework using a combination of quantitative and qualitative evidence including new entry into the supply of qualifications.

From the narrowest to broadest view of market definition the hypothesis set out in the report are:

• Markets for individual ‘subject areas’ at a particular skill level;
• Separate markets for individual ‘subject areas’ covering all skill levels;
• Separate markets for groups of subjects;
• Separate markets by qualification type e.g. “academic” and “vocational”;
• A single market for all qualifications

The report provides an illustrative not definitive set of market definition.

Ofqual has sought high level feedback from those that participated in the study on the findings. All respondents have different views of market definition. All agree that market definition cannot be set in stone and is fluid. All agree that the evolving government and regulatory landscape means that to apply the standard economic framework for market definition is difficult in the qualifications sector. Most agreed that an understanding of competition, whilst important, may not be the sole exclusive determinant of efficiency in the provision of qualifications.

Reckon LLP

This study by Reckon LLP was commissioned by Ofqual to investigate whether there are measures that might be taken to increase the transparency of fees charged for qualifications.

Reckon were asked to investigate:

• Whether it would be possible to develop a standardised method of comparing the overall price of individual qualifications that could be used by learners and centres, for example on a price comparison website
• The costs and benefits of requiring prices for all qualifications to be published one or three years in advance
• If there are other impediments to qualifications price transparency.

Reckon’s findings have informed our consultation on Economic Regulation and the Fee-capping Process, which identifies lack of fee transparency as a potential indicator of inefficiency. Our draft recognition conditions include a number of specific requirements for fee transparency and advanced publication that we propose awarding organisations will need to comply with.

3. Next steps

The reports are independent reports. They have informed the detail of a proposed overall framework for economic regulation and fee capping process that Ofqual issued for consultation in October 2010.

On 27 May a presentation was given to the Economic Regulation Advisory Group on our emerging thoughts for developing the framework, the principles that will underpin it and the issues for future investigation. The presentation slides can be found below:

View ERAG presentation on Slideshare

The feedback we received highlighted the difficulty of undertaking and setting in stone a view of market definition in the absence a clearly defined problem or issue to address. It also highlighted the fluid nature of markets and competition and the need to adjust the standard economic template in developing a framework for market definition for the qualifications sector.

The October consultation will set out our proposed approach to data collection and the proposed role of market definition in our overall economic regulation framework.

For monitoring purposes it may not be necessary to have a single view of market definition. We could monitor, for example market shares, against two or three alternative segmentations as one aspect of an overall approach to monitoring designed to identify issues for further investigation. This approach could be complemented with a market definition framework setting out; the keys areas of analysis to inform market definition in the provision of qualifications; the techniques that would be applied and the associated information requirements. This would signal the approach to be adopted at the point market definition was required within a specific targeted study. Other monitoring activity on for example on fees and on identifying where there may be features of the market constraining effective competition might also potentially trigger further investigations. This is consistent with OFT’s approach where it only undertakes an market definition type exercise once a market study has been triggered and undertake broad horizon scanning in identifying which markets to investigate. However the OFT do not have a hard-and-fast approach to market definition in market studies. When undertaking market studies the OFT tends to look at the characteristics of the sector and products and consider concepts such as substitution possibilities, cost drivers, entry barriers to understand competitive constraints in the market(s) and assess any issues/problems. This can fall short of a full blown market definition exercise which whilst a legal requirement for Competition Act cases can be less helpful when understanding the nuance of policy.

Last Updated on Thursday, 02 December 2010 18:35 Tags: Ofqual, education, examination regulation, qualifications, assessments