Funding chiefs reassured London Metropolitan University that rules on student dropouts would not be strictly applied before ordering it to repay tens of millions of pounds for breaching them, according to an internal university report obtained by Times Higher Education.
The university is facing clawbacks of up to £36.5 million and is planning to cut 550 jobs after drastically under-reporting the number of non-completing students.
A report from Brian Roper, the university's then vice-chancellor, to London Met's board of governors in November 2008 says it was "unarguable" that the university had included in its data returns students who were ineligible for funding under the Higher Education Funding Council for England's definition of non-completion.
But the report, obtained under Freedom of Information laws, says Hefce indicated that this would not affect London Met's funding.
"The university was proactive in pointing out these issues (on the definition of non-completion) at senior level to Hefce and to its auditors, and received assurances that a literal application was not intended or necessary," the report says.
The funding council responded this week by insisting that claims that it had "condoned incorrect reporting" by London Met were "wholly without foundation".
In 2007, Hefce decided that the university had not followed its completion rules strictly enough. It is now in the process of clawing back the money it said was overpaid to London Met between 2005 and 2008. It also deducted £15 million from the university's 2008-09 recurrent funding.
Under Hefce's definition of non-completion, only students who submit or take their final assessment in all modules in an academic year are eligible for funding.
In 2003, London Met was calculating student numbers on the basis of its own academic regulations, which were designed to allow degrees to be completed over an extended period and permitted students to progress who did not necessarily meet Hefce's definition of completion.
In October the same year, Max Weaver, London Met's deputy vice-chancellor for planning and resources, wrote in an email to Mr Roper that Hefce officers "seem to take the view that if a student can progress to the next stage, then there has been 'completion' of the year, although the words of the guidance, if construed strictly, do not support this principle".
He added: "Hefce's audit policy and practice for this return are not entirely clear."
In 2004, Hefce's definition of completing students was criticised in a paper to the Coalition of Modern Universities, now Million+, by Peter Knight, then vice-chancellor of the University of Central England.
Professor Knight called the definition "daft" and said that it "must be challenged". He added that his university was one of the first to be audited after the definition was introduced and that Hefce seemed "to be applying (it) literally".
This prompted Bob Aylett, London Met's deputy vice-chancellor (academic), to write to John Rushforth, Hefce's director of widening participation. The letter notes that Hefce's treatment of UCE "appears to go some way beyond the notion of the council's definition being guidance and more towards its literal application".
This approach was "difficult to reconcile" with the "more flexible" views on completion expressed by Hefce's funding team, the letter says, adding that "such contradictions emanating from Hefce are unhelpful".
He included some examples of students who would be excluded from funding if Hefce's rules were strictly applied.
Mr Rushforth replied that he had checked the examples given by London Met with the auditors.
"Their view was that the instances that were described in the paper were unlikely to be counted as non-completion in the context of an audit review," he said.
After the creation of London Met in 2002, the university was closely scrutinised by Hefce. The funding council's auditors also visited it in 2004 and 2005 under terms of reference that included investigating non-completion rates.
But no Hefce official raised questions about how the university was classifying non-completion until late 2006, Mr Roper's report says.
"The fact that it was not raised entitles the university reasonably to place reliance on its practices as acceptable to Hefce under its rules ... Hefce's officials now seek to deny the previous practice, which was ... thought to be legitimate," it says.
A Hefce spokesman said: "The suggestions that Hefce condoned the incorrect reporting of non-completion by London Met, or that earlier audit reports did not identify data problems at the university relating to non-completions, are wholly without foundation.
"We reject this entirely - as we have already made clear to the university on repeated occasions."
The spokesman said the exchange between Professor Aylett and Mr Rushforth related to a "highly specific inquiry" about one aspect of the non-completion definition with details of just six students.
It was "part of a broader exchange of correspondence between Hefce and the university, which gives a different picture", he said, and which did reveal that the university was not interpreting the definition correctly.
Times Higher Education has requested copies of all correspondence between Hefce and London Met under the Freedom of Information Act: the request has been denied and the decision is being appealed.
The Hefce spokesman added that "significant problems" were identified via the audits of London Met's data returns in 2003-04 and 2004-05.
"It is because of these ongoing concerns with the university's data that Hefce assurance and audit staff returned to carry out further work for 2005-06," he said.
On 16 June, the funding council said in a circular letter to institutions that it had decided to change its approach towards non-completing students from 2009-10.
LACK OF LEGAL CHALLENGE LEADS TO TALK OF BETRAYAL
The funding crisis at London Metropolitan University is likely to see 550 jobs axed, including 330 to go through redundancy.
To date, 112 staff have left voluntarily, and the first phase of compulsory redundancies will start next month.
Thus far, the most high-profile departure has been Brian Roper, who stepped down as vice-chancellor in March but remains on the payroll until December.
London Met's board of governors made no link between the timing of his resignation and the funding clawback, and the university has declined to reveal details of any severance payment made to him or compensation paid.
The University and College Union said the report revealed by Times Higher Education this week suggests that staff and students have been "remarkably badly treated by Hefce".
A local branch official said: "Given the Government's ostensible commitment to widening participation, it might not be an exaggeration to talk of a betrayal.
"The unions will be renewing their questions about why neither management nor the governors have challenged Hefce legally. A full independent inquiry into all aspects of this affair is imperative.
"In the meantime, the university's funding should be restored and plans for cuts suspended until responsibility becomes clearer."
SHIFTING SANDS: LONDON MET TIMELINE
2002: London Metropolitan University is formed via a merger. The Higher Education Funding Council for England carries out six-month "milestone" reports between 2002 and 2006. At no stage are non-completion or funding definitions raised in these reports; Hefce has since said this was not the point of the reports.
2003: London Met and Hefce discuss what constitutes completion.
2004: London Met checks that students who do not meet the strict non-completion definition will still be funded and is reassured. The correspondence is sent to Hefce's auditors, who scrutinise the university's 2003 data returns.
2005: Auditors scrutinise London Met's 2004 data returns.
2006: A Hefce assurance consultant says it is happy with London Met's responses following the previous audit. The university was earmarked for an audit of its 2005 data, but this was not considered "beneficial", the official says.
2007-08: Hefce's auditors scrutinise London Met's 2005 data returns and analyse data for the following three years. They conclude that its reported non-completion rate of 2 to 3 per cent is inaccurate and that the true figure is about 30 per cent. London Met governors report being "shocked" by the change in attitude.
2007: Hefce informs London Met of plans to claw back money overpaid to it. The sum is later revealed to be up to £36.5 million.
2008: Hefce reviews its teaching funding method and concludes that it "may be a barrier to institutions that wish to provide flexibility for their students".
2009: London Met's governors "reserve their position" on legal action against Hefce, including a judicial review. Brian Roper resigns as vice-chancellor. MPs suggest in the Commons that the university and Hefce have "colluded" over data submissions. Hefce commissions an "independent lessons-learnt exercise" into its role in the crisis.