The House of Lords’ Industry and Regulators Committee made the point in a document delving into the role of the Office for Students, which it says is “failing to meet the needs of students and is not trusted by many of the providers it regulates”.

The Must do better: the Office for Students and the looming crisis facing higher education paper says that the regulator, as well as the government, is failing to act on the looming financial crisis facing the higher education sector.

It is based on evidence from students, university leaders, ministers, representative bodies, the Quality Assurance Agency, as well as the OfS itself.

“At a time when the higher education sector faces a looming crisis caused by financial instability, increased costs, industrial action, and reduced EU research funding, it is vital that the sector’s regulator is fit for purpose,” Lord Hollick, chair of the Industry and Regulators Committee said in a statement.

“However, it was evident throughout our inquiry that the OfS is failing to deliver and does not command the trust or respect of either providers, or students, the very people whose interests it is supposed to defend.

“We were surprised by the regulator’s view that the sector’s finances are in good shape, which is not an assessment that we or most of our witnesses share.”

Last week, the UK and EU confirmed that British researchers will have access to EU research funding via the Horizon program from January 2024.

The committee lays the control of the main sources of income for universities with the government as it caps domestic undergraduate tuition fees and research funding. It adds that government has an influence over international student recruitment through its immigration policy.

While individual institutions are responsible for managing their own finances, it notes that the sector as a whole faces “several financial risks”.

The contribution of international students to higher education is “valuable and welcome” but dependency on their fees is a risk, especially given that international student recruitment is “a key part of providers’ business models”.

“Higher education institutions now make a loss when teaching domestic students and conducting research. These shortfalls have led institutions to become increasingly reliant on cross-subsidy from international and postgraduate students, whose fees are not capped,” the report reads.

A recent policy note from the Russell Group also called for a more sustainable approach to funding higher education as its 24 research-intensive universities face “increasing pressures”.

The committee calls on the OfS to speak to providers more regularly about their finances after saying it was “surprised” to hear the OfS chair’s assertion that the sector’s finances are “in good shape”.

“This is not an assessment that we or most of our witnesses share. In our view, this remark is indicative of the insufficient attention the OfS has paid to the financial risks facing the sector,” the committee said in its report.

It also highlights risks associated to geopolitical shifts, especially given the high number of overseas from China, and an increasingly competitive international environment where the quality of the offer is improving globally.

“The current system of higher education funding is not sustainable”

“The current system of higher education funding is not sustainable and will lead to growing issues in the coming years. The decline in the real-terms value of tuition fees has led institutions to make substantial efficiencies already, and the extent to which further efficiencies are possible is unclear.

“Further funding shortfalls will lead to risks for the breadth and quality of higher education provision,” it concludes.

“It is the responsibility of the government to put in place a stable funding model for higher education that enables institutions to plan for the long-term sustainability of the sector. It has yet to do this.”

UUK said it “particularly welcomes” the points around the deteriorating financial health of the sector, as well as the “need to for a concerted government approach to address this”.

“Equally, UUK recognises and appreciates the effort which has already been made by the regulator to improve relationships with the sector, and we look forward to working with the OfS to cement this,” chief executive, Vivienne Stern, said.