24 October 2017

Education and the ACL

The Productivity Commission's paper on University Education in 5 Year Productivity Review [PDF] considers 'Consumer rights and restitution for inadequate educational quality'.

The paper states
  • Universities are essential to Australia’s continued prosperity. Their research helps to raise productivity and living standards, while the knowledge and skills they teach to students develops human capital for better lifetime prospects, wages and productivity. However, there are tensions between universities’ research and teaching functions. Many university staff are more interested in, and rewarded for, conducting research (due to established cultures and the importance international research rankings). Teaching therefore plays second fiddle to research, with consequences for student satisfaction, teaching quality, and graduate outcomes. Realigning university incentives (both financial and institutional) closer towards the interests of students and taxpayers would help restore balance.
  • As the exact scale of any issues in teaching quality or student outcomes are difficult to determine, a first step would be improving their measurement, which would itself encourage universities to focus more on their teaching function.
  • The appropriateness of Australia’s existing consumer law provisions and their application to the higher education sector could also be reviewed to determine whether they provide sufficient restitution for inadequate teaching quality. 
  • Financial incentives, such as through performance-contingent funding (as proposed in the 2017-18 Budget) are also a step in the right direction, although there are a range of challenges with making this approach fair and effective. There is limited evidence that teaching quality is improved by universities jointly undertaking research and teaching (the ‘teaching-research nexus’), which undermines the rationale for the Australian Government’s restriction that all universities must do both. The teaching-research nexus is also used to justify cross-subsidies from teaching to research. This can create labour market distortions, as it encourages universities to increase the number of students undertaking high-margin courses and minimise the number doing low-margin courses, to increase research funds.
  • Making payments to universities for Commonwealth-supported places more cost-reflective would be an option to address the problem. However, it would have undesirable flow-on effects to university research capacity unless offset by other funding initiatives. It cannot be recommended without a reassessment of research funding arrangements for universities, or indeed their overall operation. Structural challenges in the Higher Education Loan Program (HELP) debt system can also result in unproductive skills formation. Increased costs for taxpayers associated with this may encourage short-term savings that have unintended consequences (such as limiting access and efficiency) or that undermine the principles of the system. As a solution, the Government has proposed decreasing the initial HELP repayment threshold. More debtors would make repayments, reducing the cost of the system.
  • This is unlikely to address many long-term structural challenges and could result in reduced labour supply and workforce participation through higher effective marginal tax rates. It could also undermine the historical ‘guaranteed returns’ principle of HELP (although it is subject to debate whether this remains a valid rationale). − A less distortionary method of reducing doubtful HELP debts would be to collect outstanding amounts from deceased estates (with adequate protections for hardship).
In discussing consumer protection the paper comments
Competitive markets for normal goods (such as consumer electronics) are generally covered by an implied warranty under the Australian Consumer Law (ACL) for faulty or inadequate products. These kind of warranties reinforce the rights of consumers to expect decent quality products and create strong incentives for the provider to ensure high-quality provision. Equally, providers that make misleading or false claims about the nature and quality of their products would also be liable under the ACL, as this would constitute misleading conduct.
Although the nature of the products provided by the higher education sector (both universities and non-university providers) is different to those in other markets, the basic principle of protecting consumer (student) rights in a competitive market and enabling them to seek restitution for inadequate product quality is sound.
The main barrier to the use of the ACL for educational services has historically been whether, for a Commonwealth-supported student, universities passed the test of being engaged in ‘trade or commerce’ — a necessary prerequisite for action under the statute. That barrier appears to have weakened with the adoption of a demand-driven system, which more clearly recasts universities as commercial agencies engaged in trade or commerce (Corones 2012; Fletcher and Coyne 2016; Nguyen and Oliver 2013). That has not only opened up the possibility of legal action for misleading conduct (for example, a university that marketed a course as led by an internationally renowned academic when it was not), but also for provision of inadequate services.
Equally, the requirement under the ACL for suppliers to exercise ‘due skill and care’ could, in principle, relate to set ting admission standards, curriculum design, course delivery, support for students, supervision quality and ‘fitness for purpose’ of a qualification (Corones 2012, pp. 11–12). The development of standards monitored by the Tertiary Education Quality and Standards Agency (TEQSA) would provide a possible benchmark for legal action by students. The addition of the unfair contracts regime into the ACL may also expand the scope for student legal action (Goldacre 2013).
There nevertheless remains uncertainty about whether a student could, under the existing legislation and associated instruments, successfully pursue a case against a university for a low quality course (Cohen 2016 versus Fletcher and Coyne 2016). Although universities appear to be covered by the existing ACL provisions, there seems to be no successfully prosecuted case in Australia, nor a flood of claims yet to be decided.
Part of the difficulty under the existing provisions may arise because a party making a complaint would need to show how the university had provided a sub-standard service. A poor labour market outcome would not (in isolation) trigger any restitution unless the university had provided a guarantee that successful completion of a qualification would lead to good job outcomes.
Although a lack of successful cases has also been present in the United Kingdom and the United States, recent developments suggest that the global landscape for litigation may similarly be changing (box 3.2).
A legal commentator has recently concluded that: ‘In Australia, a successful claim by a student for compensation for careless or incompetent teaching practices may well be just a matter of time’ (Cohen 2016). With virtually no jurisprudence, it is impossible to determine the likely number of future claims, let alone their possible effects on university conduct. However, it is notable that law firms are warning universities to undertake strategies to avoid liability, such as having good quality control procedures in place for staff, random supervision of lectures and solicitation of student feedback.
Box 3.2 International changes — making consumer law great again?
• In March 2017, a US federal judge approved an agreement under which President Trump will pay US$25 million to settle three class-action lawsuits relating to alleged problems in the quality of particular educational programs at Trump University (Eder and Medina 2017). Settlements have no precedent value because a party may decide to settle even if they expect to win in court (a point emphasised by President Trump). Regardless, the mere existence of settlements provides an avenue for claims by students. Settlements usually occur where is at least some prospect of success by the plaintiffs, whatever the particular merits of a given case.
• In the United Kingdom, the Competition and Markets Authority (the UK equivalent to the Australian Competition and Consumer Commission) has clarified that the newly enacted Consumer Rights Act 2015 applies fully to higher education providers (CMA 2015). The result is that, among other things, universities must provide services with ‘reasonable skill and care’, must not include unfair contract terms, and must not misrepresent the nature of their courses. A new feature of the Act is that a student would have a ‘right to require repeat performance’ (s. 55) — a right to return — if the university’s performance was below that implicit in its contract. That might arise because of the poor quality, organisation or supervision — all of which would breach the requirement for reasonable skill and care. The right to return may only relate to a part of the course. A student could alternatively seek damages or a refund.
Policy options in Australia
The Australian Government has a range of different approaches open to it, given domestic and international legal developments:
  • do nothing further, letting parties and courts determine the extent to which the current ACL provides remedies for students who have been given poor quality educational services 
  • change the ACL to include some of the features of the UK Consumer Rights Act 2015 (particularly some provision that emulates section 55)
  • develop complementary approaches to provide restitution outside the ACL, such as through alternative dispute resolution arrangements activated by a formal complaints mechanism.
Given the relevance of the existing ACL provisions and an apparent lack of pressing need for change, the most prudent short-term option would be to allow the current law to stand and for the courts to develop legal precedents over time.
However, continued monitoring of the outcomes of the UK experience should also be undertaken. If, after several years, the new UK arrangements have had significant positive effects on universities’ conduct, it would then be worth considering adoption of similar provisions in Australia. In particular, this would involve making it clear that the ACL does relate to higher education and giving the student the right to a refund, other compensation or the ‘right to a repeat performance’ in the event of unacceptable teaching quality.