| Exmination of Witnesses (Questions
WEDNESDAY 6 FEBRUARY 2002
300. If you had been setting up that scheme,
or if you had been asked for adviceand we have heard a
suggestion that LSCs were being involved in thisif you
were involved in setting up a replacement scheme, would you advise
a government sector scheme that had no quality assurance whatsoever
on the providers?
(Mr Stark) We operate in a quality-assured environment;
it is natural, it is part of what we do. If it is public money,
we would want to see quality assurance. That does not have to
be at any particular threshold. The threshold is determined by
the value of the public contribution.
301. So you would never recommend a scheme like
ILAs mark 1, which had no quality assurance?
(Mr Stark) Certainly for the future we think there
should be quality assurance.
302. Was it a victim of its own success, and
the plug was pulled effectively because it was over-run in its
budget, or was it a victim of fraud?
(Mr Stark) I think we have seen what the evidence
has been on this, and I have no reason to disagree with what ministers
and officials have told you.
303. We have heard in different sessions of
this Committee very contradictory versions of that. Today we have
heard people say it was just a licence to print money; it over-ran
its costs and the plug was pulled, as happened on other occasions;
yet we have heard ministers say there was fraud. So far, there
is very little evidence of fraud that has been put.
(Mr Hall) I wonder if I could comment on that, to
try to be helpful? As some members know, I have had some experience
with these issues arising from the difficulties of franchising
at a number of colleges. I have had the equal pleasure of being
associated with the PAC hearings. I would say, from my experience
304. I hope you said that seriously! There was
a hint of tongue-in-cheek there.
(Mr Hall) I would not use the word "fraud".
There have only been one or two prosecutions for fraud arising
from what generally we refer to in the vernacular as "scams",
and that was when, quite deliberately, no students existed and
enrolment registers were forged in order to draw down money. In
most of the so-called scams, something happens, and the question
is whether it was eligible for public funding when we had Schedule
2but that has now goneso it is whether it is of
any value whatsoever. That is one aspect of it. The Minister has
explained to you that in this particular case, on top of possibly
some, but I suggest very limited, fraud, there were a lot of scams
apparently but also what I would call hacking in to the computer
system. The Minister explained to you that approaching 80 per
cent of claims in one week were from less than 10 per cent of
the providers, and that suggested a very serious risk to the control
of public funds, which I am sure the Minister and the Permanent
Secretary as accounting officer could not countenance.
305. Did either of you at any point in the last
15 months advise the Government about the potential loopholes
in the scheme?
(Mr Stark) We were in constant touch with the Department.
We were fully informed. We knew exactly where they were at each
stage of the discussions. We have had close liaison.
306. Is that advice in writing?
(Mr Hall) If I could break the question down, there
were a number of cases that came to our attention in the summer
of 2001 which of course we drew to their attention. There was
a liaison body, so there were opportunities. There was liaison
between audit teams and special investigation unit teams of both
the FEFC and then the LSC, so if cases came to light you would
obviously do that.
307. But by June 2001 the abuse of the scheme
was already well established. My concern is, at what point did
either of you identify the potential for abuse and advise the
Government that this could happen, in advance of it actually happening?
(Mr Hall) I would have to answer a Committee of Parliament
and say that we advised of the risk of abuse in May 2000.
308. On the future of the scheme, you both mentioned
the potential for re-invigorating the concept of the account as
a savings account, as a financial instrument. My understanding
is that at an early stage the research ruled out that possibility
because there was no demand for it, and the concept of saving
for learning did not seem to be attractive. Against all the evidence
to date, why do you not think there is mileage in re-establishing
that? The banks, with a few exceptions, have not shown any interest.
Do you think there is really any potential for the banks to come
(Mr Stark) I think we can break this down. If you
take a non-learner, the hardest-to-reach learner, and say, "would
you like to take out a bank account and save up for 15 years and
build up money and then you can spend it on learning?" the
answer would obviously be "no". At the other end of
the spectrum, it is a very natural for people who are engaged
with financial transactions to hold their money in different pots
and to build it up, and sometimes the account is in credit and
sometimes it is in debit. So there are two different markets there,
and there is not a single mechanism that is going to hit exactly
what you want. Essentially, for the non-learner you want a fee
discount scheme and you want it to be instantaneous, and for other
people you want a mechanism that will build over time. We did
not ask the banks exactly the right question, I think. We tended
to say, "would you like to engage with us in a set of transactions
of low value each of which is a single one-off process with nothing
that follows from it?" Naturally, the answer to that is,
"no thank you". If we ask a different question: "Would
you like to engage in a process which builds communities and brings
employees closer to their employers, which enables learning to
be funded in flexible ways?"we already know the answer
because banks already are doing that. That is what the HSBC has
been doing in Birmingham and what another bank did with the Gloucestershire
accounts. There are opportunities here.
(Mr Hall) The Hereford & Worcestershire TEC worked
with credit unions to address that group of people that Michael
said may be reluctant.
309. Returning to the advice you provided in
May 2000, that was in your position as employee of the FEFC.
(Mr Hall) Correct.
310. Could the Committee have a copy of that
(Mr Hall) The advice was at a meeting when the way
the scheme was going to operate was explained to us. As I have
outlined before, because of our very difficult experiences in
franchising that we had gone through, we did draw the attention
of our colleagues to the fact that there may be the potential
for some of the providers to be brought in to be the same providers
that we had difficulties with. That was the nature of the advice.
311. My question is, have either of you provided
any written advice at any stage in the last 18 months? If not,
why not; and, if not, has anybody else in the LSC, nationally
or locally, provided any advice?
(Mr Hall) There were regular liaison meetings and
issues about whether or not audit arrangements were raised. They
are in the minutes of the meetings. When cases came to attention,
they were drawn to the attention of the relevant official in the
Department; but in the sense of, at the highest level has anybody
written saying, "I hereby give due notice . . ."no.
That is not how life is, is it?
312. It is interesting, Mr Hall, that early
on you said you did not have anything to do with ILAs, but as
you have given evidence you have actually suggested that you had
quite a lot to say about ILAs in terms of liaison meetings.
(Mr Hall) We have to be specific about the roles we
had. We ran two schemes in the FEFC. We were running them through,
and around May 2000 a national scheme came in; it was designed
and the arrangements were through Capita. It started in 2000.
Once it started, we did not have direct influence and I personally
then did not have any involvement in preparation for thisand
then another evidence session, and then one looks back at the
files. More junior colleagues were part of the liaison arrangements
and I see that they drew the Department's attention to some cases
of concern in 2001.
313. Looking at those files, and bringing back
some memory from an earlier witness, the Principal of Preston
College said, "I am familiar with this kind of pattern because
it has happened twice before." In fact, he was pointing to
the very clear response of the Further Education Funding Council;
and he said there were two other examples of schemes going wrong,
very similar to the way in which the ILA went wrong. Did you not
feel a little pain when he said that, because you were there with
the other two schemes?
(Mr Hall) I am not sure what the other two were. He
referred to the withdrawal of the demand-led element. It was the
previous government that withdrew the demand-led element in January
1997 because the FEFC had to try and manage the loss of £100
million in the following financial year. The Government did honour
its obligations in that year.
314. Do you recognise the point that he made?
There is nothing new in the FE sector in having schemes like this
that seem to go wrong, and the people who carry the can at the
end are the colleges.
(Mr Hall) I thought I heard the Principal of Preston
saying that one of the difficulties is that perhaps the success
315. I am very happy to call him back, so he
can refresh our memories.
(Mr Hall) I thought he said it is the success that
had to be taken into account.
3 See Ev 91. Back