Thursday, 8 May 2008.
The Committee met at two o'clock.
[The Deputy Chairman of Committees (Lord Tordoff) in the Chair.]
Sale of Student Loans Bill
Clause 1 [Sale of student loans]:
1: Clause 1, page 1, line 13, at end insert “including the obligation to protect personal data”
The noble Baroness said: I shall speak also to Amendment No. 26, which stands in my name on the Order Paper. All the amendments in this group are concerned with data protection issues. The first of the two amendments tabled by the Liberal Democrats is the more substantive. The reason for it is that there is concern that public sector organisations do not treat personal financial data as securely as they should. We have seen several examples in the past year of failures of public sector organisations in this respect, most famously the loss of personal data by Her Majesty’s Revenue and Customs, including the names, addresses, bank account details and national insurance numbers of 1.2 million people who were claiming child tax credits, but other examples have come to light of public sector organisations—for example, the Child Support Agency or the agency dealing with pension credits—where personal financial data have been treated in a very cavalier fashion by public servants. The incident last November at Her Majesty’s Revenue and Customs in relation to the child tax credit is a case in point. The full details of what happened have never really come to light, but it appears that the National Audit Office asked for data for its investigation, that request was passed to a relatively junior official who copied the data on to an ordinary CD without proper encryption which he sent through the internal mail by TNT and somehow it never arrived where it was supposed to arrive. The result was to waste many hours of police time in what ended up being a totally futile search.
Why does this worry us, and what relation does it have to the Bill? I was involved in the report of the Science and Technology Committee of the House of Lords on internet security. Identity fraud is one of the big issues that came up in the debate on internet security. From the point of view of those wishing to hack into the internet, what better than to provide them with all these data linking names, addresses, bank accounts and earnings on a CD-ROM? What a blessing that would be.
The question arises: why were procedures so lax? The Minister may well argue that these incidents are totally irrelevant, that the collection of money from former students through the Student Loans Company, as well as the loans, will be sold off in tranches, and that it is quite clear from the Bill and the details we have been provided with that these data will be anonymised. There will not necessarily be any need to hand over the data, although it is also clear that should the purchaser ask for the data they have the right to see them
Clause 6(3) makes it clear that Her Majesty’s Revenue and Customs may be asked to pass over information to the Student Loans Company—whether the person or body requires the information in that capacity or the capacity of any agent of the loan purchaser. Subsection (4)(b) of that clause expressly permits onward disclosure of information to a loan purchaser or its agent in relation to the loan transfer.
Information is clearly going to be exchanged. The amendments merely reinforce the obligation on Her Majesty’s Revenue and Customs, the Student Loans Company and any other body involved in that exchange to treat all these personal financial data with the normal precautions and protections. Experience has indicated that directives and regulations are not enough. These days, civil servants, teachers and social workers are subject to so many regulations that they almost fall off them like water off a duck’s back. It really helps for these matters to be reinforced by being mentioned in the Bill. The aim of the amendments is to put into the Bill the need for public servants to take the normal protections and precautions. I beg to move.
It is often noted that our job in this Committee is to give in-depth, line-by-line scrutiny to legislation that sometimes gets rushed through another place. I do not necessarily want to suggest that the Bill has been rushed through, but that does not remove the mantle of our responsibility to give it a thorough inspection.
There are two kinds of scrutiny. There is scrutiny that arises out of the particularities of the policies in a given Bill. Yet other issues arise, not because of the policies themselves, but because of the Government’s history in handling and implementing particular schemes. This, then, requires us to keep in mind a different way of approaching legislation.
The amendments of the noble Baroness, Lady Sharp, in this group are a good example of this second kind of scrutiny. To reiterate the noble Baroness’s point, the Government's history with data protection is not good. In fact, saying it is disappointing would be euphemistic. Whether it is keeping diseases in labs or disks in offices, this Government do not seem to be able to keep track of a great number of extremely important things. The 25 million people whose data were lost have been discussed at great length. I do not really want to make a cheap political point but, considering the sensitivity of the information that will be stored and passed around in connection with the Bill, why should we believe any assurances about data protection this time?
We understand the Government’s amendments and the need for data to be used to generate models so that the loans will be saleable. Yet with so much sensitive information being transferred out of the Government’s hands, what policies are in place to guarantee that personal data are protected? As some anonymous data will be transferred out of the Government’s direct control, how will the procedures for ensuring data protection differ from their own safeguards? I am sure that the Minister will tell us that there will be sufficient safeguards. Why, then, can the requirement to protect data not be transferred with the loans? If the Government are committed to that kind of protection, why are they shying away from putting it in the Bill?
I thank the noble Baronesses, Lady Sharp and Lady Verma, for their comments, giving me the opportunity, I hope, to offer significant reassurance on their concerns. I should like to say to the noble Baroness, Lady Sharp, that I do not think that identity fraud and concerns about the internet are irrelevant. They are extremely important and I know through other work unconnected with this Bill how seriously my department takes these issues, particularly with regard to the student loan companies. I appreciate her concerns.
I agree wholeheartedly with the noble Baroness, Lady Verma, about scrutiny and hope that we do not appear to be rushing this Bill through. We very much appreciate and enjoy detailed scrutiny in this House and I am sure that we will see some improvements as a result of our discussions. I hope that I can offer reassurance, particularly on the progression of protection through the Data Protection Act.
I welcome this opportunity to restate the Government’s wholehearted commitment to the proper protection of borrowers’ personal information, which is very important. These amendments are proposed by the noble Baroness, Lady Sharp, in respect of Clauses 1 and 6, and by the Government with respect to Clause 6. I share the noble Baroness’s determination that there should be no doubt as to the purchaser’s obligations to protect borrowers’ information. These provisions ensure that in addition to purchasers of loans being subject to the Data Protection Act in how they handle borrowers’ data, they will also be covered by the criminal sanction of improper disclosure of HMRC personal information, as set out in Clause 6. That is a significant step.
Amendment No. 1 seeks to ensure that purchasers will take on the Secretary of State’s obligation to protect personal data. Under the Data Protection Act, an owner of sold loans who was in possession of personal information about a borrower would be a data controller in respect of it and would automatically have the same obligations as the Secretary of State for unsold loans. So it is unnecessary to include the specific provisions set out in Amendment No. 1 because the obligations are there. In any event, the Secretary of State’s obligations would neither cease nor transfer so long as he, too, remained in possession of the information, whatever the status of the loan. Amendment No. 26 is motivated, as the noble Baroness said, by the same concern to protect personal data.
Clause 6 relates to what is known as a statutory gateway that allows the disclosure and onward disclosure of HMRC information. However, there is an important distinction made between two different sorts of data. Subsection (4)(a) specifically relates to the onward disclosure of anonymised information. No individual could be identified from such data. While I fully recognise that it must still be handled with care, we should reserve the strongest safeguards for personal data concerning identifiable individuals. By applying the same standards to anonymised data, the amendment would raise a difficulty in relation to letting relevant interested parties view models relating to the loan portfolios that contained such data. I shall say more about that in a moment in relation to the Government’s amendments. So for those reasons, and given the other safeguards in the Bill, I believe that Amendment No. 26 is unnecessary, although I entirely understand the motivation behind it. On the basis that a purchaser unequivocally has obligations to protect personal data under existing legislation, I hope very much that the noble Baroness will consider withdrawing her amendment.
I turn now to the government amendments. It makes sense for me to talk to Amendments Nos. 22 to 25 as a single set of broadly technical changes clarifying Clause 6. As I said at Second Reading, and as has been made clear in greater detail in another place, the Bill intends that only anonymised data can be disclosed to potential purchasers, or those who advise them. However, the personal data of borrowers are subject to greater safeguards, and can be made available only to the actual purchasers and their agents. As I have indicated, the existing criminal sanction on wrongful disclosure of personal information originating from HMRC is being extended by the Bill to cover personal data on sold loans.
The proposed changes to subsections (1) and (2) in Amendments Nos. 22 and 23 provide a similar expression that disclosure of anonymised data may relate both to loans being offered for sale and those that have already been sold.
As Members of the Committee will be aware, we expect that sales will include a securitisation process. That means that a range of parties will properly need to consider financial models, containing anonymised data on loans, to assess how the loans to be sold may perform and make informed decisions about whether to be involved in the purchase of student loans and bonds.
In addition, Amendment No. 24 proposes a change to subsection (4) to describe a class of disclosure of anonymised HMRC financial information, so that it may go to those who have a purpose connected with the loans being offered for sale or that have been sold. We believe that this is the most effective way to ensure that such non-personal data can be given to those who need them, including potential purchasers and investors, and financial institutions involved in the transaction. Across a long-term programme of loan sales we could never create a complete list of such parties that would stand the test of time. If this amendment is passed, we will describe the parties in the next version of the Explanatory Notes to the Bill. I stress again that such parties would only ever be entitled to anonymised data. There is no question of the personal details of any borrower being released to this wider class of individual or of any individual being identifiable.
Finally, on the much more restricted access to personal data, Amendment No. 25 is intended to make it clear that the narrower definition of actual purchaser or its agent should include the purchaser’s auditor. Without the explicit reference we were advised that this might be misunderstood.
I hope that with this rather dry, technical explanation, the noble Baroness will consider withdrawing her amendment. I take very seriously her comments and I hope that with the reassurance I have given about the role of the Data Protection Act and the additional criminal sanction for the wrongful disclosure of HMRC data, she will consider supporting the government amendments.
I am grateful to the Minister for her reply and her sympathy with the cause that I have argued. She said that the role of general data protection applies for the onward sale of loans and that, as an additional precaution, only anonymised data will be passed on to the purchaser or their agent. If that is case, we can be reassured.
I thank the Minister for that clarification. She is of course correct.
The useful note to the Bill lists the four main functions of the Student Loans Company. The first two are: delivering financial support to eligible students and paying to the higher education institutions the public contribution towards tuition fees. Its third function is significant: supplying information needed by HM Revenue and Customs to ensure repayments are collected on time from all those due to repay under the income-contingent repayment loans scheme. The final function is managing the direct collection of repayments for loans granted under the former mortgage-style loan scheme.
It is clear that there will be exchange of information between the Student Loans Company and HMRC, and between those two organisations and the actual purchaser. The actual purchaser will have the right to personal information. The Data Protection Act comes into play, but it was under the security of that that the CD-ROM containing data was sent by HMRC. I concede that one cannot allow for public servants not adhering to regulations, which is why it perhaps would have been useful to reinforce the obligation in the Bill.
There is no point in pursuing the amendment. It is sensible to withdraw it.
It is a pertinent point, because we may see student loans sold on to foreign-owned banks. An answer to that question would be useful.
There is not much more to pursue on this issue. I will read the Minister’s answer with care. We may bring back the matter on Report if we feel that there is cause to do so. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
2: Clause 1, page 2, line 4, at end insert—
“( ) Transfer arrangements shall not confer on the loan purchaser the right to alter loan arrangements made under the terms of subsection (4)(b).”
The noble Baroness said: In moving Amendment No. 2 I shall speak also to Amendment No. 4 in this group. Paragraph 8 of the introductory note that explains the purpose of the Bill says:
“The primary protection for borrowers is that the purchaser of loans cannot alter the terms and conditions of that loan (for example, interest rate, repayment rate or repayment threshold)”.
“As noted, those matters remain governed by Regulations scrutinised by Parliament”.
The question underlying Amendments Nos. 2 and 3 is whether it is sufficient to leave this commitment to regulations or whether more detail needs to be written into the Bill. There is nothing in Clauses 1 or 2 to provide any guarantee to students that the onward sale of their loans will not involve any change in the terms and conditions of that loan. All we have is subsection (4)(d), which enables the Secretary of State to,
“require a loan purchaser to make specified arrangements in connection with the administration of loans”,
and subsection (4)(e), which prohibits,
“the loan purchaser from making specified arrangements without the Secretary of State’s consent”.
Amendment No. 2 would strengthen the commitment by writing into the Bill the principle which has throughout the proceedings in the other place been stressed by Ministers and incorporated into the introductory note. The amendment merely adds a new subsection stating the principle that:
“Transfer arrangements shall not confer on the loan purchaser the right to alter loan arrangements made under the terms of subsection (4)(b)”.
In fact, the amendment should really refer to loan regulations rather than—or, perhaps, as well as—loan arrangements. However, in preparing these notes I noticed that paragraph 16 of the Explanatory Notes says explicitly:
“The Secretary of State is not obliged to transfer all of his rights and obligations with respect to the loans in any contract with a purchaser—he may retain some of them if he wishes. For example, the Government does not intend to grant purchasers the right to alter the repayment terms of sold debts. Such terms will continue to be governed by Regulations made pursuant to section 22 of the Teaching and Higher Education Act 1998, which are subject to Parliamentary Scrutiny”.
Whether regulations or loan arrangements, the principle remains the same. This is an important aspect of the sale arrangements and should be written into the Bill, not left to reliance on Ministers’ intentions as written into the Explanatory Notes or in Hansard.
Amendment No. 4 deals with a different issue. It is the intention of the Secretary of State that repayments of student loans should continue to be administered by the Student Loans Company and collected for it by Her Majesty’s Revenue and Customs. In this respect, as was pointed in debates in the other place, for the borrower nothing has changed. The terms and conditions of repayment remain the same. The bodies with which they deal remain the same. Is there any reason why the borrower should not know that the loan has been sold on? Again, the Explanatory Notes are helpful. Paragraph 18 says that it is common practice for sales of this type,
“to proceed without the permission of the borrowers whose loans are being sold, and without giving them prior notice of the sale”.
It also says:
“The Government intends to write to borrowers whose loans have been sold soon after the sale has been completed to inform them of the new owner of their debt”.
This is necessary because borrowers will read in the newspaper about the sale of the debt and many may be very alarmed at the thought that the new commercial owners will demand a commercial rate of return on their loans. Amendment No. 4 makes it an obligation on the part of the Secretary of State that has statutory standing. It writes into the Bill what is at present merely an intention expressed in the Explanatory Notes. We feel that this would be of advantage. I beg to move.
I shall speak to Amendments Nos. 3 and 5. I want to touch briefly on a matter that was the cause of some concern in another place, and as a result, some assurances have been given. However, I do not feel that they are entirely sufficient.
The first of our amendments in this group concerns guarantees that there will be no effect on the students. In this respect, our amendment is very close in sentiment, if not in wording, to that tabled by the noble Baroness, Lady Sharp. The point of our amendment is to strike at one of the primary concerns regarding this Bill, which is protecting students’ interests. I appreciate that the Government have made strong statements that there will be no real impact on students. But how far does this limitation affect the commercial viability of these loans as a product? I understand that the Government have had considerable consultation on this matter and I hope that the Minister will explain the point in detail.
The fact remains, however, that we want to be absolutely certain that the terms and conditions will be identical whether the students are paying their money back to the Government or a private body. As I mentioned, we have received some assurances to this effect. However, the Bill would allow the terms to be changed at a later date simply through consulting the Secretary of State. Bill Rammell, speaking in another place, made the point that even at the moment,
“the Secretary of State has the power, if backed by Parliament, to alter the terms and conditions of access to student loans.—[Official Report, Commons, 4/12/07; col. 48).
The important part of that sentence is, “if backed by Parliament”. However, if the Bill is passed and the loans are sold, will it be easier for the terms and conditions to change? Will it take only the consent of the Secretary of State to alter the conditions if the loans are sold, whereas at the moment it requires parliamentary scrutiny? Will the noble Baroness assure us that if there is any danger of the terms and conditions changing, the changes to the terms of sold loans will be subject to as rigorous parliamentary scrutiny as a change to government loans? Our amendment would put this in the Bill. Would it be acceptable to have some sort of parliamentary mechanism mentioned in the Bill, should changes be considered?
Further, does the Minister accept the amendment that organisations underwritten by Her Majesty’s Government will not qualify to be purchasers? Is she willing to give a guarantee that that will not occur, although it may seem unlikely? By way of clarification, can the Minister comment on the recent articles and news items in which it was reported that students were overpaying their loans and that there was no one to check with the Student Loans Company if and when they had been paid, or indeed what amounts were outstanding? The payments went to HMRC and remained in that department for a year. Surely that would cause chaos if this persisted after loans were sold. This seems to be a potential pitfall that could adversely affect students to a very large degree. It seems that during the year that the money was kept with HMRC, the Student Loans Company had no access to information to forward to students inquiring about the status of their loans. Indeed, the Student Loans Company itself did not have the information. Will the Minister say how this situation will be remedied urgently and whether, if students have overpaid, the Government will be paying lost interest to those students?
I shall start with the last point first. The student loans payments are collected through HMRC alongside the process of the collection of tax. From time to time there are cases of overpayment, which the Student Loans Company investigates, and corrections are made. I reassure the noble Baroness on the role of parliamentary scrutiny and the regulations. The role of regulations in determining the repayment terms and conditions of student loans will continue, as will parliamentary scrutiny. That is the Bill’s intention.
This group covers amendments about the form the sales transaction itself will take. As we have heard, Amendments Nos. 2 and 3 concern whether a loan purchaser will be able to change the terms and conditions of the loans. I fully agree with the intention behind the amendments. It is a central tenet in our policy in embarking on a programme of sales of student loans that the purchaser is not buying the rights to alter the terms and conditions of the loans. The Bill does not allow the sale contract to give the loan purchaser the power to alter terms and conditions set out in regulations.
By virtue of Clause 4, terms and conditions for all loans will, as now, be governed by the regulations and scrutinised by Parliament. The loan document also contains a very few minor contractual arrangements, to which the noble Baroness, Lady Sharp, referred on Second Reading, which are not derived from the regulations. These residual terms, however, contain none directly concerned with the terms of repayment. As with any contract, it will not be open to the purchaser unilaterally to change the terms even in respect of these. That would be possible only with the agreement of each borrower. The protection envisaged by Amendments Nos. 2 and 3 is already in place. They simply restate something that is already the case in law.
I am happy to give the Committee a clear assurance, as my honourable friend the Minister of State for Lifelong Learning, Further and Higher Education has done in another place, that purchasers will not have the right to alter a borrower’s terms and conditions and that regulations will continue to apply. Some minor amendments to the loan documents might be possible but could be made only with the agreement of each individual borrower. We do not expect that purchasers would wish to do this, or that there would be any benefit to them. On that basis I hope that the noble Baroness will withdraw her amendment.
Amendment No. 4 would place a duty on the Secretary of State to contact borrowers whose loans had been sold. I welcome the opportunity to set out clearly our position on communication with borrowers about sales. The Bill makes provision for the sale of student loans without prior notice to the borrower. We believe that that is justified because the borrower will experience no adverse effect as a result of the loan being sold under the protections that we are putting in place. It is common practice for loans underlying a financial asset to be sold on without notice to borrowers.
My honourable friend the Minister of State for Lifelong Learning, Further and Higher Education has given a commitment in another place that we would write to all borrowers whose loans had been sold to let them know. That is picking up the concerns raised by the noble Baronesses about expectations—perhaps fuelled by media coverage. The noble Baroness, Lady Sharp, proposed that this commitment be placed in the Bill, and I am happy to take the matter away and consider whether it is possible to bring something forward on Report.
Amendment No. 5 seeks to include a specific restriction about organisations to which sales can be made. In embarking on a programme of loan sales, the Government are aiming to manage a growing public asset efficiently and to secure good value for money for the taxpayer. We believe that, in reality, the restriction proposed would work against these aims.
We do not expect that any financial institution would want to own the loans itself, but that the loans would be sold to a legally separate special purpose company. It is not straightforward to see how the restriction might be applied. It is not clear, for example, whether the restriction is intended to apply only to the legal title of the loans, or whether it would also apply to bonds backed by the income from the loans. Nor is it clear from the amendment exactly how the target for this restriction would be defined, although I understand the noble Baroness’s concerns.
A further difficulty is that the proposed restriction would apply to onward sales as much as to initial sales by virtue of Clause 3(2). Onward sales from the special purpose company are unlikely in practice. However, once the Government have sold an asset, they have transferred ownership and cannot exert substantial control over to whom the purchaser could then sell that asset. If this restriction on onward sales were included in a sales contract, then the independent Office for National Statistics would be likely to rule that the transaction did not constitute a true sale. The noble Baroness knows that that is a key prerequisite to achieving this programme of sales. That would mean that the loans would remain on the Government’s books, and would not make funds available for investment in other priorities. The amendment would therefore have the opposite effect to what I assume it aims to achieve; that is, to ensure good value for money and a transfer of risk away from the public sector.
The Bill contains the necessary provisions to ensure that borrowers are fully protected no matter who owns the loans, and no matter whether it is an initial sale or an onward sale. We will cover that issue further when we reach amendments on Clause 3 on onward sales.
I do not believe that this proposal is necessary. It applies to an extremely unlikely combination of circumstances, although I accept it is always helpful to look at all possible circumstances. Furthermore, my view is that it would not be possible to draft a provision with sufficient clarity to achieve its purpose without introducing issues of interpretation and possible impact on the marketability of bonds, particularly with regard to what I was saying about the classification of sales. We will consider further the question of contacting borrowers on the sale and I have explained why I hope that the noble Baroness will consider withdrawing her amendment.
I am very grateful to the Minister for her reply. I am particularly delighted that she will take away Amendment No. 4 and think further about it. It would be good to get that in the Bill.
It seems to me that the reassurance given to borrowers under Amendment No. 4 is less important than the reassurance in Amendments Nos. 2 and 3. Amendment No. 3 is not my amendment. I use the term “loan arrangements”. It really should be “loan regulations”. Therefore Amendment No. 3 is the preferable amendment of those two. Ministers have given us very clear commitments that there is no intention whatever that the purchaser should have any influence over these loan regulations.
There is a great fear that when a loan is sold on to a commercial purchaser, they will seek to maximise the benefit that they might get out of it. If we need to reassure borrowers, this is the big issue that they will be worried about. Information is a not unimportant issue. It is appropriate that the Government should tell borrowers what has happened to their loans, but it is more important that reassurance that the terms of repayment will not be altered by the purchaser is incorporated in the Bill. I urge the Minister perhaps to think more about that.
The Bill does not allow the Government to transfer power to amend terms and conditions. The amendment of terms and conditions will be done only by regulations that are scrutinised by Parliament. It is not that we do not want to extend protection, but that that protection is already in the Bill.
It is not on the face of the Bill. Therefore, the borrowers might be worried. The Teaching and Higher Education Act 1998 is, I think, appropriate here.
There is no point in pursuing this now. Again, I shall read carefully what the Minister has said and think more about these things. Perhaps the noble Baroness, Lady Verma, and I can confer on whether we feel that it is worth while pursuing this matter on Report. For the moment, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 3 to 5 not moved.]
6: Clause 1, page 2, line 11, at end insert—
“( ) In advance of entering into transfer arrangements, the Secretary of State shall—
(a) examine the prevailing market conditions and ensure that a competitive market for the loans has been generated;(b) provide the market with full information about the loan book in order that the assets can be efficiently valued;(c) ensure that there has been a genuine transer of risk from the public accounts to the private sector;(d) assess the proceeds that look likely to be achieved in the transaction using full and clear market information and a comparison with keeping the loans on the Government books, in terms of both likely income flows and levels of risk;(e) make a written statement on expenditure incurred in connection with each transfer arrangement.”
The noble Baroness said: I understand that this is an enabling Bill and that there is no specific timetable for the use of its powers. However, timing is all-important. The commercial attractiveness of student loans generally is fairly high. Students rarely default and payment is made through the tax system, but that does not mean that there will always be a fair price. Market conditions are extremely influential. The current market, especially in terms of the packaging and sale of debt, does not seem to present the most attractive options for sale.
We are very concerned that there does not seem to be any mechanism to ensure that we get value for money for the sale. While ministerial assurances go some way, we strongly feel that there needs to be provision in the Bill that guarantees proper investigation of market conditions, as well as adequate disclosure of information, so that loans can be valued efficiently. It is essential that loans generate the appropriate amount of income for the Treasury.
Let me be frank. There seems to be nothing in this Bill to stop the Secretary of State selling off parts of the student loan book hastily, just to plug a few holes in a leaky budget. I should like the Government to be upfront about their intentions. Of course, I expect that the Minister will assure me that the Government intend to do their best to realise value for money on these assets, but is that good enough? It would go a very long way to assuage some cynical feelings if the Minister gave a firm commitment that they will not be sold off without the most thorough examinations of market conditions and an assurance that the sale fetches the best possible price that can be achieved.
This price should be the best possible in general terms, not the best in a bad time. The priority for the sale should be achieving value for money, not plugging holes in a mismanaged Treasury. Achieving value for money can come only when there is no time pressure to capitalise on the loan book. There is genuine worry that in order to raise extra revenue, the Government might too hastily sell off the loan book, and thus not get as much as could have been achieved had they been more prudent. I think the Minister will completely understand this scepticism. Thus, will she explain whether there is an expected timetable for sales, what is their volume and what analysis has been conducted about the current state of debt markets and the commercial viability of loans in such a market? Has there been a report from the Treasury on these matters? It would be interesting if she were willing to give me her analysis of the current debt markets and the relationship to the commercial viability of the loans.
With the collapse of sub-prime debt affecting credit products with much higher ratings in concert with the pressing need for increased liquidity in the market, does the Minister not agree that getting value for money seems unlikely in the present climate? What general economic factors and broad market trends generally bolster debt sales? Are the Government willing to wait for a recovery in the debt markets? What would signify such a recovery?
Essentially, we need transparent and open value-for-money criteria. Indeed, some of the words we used in this amendment came from the undertakings by Bill Rammell in another place; thus we sincerely hope that this amendment will find support on the Government Benches. I beg to move.
I have added my name to Amendment No. 6. Amendment No. 7, which is in this group, is tabled in my name. The noble Baroness, Lady Verma, made much of the proposed timing of the sale. I was somewhat alarmed to receive on 4 April a letter from the Minister setting out the proposed government amendments. In the first paragraph, she indicated that the Government had appointed Deutsche Bank to help them prepare for student loan sales in 2008-09. In other words, the Government are thinking of selling part of the student loan portfolio imminently at a time when the market is, it would seem, not at its best. I echo the remarks of the noble Baroness, Lady Verma. It is very important that the Government are not rushed into this. The money markets are in considerable disarray. Indeed, it is possible that the Government will find that there will be very little take-up for securitisation and onward sale of these loans, other than at a very poor price, for that very reason.
This is a core issue in our debate on the Bill. The Government are confronted by a dilemma, or perhaps I should say Parliament is confronted by a dilemma because it is important that Parliament, in its role of holding the Executive to account, should make sure that we get value for money from such sales. How can we judge value for money unless we know in advance what sort of discount the Government expect to give in order to sell on these loans? Yet to reveal the expected rate of discount would be to reveal to potential purchasers the Government’s negotiating hand on these sales. On Report, the Minster in the other place noted in his response that,
“we could not sensibly include in the Bill any details of the Government’s assessment of what price would constitute good value for money. That would reveal our hand in advance of the competitive sale of the loans”.—[Official Report, Commons, 23/1/08; col. 1548.]
I appreciate that. Therefore, the only way in which Parliament can judge value for money is via the scrutiny process of the National Audit Office looking after the sale at what has gone on and taking it through to the Public Accounts Committee. However, such scrutiny is after the event. While recognising that the process of sale envisaged in the Bill will be ongoing and, therefore, that there may be lessons to be learnt from such scrutiny for further sales, nevertheless it can be argued that this is too late. The sums involved are large; we are talking not about the odd million but about billions. It is vital. If mistakes are made, they will involve hundreds of millions of pounds and not just the odd pound here or there.
What is to be done? I agree that the Government cannot reveal their hand in advance, but I do not agree with the Minister when he said, in the same debate that,
“we should not try to translate the principles of our value-for-money approach into a set of statutory tests … Principles are not precise enough to serve that function”.—[Official Report, Commons, 23/1/08; col. 1548.]
It is actually quite sensible to set down some principles to be followed, which is precisely what Amendment No. 6 would do. That is why I am backing that amendment.
Amendment No. 7 should perhaps be considered as an addendum to Amendment No. 6. I confess that I put it down partly with my tongue in my cheek. As the Minister will know, every local authority is required to seek compulsory competitive tendering, and the Government need to be seen to be doing the same. It is therefore necessary that competitive bids are seen to be made on this and that the Government do not just do a deal with a purchaser that makes it known that it would be interested in such a purchase. It has to be seen to be a competitive deal and that there is no collusion. Again, it is clear from recent evidence from the OFT that with local authorities there is frequently collusion in such competitive bidding. It would be necessary for the Secretary of State on an occasion such as this to ensure that there is no collusion between bidders.
Under the same heading of value for money I can raise a further issue, which crops up in relation to this Bill. We have had some discussion of this with the Minister and some clarification from her team about the process by which the loans will be sold on. Nevertheless, there is a real issue about risk transfer. When we discussed with the Minister how these loans would be sold on, it was made clear that because there was no track record and because we were only just beginning to see the repayment of these income-contingent loans—and there are still many students who have outstanding loans on which they have not started to make repayments—in order to sell part of this £22 billion of those loans, they must clearly be packaged up. Those who are already repaying will be put in the basket to be sold on. I can see precisely why that will be the case, and the Minister assured us that they will not just select those with a good track record of repayment. However, there is a downside risk. Loans for which there is a track record of repayment and repayment comes in easily will be put into the basket and sold on as a tranche. But there is a danger that over time the loans for which there is no track record of repayment will be the ones held by the public purse.
The Minister talked at length in the other place about the need to transfer risk and said that it was not appropriate that the public sector should hold it, and that assets in the public sector should not be seen to be risky. As an economist, I have reservations about that statement, partly because, if one is going to spread risk, the Government are in many senses the authority that should hold it. But if that is the Minister’s attitude, it is very important that the Government do not end up holding the really risky assets. We have no assurance that that is not going to happen. I am concerned that we will not get value for money because we will sell on the good, non-risky debts, and the Government will be left holding that basket of debts that are distinctly risky.
We support Amendment No. 6. It is important. We disagree strongly with the Government and suggest that it is not impossible to write the principles that they enunciated into the Bill.
I feel that I need to congratulate the Committee on anticipating some of the things that I am about to say—it is important to have this debate. Before I do so, I refer Members of the Committee back to the protection and regulation of terms and conditions. That comes not under this Bill, but under Section 22 of the Teaching and Higher Education Act 1998. I shall write to the noble Baroness on that point, but it is helpful to let her know that other legislation helps with the protection that we discussed.
As we have heard, this group of amendments covers value for money. The principles behind the approach to value for money set out in Amendment No. 6 are wholeheartedly endorsed by the Government. Indeed, as the noble Baronesses, Lady Verma and Lady Sharp, stressed, my honourable friend the Minister for Higher Education and Lifelong Learning placed them on the record in another place during earlier stages of this Bill.
The Government have a duty to obtain value for money in all that they do, and all sales of student loans will be subject to a rigorous assessment in that respect. If Ministers and departmental accounting officers are not satisfied that a sale at a given time represents good value for money, it will not go ahead. It is right that the Government have clearly set out for the record the principles of their approach to value for money, but we should not take the unusual step of translating those principles into a set of statutory tests, as Amendment No. 6 would do.
The Government have published forecasts of the anticipated receipts from the proposed sales programme over the period of the Comprehensive Spending Review. They total £6.3 billion: that is, £3.4 billion in 2008-09; £1.3 billion in 2009-10; and £1.6 billion in 2010-11. These amounts are forecasts rather than commitments. The Government are committed to the student loans sale programme, but only if it represents good value for money. We have made it clear that these are estimates, and that the actual profile will be subject to market conditions.
The noble Baroness referred to market turbulence. The Bill is about enabling a long-term programme of student loans sales, so we need to think about market conditions over the long run. As for any continuation of the current market turbulence translating into poor value for money in any sales, we would not go ahead with a sale in that case. It is important for the Committee to understand that we are not talking about one sale; we are talking about an ongoing programme of sales. Every year, the student loan book is increasing in value as there are more students, particularly with the widening participation agenda. We need to appreciate that this is an ongoing enabling Bill.
The noble Baroness, Lady Sharp, raised the question of repayment track records. The whole point of the sale of student loans is to transfer the risk away from the Government. As she suggests, it would be counterproductive if the Government were left holding the riskiest loans and those with a poor repayment profile. We are talking about loans of a particular vintage, regardless of their repayment history. When it comes to the securitisation process and the creation of bonds, perhaps the riskier profile loans might be of interest to particular investors. The noble Baroness is right to highlight that as a concern, and I want to reassure her that that is precisely what we do not intend to happen. We do not intend to see the riskiest loans remaining with the Government.
When we talk about the purchaser, we are talking about the special-purpose vehicle that will purchase the tranche of loans of a particular vintage. We are not selecting loans for sale based on the individual characteristic of loans or borrowers, but by category, such as being in the repayment phase. Purchasers will have no say on which loans are available for them to buy.
That calls into question whether that purchaser wants to be part of the securitisation process. If it does not want to be part of it, we will not be able to accommodate it.
Returning to the amendment tabled by the noble Baroness, Lady Verma, the principles are not precise enough to serve the function of a set of tests that must be met before a transaction can go ahead, although we agree with them. Decisions on value for money will always be matters of judgment that are rightly taken by the Government of the day. While it is right that after any sale there should be scrutiny of how the Government have addressed the principles we have set out, it is not sensible to attempt to turn these principles into specific legal tests. There will be a sales programme going forward, and we expect that there will be scrutiny as each sale happens. We are all in agreement, for example, that a competitive market must be generated, but there is an element of subjectivity in any such assessment. I do not believe that we should create a process whereby there could be the prospect of having to prove beyond challenge that a test on such matters of judgment has been met before proceeding with a transaction. The issues simply do not lend themselves to that approach.
We envisage a long-term programme of sales and the value-for-money judgment on each transaction will, of course, be open to parliamentary scrutiny in the usual way. I am happy to reiterate for the record that the Government will report to Parliament after each sales transaction and the National Audit Office will, no doubt, report to the Committee of Public Accounts on this sales programme.
The continuing scrutiny will be most valuable in helping the Government to ensure good value for money in the long term. We certainly would not want to establish an exclusive list of tests at the start of a long-term programme of sales. We will want to be able to build on the experience of sales transactions—for example, using any evaluations by the National Audit Office. Such an approach could be prevented by this amendment. I hope that I have come some way to reassuring the noble Baronesses that we are very committed to the principle of value for money.
I turn to the perhaps tongue-in-cheek amendment of the noble Baroness, Lady Sharp, but it was a matter to which we gave proper consideration. Amendment No. 7 proposes a competitive procedure for conducting the sale of student loans and seeks to ensure maximum value for money for the taxpayer. I am sure that that is what she was driving at. If all future loan sales were to be conducted by way of an auction, I would have no difficulty in welcoming this amendment. In those circumstances, I think that we would be looking for rather more then three different bids and would certainly want to ensure that there was no collusion between bidders. However, the Bill is intended to enable a long-term programme of sales, and I do not think that the proposed amendment will work for the full range of possible ways that a sale might be undertaken. In particular, it will not work for the model we are planning to employ for the first sale: sale by securitisation.
I indicated in debate on the previous group of amendments that in making a sale the Government do not expect that any financial institution would want to own the loans. Our current plans are, therefore, that the loans will be securitised. This is a process by which a special-purpose company is created to issue bonds which trade in the financial markets. Those bonds are backed by the income received from the student loan repayments. The special-purpose company buys the portfolio of student loans from the Government, and the price it pays is based on the finance it can raise from the sale of bonds.
It is important to note that real competition is built into this process. Rather than comparing three or more bids from potential purchasers of the loans to achieve the best price, the Government’s income from the sale depends on a market in which investors at large will be bidding to buy bonds. It will be important to ensure that there is a genuinely competitive market for the bonds. This is a judgment that the Government of the day, drawing on professional advice, will have to make for each sale in this long-term programme of sales we have been talking about. A key element of that will be to ensure that there is sufficient information available about the loan portfolio for investors to be able to model how the loans might perform. That comes back to the discussions we had earlier about the importance of the anonymised data.
Securitisation can help maximise value for money by widening the potential range of investors. Different investors will be interested in different tranches of securities that will have differing levels of risk and return. Pension funds and banks, for example, may want the relatively secure investment of the triple-A bonds, whereas other investors, such as fund managers, may prefer the relatively greater risks but higher returns of the lower tranches. It is also possible to interest a much wider range of investors in purchasing tradable securities than in purchasing a package of loans outright because investors know that they can sell those liquid securities in the markets, should they wish to do so.
It is possible that a future Government may decide that, in the particular economic circumstances of the time, they can get the best value for money from a sale by auction rather than by securitisation. In that situation, a Government would, of course, ensure that a competitive process takes place. I would not like to attempt to foresee all possible future circumstances, but I would expect that process to include substantially more than three competing bids. Although it may have been a tongue-in-cheek amendment, I can assure the noble Baroness that we take all amendments very seriously. I hope that with the discussion we have had the noble Baroness will consider withdrawing her amendment.
I thank the Minister for trying to allay our fears. However, I am not an economist like the noble Baroness, Lady Sharp, but a businesswoman. Anybody in business would have set criteria to meet in the current climate, and I do not think that the Government are meeting them. I tried very hard to listen carefully to what the Minister said, but I do not feel convinced that the Government should not put my amendment in the Bill. It would give a good framework for purchasers and the Government to be able to work against to achieve a good value-for-money sale. It is difficult to be convinced that statements and investigations after a sale would be useful.
We are talking about a programme of sales, not a big, one-off sale. In truth, each sale will, no doubt, result in an enormous amount of scrutiny and poring over the process. As the noble Baroness, Lady Sharp, said, that will be retrospective, but because we are talking about an enormously valuable ongoing book, learning will be taken from each sale process. One accepts that one cannot prejudge the conditions of a sale as it is a commercial transaction and we have to get the best possible deal for the taxpayer. It would be very difficult to give away key negotiating points before a sale negotiation. We are all concerned about the same issue, but does the noble Baroness accept at all that we may have to look at things retrospectively?
I thank the Minister for that. My point is that I have a great concern that the current climate is not right for a sale. Unfortunately, the Government are in a position in which they need the finances. The worry would be that perhaps if the sales were done in haste in the wrong current climate, they would not fetch the best value.
I return to the point that I raised in my amendment. Perhaps the Minister could go back and look at the framework in the amendment and at whether parts of it could not be considered a little more closely. The cynical view in the world outside might be that the sale will be hasty and that it will not be best value for the taxpayer.
I shall go back and read carefully in Hansard what the Minister said, but I am not convinced. I hope that I shall get more positive responses from her at some point.
I share the reservations expressed by the noble Baroness, Lady Verma, on this issue. It is important that there are some criteria by which value for money is judged. On these Benches, as on those of the Opposition, it is well understood that the Government have a big hole in their forecasts of public sector revenues, which they need to fill, and this is a very useful way in which to fill that hole.
In a sense, carrying the whole process to its absurd extreme, it would be possible for the Government to securitise the future Inland Revenue income tax streams of revenue and raise quite a lot of money. One could argue that that is what the national debt partly is, that we are borrowing money on the expectation that we can meet the costs of servicing it over time.
On Amendment No. 7, I understand the difference between the securitisation process and the process of negotiating with a number of competitive bidders for a block of loans. As I understand it, when the Government sold off the mortgage-style loans in 1999, the deal done with Nationwide and Deutsche Bank was a one-off sale. There were a number of competitive bidders, and Nationwide and Deutsche Bank were successful in buying up that block of loans.
This is, of course, a very different process, very similar to that used by Northern Rock when it created Granite as its special-purpose vehicle and used it to sell on a number of bonds based on its mortgages. We saw with Granite the difficulty of selling on some of the sub-prime blocks of mortgages. I therefore come back to my point about risk management, and the fact that the Government might be left with the riskier tranches of loans. The Government say that they might be more attractive to certain members of the market, but they may not be attractive to any part of the market. Certainly, given the present difficulty with the sub-prime market, it is likely that they would not be attractive to any part of the market and that the better loans would be more attractive.
On the core issue of how we secure value for money, we need something in the Bill that enables the public to feel reassured that the Government are seeking it. We shall go on looking for some way of doing that.
8: Clause 2, page 2, line 19, at end insert “by such organisation as may be specified by the Secretary of State”
The noble Baroness said: I speak also to Amendments Nos. 9 and 21 which are tabled in my name. None of these amendments is substantive, in that they are all intended to clarify who is collecting or benefiting from payments made in respect of these loans.
Amendment No. 8 merely clarifies who is responsible for collecting the repayments and makes clear that the Secretary of State needs to specify who shall take on that role. In this respect, it refers to Clause 5 which deals with repayments, and brings in Amendments Nos. 18 and 19 tabled by the noble Baroness, Lady Verma. For her part, she is anxious to call a spade a spade and makes it clear that the Student Loans Company will collect the repayments. I know of the reluctance of parliamentary draftsmen to name any government agency in the Bill on the grounds that it may not exist in the future. However, it is noteworthy that Clause 5(2)(b) names Her Majesty’s Commissioners for Revenue and Customs, even though they have been through an organisational and name change in the past few years. They may yet change again under future Governments. I have played along with the convention in Amendment No. 8 and not named names.
Perhaps I may speak to Amendment No. 21, because it is linked to Amendment No. 8. It is a clarifying amendment. “Or other person” is very vague. Accepting the convention that the agent is the Student Loans Company or Her Majesty's Revenue and Customs, the amendment asks that, if it is to be someone else, they should be specified by the Secretary of State.
Amendment No. 9 is more substantive. We on these Benches are unhappy with the vagueness of “may include”. It is important in transfer deals of this type that it is clear at the outset who is entitled to interest payments, penalties or other charges which arise from, for example, slow payment or non-payment of repayments due. “May include” is much too vague. These things need to be specified clearly in advance, which is what Amendment No. 9 asks for. I beg to move.
I shall be brief. The noble Baroness, Lady Sharp, is right: I call a spade a spade. The Bill specifies particular rights and powers that will be the remit of the agent concerned—which, of course, is the Student Loans Company. Why is this not explicit? Does this degree of ambiguity mean that the Government envisage someone else having recourse to the powers? We want to get rid of any potential ambiguities which might slip through parliamentary nets and have unintended consequences. Will the Minister explain precisely what this part of the Bill means?
This group of amendments covers repayment and collection arrangements after sales have been made. The manner in which repayments are collected and administered is a key facet of the borrowers’ experience, and noble Lords are right to seek reassurance that those borrowers whose loans are sold will notice no material difference as a result of the loan sale.
Clause 1(4)(d) of the Bill is designed to give the Secretary of State the power to specify in the sales contract which organisation may administer the loans for purchasers. Clause 2(2) gives the Secretary of State power to set down in that contract that he will make sure that repayments due to loan purchasers get to him, and provide for the manner of that repayment—for all loans, unsold and sold alike.
All repayments are collected in the same way, through employers and HM Revenue and Customs, or through the Student Loans Company for direct or additional repayments. The Government then ensure that the right moneys go to the purchasers of sold loans. Purchasers will not be able to appoint collection agents of their own choosing. Collection of repayments through the tax system will remain as now, and the administration of loans will remain with the Student Loans Company. This collection system is a key feature of the loans, which we expect to be attractive to investors.
I turn to Amendment No. 8. It is logical that repayments can be gathered on behalf of the Secretary of State only by an organisation that he has specifically authorised to gather such repayments. It will not be possible for purchasers to decide to use an alternative mechanism from that stipulated under Clause 1(4)(d), nor do we think that such a prospect would be attractive to them. The intention behind Amendment No. 8 is already catered for by the existing wording in the Bill. I therefore urge the noble Baroness to withdraw this amendment.
Amendment No. 9 relates to who will be entitled to moneys of different types connected with loans that have been sold. In general, repayments of principal, interest and any other moneys due in relation to a loan would go to the owner of that loan, which is the presumption set out in Clause 5(3). But there may be some payments, such as penalties relating to compliance with the tax system, where it may not be appropriate or possible for moneys collected to be directed to the purchaser. The current drafting of the Bill means that, as part of the negotiated sales contract, there may be arrangements made for certain moneys that differ from this main presumption.
In practice, of course, the sales contract will be clear about all such matters, one way or the other, because of the operation of the presumption in default of specific provision. As such, we believe that we do not need to legislate that the contract must contain this specific item, and I urge the noble Baroness not to press her amendment.
Amendment No. 18 seeks to ensure that the SLC and HMRC will be the only organisations involved in the collection of repayments of sold student loans. As my honourable friend in the other place made clear, the Government very much share the view that the SLC should continue to fulfil those functions it currently performs in respect of both sold and unsold loans. In fact, this Bill allows the Government to specify in the sales contract the identity of the party by whom sold loans will be administered following a sale—our intention being that SLC will perform this function, either directly or continuing as a delegate of the Secretary of State. However, the SLC is a private limited company. It is not a statutory body.
There are two primary reasons why it would consequently be problematic to name the SLC in the Bill. First, as the SLC is a private limited company, not a statutory body like the HMRC, like any company it may in future cease to exist. Clearly, this is an unlikely scenario but, to allow for a sustainable programme of sales to develop, the provisions of this Bill will need to continue to be workable in the event this scenario were ever to occur. So the drafting would have to provide for this possibility in any event, and so allow for the possibility of someone else undertaking this role.
Secondly, and in a similar vein, the Bill is designed to be flexible so as to cater for any wider changes in the administration of the student loans system in the future. As this Bill seeks to enable a sustainable programme of sales, it needs to allow for changes to the system to be made. I reiterate the Government’s clear intention: the SLC will continue to administer all student loans, including the process of collecting repayments, and this will not be affected by the sales process.
Amendment No. 19, like Amendment No. 18, seeks to ensure that the SLC is named in this Bill as the only organisation that will administer sold student loans. This amendment in particular seeks to constrain the identity of the party that is able to make payments to a purchaser of money due to them. However, for the reasons I have already given in respect of Amendment No. 18, it is problematic to name the SLC in the Bill as the Bill needs to retain flexibility to be able to cater for any future changes, however unlikely. I therefore urge the noble Baroness not to press the two amendments.
Amendment No. 21 concerns the exemption in the Commissioners for Revenue and Customs Act 2005 that enables student loan repayments collected by HMRC through the tax system to come back to the Secretary of State to be set against the loans themselves, rather than being treated as payment of tax. The amendment aims to make Clause 5(5) more specific. The exemption covers,
“sums required to be paid to a Minister of the Crown by virtue of an enactment relating to financial support for students”.
So with the current wording of the Bill, if enacted, the exempt sums would be those,
“required to be paid to a Minister of the Crown or other person by virtue of an enactment relating to financial support for students”.
This overall wording makes clear that this is a specific and narrow change, which is necessary to allow money to flow to purchasers who will be entitled to repayments by virtue of the sales contract and the repayment regulations and pursuant to this present Bill. That is the nature of the specification that applies to “other persons” in this context. If we ever should wish it to be the case, an agent of the Secretary of State could in any event be the recipient of repayments on the Secretary of State’s behalf, so it is not necessary for that to be set out in the Bill. In the hope that this provides reassurance to the noble Baroness, Lady Sharp, I urge her not to press the amendment.
Amendment No. 20 is a minor amendment. As the Explanatory Notes on Clause 5 set out, and as I have just mentioned, there is a presumption in the Bill that all moneys paid by borrowers relating to sold loans should be paid to the loan purchaser. The presumption is currently qualified by the cross-reference in Clause 5(4) to Clause 2(2), so that the transfer arrangements—the sales contracts—may provide for exceptions. However, we now consider that this precise cross-reference is not the clearest way of saying that the transfer arrangements in general could provide that some moneys would still be due to the Government after a sale; for example, penalties relating to compliance with the tax system. To provide greater clarity, the amendment therefore expands the scope of the cross-reference to Clause 2 as a whole. This amendment would do no more than fulfil what we originally intended.
I am grateful to the Minister for his spelling out of these things. As I suggested, my amendments were probing amendments to seek clarification, and the Minister has given us considerable clarification. The one issue I raise is on Amendment No. 9, about transfer arrangements in Clause 2(3), which states
“Transfer arrangements may include”—
I suggest that it should be “specify”—
“provision as to who is entitled to interest, penalties”,
and so forth. As the Minister explained, the main repayments are covered by subsections (1) and (2), but there are perhaps other elements of payments that must be made. He also made it clear that, within the contract with any purchaser, it would be clear—the word the Minister used—who collates these revenues. It is a minor issue of semantics, granted, but the term “specify” covers that. The contract will have to specify this, because it will be made clear. Why we cannot have the same wording in the Bill, I do not know. Granted, that it does not really make much difference and I am not going to quibble about it. Nevertheless, it seems to me that it will be specified. To call a spade a spade, if you are going to specify it you might as well say so in the Bill.
The answer to the amendments of the noble Baroness, Lady Verma, wanting to include the name of the Student Loans Company, came as I expected. I have to admit that I had not appreciated that it was a private company. I had thought that it was a public company, but am interested that it is private. On Amendment No. 21, the Minister is right that there is no need to spell it out at greater length.
Returning to the two amendments tabled in my name, it is important for clarity to the purchaser that the company from which they are purchasing is placed in the Bill. I believe that putting “agent” in, because somebody might purchase them in future, gives great uncertainty to the sale. It is worrying that the Government are not prepared to put “the Student Loans Company”. I know that it is only a small change, but it is useful for future purchasers to know that they are dealing directly with the Student Loans Company because that, as far as I am aware, is the body through which these sales will take place.
This gets even more confusing. All along, we have been clearly told that the loans would be sold through the Student Loans Company. Therefore, the Student Loans Company owns the loans. Purchasers will be purchasing from the Student Loans Company. We have suddenly been told that it is a private company, but the Government own it.
10: Clause 2, page 2, line 30, at end insert—
“(4A) Transfer arrangements may include undertakings by the Secretary of State about the power to make loan regulations; in particular—
(a) the Secretary of State may undertake to exercise the power so as to achieve a specified result,(b) the Secretary of State may undertake not to exercise the power so as to achieve a specified result,(c) the Secretary of State may undertake to follow, or not to follow, a specified procedure in connection with the power,(d) the Secretary of State may give undertakings about the indices, information or other matters to be used or considered for the purposes of section 22(4)(a)(i) of the Teaching and Higher Education Act 1998 (interest rate to maintain real-terms value of outstanding amounts), and(e) a loan purchaser may enforce an undertaking by way of legal proceedings in public law, private law or both.”
The noble Baroness said: I feel that I should politely let the Committee know that I have rather a long speaking note that I will try to get through as clearly as possible. Amendment No. 10 concerns detail on the options for the operation of the sales transaction. I have written regarding this amendment to all noble Lords who took part in Second Reading, and I hope that I can develop the points I made in that letter. In developing the potential sales programme, the Government have engaged with a number of external advisers from the financial and legal sectors as well as experts in my department and Her Majesty’s Treasury. We have appointed Deutsche Bank to act as sales arranger for the first round of sales in the coming year and have appointed Lovells, the commercial lawyers, to act for us in the sale.
As with any transaction as complex and novel as this, the blueprint for how the sales will be conducted can evolve over time, drawing on advice that the Government receive during the development of the programme. Based on the expert advice of our sales arranger, we now believe that some amendment is necessary to the provisions in the Bill to ensure that potential purchasers can fully understand our future intentions and what they would be buying. That clarity of understanding on the potential purchasers’ part is a prerequisite for us to be able to achieve good value for money.
I need to set out again that, in selling student loans, the Government intend to transfer risk to a purchaser. Those risks include, as we know well, the uncertainty about future graduate earnings, graduate unemployment and other macro-economic factors that are not in the Government’s power to control. Investors need to assess the value of the loans, taking into account those risks and a range of factors, such as how loans are deducted from payroll alongside income tax and national insurance contributions.
At the same time, we have been clear throughout that, regardless of whether a borrower’s loan is sold to a private purchaser or retained in the public sector, decisions about the terms and conditions of their loan remain with the Government, who retain the ability to make changes to those loans after they have been taken out, through the mechanism of regulations, as we have already discussed, and as is the case now. Investors can include in their financial calculations risks around graduate salaries and repayment mechanisms, but what investors will find hard to assess or model is the likelihood that Ministers will, in the future, use their powers to change the conditions of repayment in a way that alters the predicted cash flows to the special-purpose vehicle. That is not an economic risk; it is more of a political risk and, as such, one that investors will find hard to value.
In general, purchasers want maximum certainty about what they are buying so that they can make a reliable assessment of the potential performance of, and risks associated with, those investments. If potential purchasers believe that the Government may change the nature of an asset after selling it in a way that cannot be predicted, that will seriously reduce the amount they are prepared to pay for it.
Clause 2(4) presently contemplates addressing this issue by providing in sales contracts for compensation to be payable to purchasers in the event of future policy changes that compromise the value of the transferred asset. While we still wish to retain this as an option for proposed transactions, we have been advised that it would be wise to allow for more than one way to address this issue.
The amendment enables another method of giving purchasers greater certainty on Ministers’ future intentions by giving the Secretary of State the power, through regulations, to give undertakings in the sales transaction about how terms and conditions might or might not be changed in future. For example, he could undertake that the repayment threshold will be uprated in a certain way, in line with publicly stated policy, and he could give an undertaking about how the interest rate will be determined each year. Such commitments can provide certainty for both parties—purchaser and borrower alike—and remove concerns about unexpected changes. In the event that a Secretary of State sought to alter terms and conditions for sold loans in a way that cut across such undertakings, a purchaser could pursue a claim against the Government in public and private law.
The Government might be able to achieve better value for money by giving an undertaking about future treatment of a particular repayment parameter rather than by promising a one-off compensation payment. Investors may discount the value they would accord to the loan book to take account of any uncertainties—or perceived uncertainties—about how compensation might be made. In making their investment decision they may have placed value on a particular expected size and timing of cash flows, which may be altered by a one-off compensation payment. The amendment gives future Governments the flexibility to secure the best value for money. It is an additional tool, if you like.
The Bill enables a long-term programme of sales, which is another reason why flexibility in the Government’s options is important. Classification rules are currently being redrafted and changes in those rules over time could have a material impact on the ability to offer compensation for all such changes. We do not want to put future Governments in a position where the only means they have to address the issue of future policy change became something that, under future rules, led to the transaction not counting as a true sale. We know that this is a real risk, as the classification rules have changed significantly since the previous sales of student loans a decade ago and we would not now be able to sell student loans in the way we did then.
The amendment gives the Government the powers they need to pursue good value for money in the transaction. If a Government gave undertakings as part of a sale, they would be constraining future discretion on policy change affecting those loans, but not unreasonably, in that they would only be committing not to change terms in an unexpected way in the middle of a borrower’s period of repayment. No borrower will be in a worse position for their loan having been sold. Amendment No. 17, which I will come to shortly and which is in a sense an intrinsic part of these provisions, would make this explicit in the Bill. Terms and conditions will remain as set by regulations and, as we have stated unequivocally, purchasers will not have discretion to alter them.
I should make it plain that, in making undertakings, the Government would not be agreeing with the purchaser of the loans to make specified changes to benefit purchasers after the sale. The purpose will not be to improve the lot of the purchaser, but to give certainty about the current position and about the Government’s intentions over time. If the Government pursue the route of using undertakings in sale contracts, the proposed undertakings will be made public as part of the sale process.
I welcome the opportunity of Amendment No. 15 to clarify the distinction we are making between loan regulations and loan arrangements. The term “loan arrangements” is used to denote those parts of the agreement between the borrower and the Secretary of State as lender that are not determined by regulations; we have already discussed this in part. The arrangements are contractual arrangements deriving from the completion of the loan application form, the signing of the usual declaration by the borrower, the acceptance of the application and the provision of the loan. Examples of these would be acceptance of an obligation to repay the loan or acceptance that the ordinary civil courts have jurisdiction over any enforcement actions.
Although we are making specific provision that future changes in loan regulations will apply to sold loans as well as to unsold loans, we do not see that it would be necessary or desirable for the Secretary of State to have any place in the future amendment of contractual arrangements between the borrower and the loan purchaser, who would have taken the Secretary of State’s place as the lender. It is a necessary part of the sale that the parties to the contract moving forward are the borrower and the purchaser. The substantive provisions of the loan contract will continue to be contained in and derived from the regulations. As with any contractual arrangement, the two parties involved could by agreement amend those parts of the arrangements not deriving from the regulations, and we do not need to legislate for them to be able to do so. It is important to recall, however, that neither party may amend these arrangements unilaterally. The purchaser would need the consent of every borrower to make changes to its portfolio, and the technical nature of those terms makes it unlikely that this would be of interest to them.
The Bill already has at Clause 2(7) the powers necessary to make amendments to the loan arrangements that are consequential on the sale—for example, substituting the loan purchaser’s details for the Secretary of State as lender. On that basis, I hope that the noble Baroness, Lady Sharp, will consider withdrawing Amendment No. 15.
I am going to close in a minute—I promise. It is important to ensure that we have clarity about the meaning of terms in this rather technical Bill, as the noble Baroness, Lady Sharp, indicated with Amendment No. 16, to accompany the proposed Amendment No. 15 to Clause 4(4). Various terms in the Bill are “defined terms”. The location of their definitions is set out in Clause 9. “Loan arrangements” is one such term, and the definition at Clause 1(4)(b) applies to all references to that phrase contained in the Bill. I hope that that is helpful and that, with that explanation, she will feel able to withdraw her amendment.
Amendment No. 17 picks up the clear commitment that the Government have given throughout the stages of the Bill so far, in your Lordships' House and in another place, that loans sales will not affect the borrower. We know that groups representing students and parliamentarians alike attach great importance to this commitment. Our proposed amendment concerning a power to give undertakings in sale contracts about how terms and conditions may or may not be changed has prompted us to ensure that our commitment to parity of treatment is put clearly in the Bill. We believe that that is necessary to give current and future borrowers full confidence that loan sales will not affect them adversely.
Proposed Clause 4(6) will mean that the Secretary of State must seek to ensure that disparity between borrowers does not arise as a consequence only of their loan being sold or retained. If the Bill is enacted, the provision will apply to all changes in regulations thereafter, not just in cases where an undertaking may have been made in a sales contract. As such, I hope that noble Lords will agree that this amendment is a worthwhile strengthening of the statement that we have already put on the record, which will give borrowers confidence that the commitment is intended to stand the test of time. I beg to move.
I shall start by addressing Amendments Nos. 10 and 17 and then come back to Amendments Nos. 15 and 16, which stand in my name.
Government Amendment No. 10 is important because it provides for the Secretary of State to give undertakings which are enforceable by law and in law that bind his successors to a particular course of action. We recognise how difficult it may be in present circumstances of the money markets to persuade buyers to buy tranches of these student loans. As the Minister explains, they must give these undertakings to give greater certainty about future payment conditions. As things stand, the Bill provides for the Secretary of State to compensate any purchaser should changes arise, such as raising the repayment threshold or altering the repayment rate. Should the Government decide to change either of those, it is provided within the Bill that the Government shall compensate the purchaser for any such changes that they introduce.
The advice received from Deutsche Bank as the adviser to the Government about sales within the next year or so was that the mechanism for giving compensation was not enough and that such changes would raise unquantifiable uncertainties for the purchaser. Hence the advice was that the Bill needed to incorporate the ability for the Secretary of State to give some firm undertakings not to, for example, raise the repayment threshold or alter the repayment rate.
Our reservations about these undertakings come mainly because we are unhappy about the degree to which they tie the hands of future Governments. Let us take the repayment rate. Given that it is paid through the PAYE system to Her Majesty’s Revenue and Customs, it amounts de facto to a form of graduate tax to be paid by young graduates. Indeed, many of those advocating loans and repayments in our debates on the Higher Education Bill talked about this system being a form of graduate tax. I remember a long discussion with Nick Barr from the London School of Economics, who was the author of these ideas. He said, “Margaret, you’ve got to realise that it amounts to a form of graduate tax”. Be that as it may, we know that very many young graduates these days are finding life extremely tough. Most of them earn more than £15,000 and so are above the threshold at which one starts repaying loans, but many are not earning much more than £25,000. On those earnings, they have to pay not only income tax—which I admit has gone down from 22 per cent to 20 per cent, but it is still only a 2 per cent reduction—national insurance of 10 per cent and then, on top of that, the 9 per cent repayment of their graduate loan. Many of these young graduates, earning quite probably between £20,000 and £25,000, are hitting a marginal rate of tax of 41 per cent, which is higher than we charge millionaires.
The problem with these undertakings is that, should a future Government wish to introduce different repayment rates to make it easier for young graduates, many of whom are also in the housing market and face problems of trying to get mortgages and so forth, they tie the hands of future Governments in relation to the loans that have been sold off. I presume that they do not tie their hands in relation to new tranches of loan because there would be specific undertakings in relation to each of them.
I do not doubt that the Minister will recognise that, as with the PFI deals, one is talking long term; one is talking 25 years. It is very unlikely that the Government will not change within the next 25 years and the hands of future Governments will be tied. The Minister spoke about giving future Governments flexibility to secure best value, but the Bill also provides a very inflexible instrument and gives them very little choice. This raises an issue of principle. I have discussed it at some length with my Treasury team and we are agreed that we are not happy with the provisions as they stand.
Amendments Nos. 15 and 16 are minor amendments, which seek clarification. It might have been better to have spoken to them earlier with the second group of amendments, since they pick up the issue that I raised then; namely, the difference between loan regulations and loan arrangements. I am grateful to the Minister for having clarified that.
It is clear in Clause 1(4)(b) that the loan purchaser inherits a repayment regime laid down by loan regulations or arrangements for those issues which cannot be covered by them. It struck me that there might be issues of substance there which it would be necessary to allow for in any amendments to loan regulations. However, I accept the Minister’s point. This is not a substantive amendment in any sense. However, we on these Benches are not happy with the commitment to undertakings as proposed by Amendment No. 10.
I wholeheartedly agree with the noble Baroness, Lady Sharp, about how this impacts on students. With the cost of living going up and everything else, students are facing higher tax bills than most millionaires. The Government and the Minister need to seriously look at that.
The government amendments in this group are very strange. For a start, they are so open-ended that there is little that the Secretary of State would not be empowered to do with regard to the sale of student loans, including altering the terms of the loan and specifying various terms of the sale. Perhaps the Minister could outline any powers regarding the terms of the student loans and the sale of the loan book that the Secretary of State would be prevented from exercising. Is there anything that he or she cannot do?
The purpose of these amendments is not entirely clear. They seem to have two potentially very different purposes. First, the letter that I gratefully received from the Minister said that this amendment was inspired by consultation with Deutsche Bank. The consultation, as I understand it, was on what mechanisms needed to be included to ensure that loans were commercially viable. The whole business of selling off the student loan book is complicated by the fact that the Government are doing the selling and that changes in government policy might affect the product on offer. In commercial terms, a purchaser then faces the unquantifiable risk of changes in government policy which could have real effects on cash flows.
Any savvy negotiator seeking to purchase these loans would surely pounce on this unquantifiable risk to drive down the price and thus jeopardise our ability to get value for money. Is this amendment intended to make the loan book more commercially attractive by dampening the degree of unquantifiable risk and effectively saying that if it is changed it will be changed only in certain ways? If that is the case, there seem to be several problems.
First, there is absolutely no specificity as to what a Secretary of State would promise; that is, what terms of sale would be appropriate. Would it take the form of agreeing only to change the terms of student loans along with the RPI? Could it be an agreement on any other index of inflation? What promises is the Secretary of State likely to make? Under this amendment, it seems that he or she could make any promise he or she wanted, and do so in private. While I appreciate that this is commercially sensitive and therefore cannot be public, and that the way in which it might change is unpredictable and therefore must be flexible, an enormous amount of power seems to be being handed to the Secretary of State without any real transparency or checks. Are the Government just asking everyone to trust them?
Secondly, agreeing that the loan book, or even just a particular tranche of loans, will change only in certain ways binds the hands of future Secretaries of State to amend education policy as he or she and the people of this country who elected him or her see fit. That seems particularly dangerous. Will the Minister unravel the paradox that places a firm commitment on the purchaser on the one side and the sovereignty of Parliament on the other? Are the two mutually exclusive? However, increasing commercial viability of the loan might not be the only reason that this amendment has been brought forward, although it seems unlikely that Deutsche Bank can, or should, be allowed to advise on anything else.
The other issue concerns the ONS and the ability to classify these sales as genuine because there has been a transfer of risk. There was no mention of that in the letter I received from the Minister. The current mechanism in the Bill which provides for compensation to purchasers whose cash flow is affected by changes in government policy means that the purchaser is not taking much of a risk. As I mentioned before, the rate of default is fairly low; thus the Government would essentially be saying to purchasers that they will fix any mess they cause, once again placing the Treasury coffers in the firing line. I understand that the Government have been in consultation with the ONS regarding whether this compensation mechanism would mean that the sale of the loan book would be a genuine sale. Will the Minister outline in detail the results of that consultation? If the consultation has not been completed, does the Minister not agree that it is hugely irresponsible to make this law without such guarantees? Is this amendment intended to get around this hitch by giving assurances to purchasers so that they will be willing to take on the risk, and therefore firmly get this debt off the government books? Essentially, is the heart of this amendment about making the loan book more attractive, or is it about the genuine transfer of risk from the public accounts to the private sector?
We, too, are also extremely unhappy at the open-ended nature of this amendment. It seems in many senses to give powers to the Secretary of State to do things or not do things more or less as he or she wishes. We are not happy to lob through these provisions.
I thank the noble Baronesses for their comments. I hope I can come back with some reassurances. The noble Baroness, Lady Verma, asked what the objective of the amendment is. We have said on a number of occasions that it is about creating as much certainty as possible for potential purchasers so that they can properly value the loans. By reducing uncertainty, we reduce the likelihood that the value of the loans would be greatly reduced. That is the objective. I need to stress that we are talking about an additional option or tool. The noble Baroness, Lady Sharp, said “This will happen”, but I need to be clear that the undertakings may be made. It is an additional tool. We have the option of compensation in the Bill as well, which the noble Baroness, Lady Verma, highlighted.
With regard to transparency, which is very important, as I said, any agreed undertaking would be made public as part of the sale so there would be transparency about agreements. Parliament can repeal any Act it likes at any time, so the constitutional issue about the sovereignty of Parliament and our role as parliamentarians is not affected. I understand the noble Baroness’s concerns. This is not something we would consider lightly, but we will not be able to achieve value for money if purchasers face uncertainty because the asset they had bought could fundamentally change. That is what the instrument of compensation is for. Therefore, this represents another option. We need to be clear that we are referring to making undertakings about the loans that are sold. For sold loans, it would not be possible for terms and conditions to change in the middle of their repayments. These undertaking refer to sold loans.
In the same group, we have talked about including our commitment to ensure that students whose loans have been sold are not treated less favourably. We need to be clear that future Governments could still change eligibility and entitlement for new loans; for example, the levels of grant and loan, and the income thresholds, for receiving them. The Government have made a public commitment that in 2010, the threshold for repayment will increase with RPI.
The noble Baroness, Lady Verma, asked about the classification of sale. The Office for National Statistics follows guidance from Eurostat in setting out the classification rules for a true sale. Eurostat is reviewing its guidance, which may change, and may change again over time. Giving undertakings is another way to reassure loan purchasers that they are not exposed to political risks while taking on economic risks. I know that the noble Baronesses, Lady Verma and Lady Sharp, are aware of these points.
I have found this discussion very useful, but I need to come back to the original motivation for laying these amendments, which are about creating certainty for potential purchasers. We are talking about possible undertakings being made on the treatment of sold loans. As for future Governments, as we know, and as I am trying to stress throughout our discussions, we are talking about a rolling programme of the sales of student loans going forward, which would be a feature of the student loan book. We need to have all the instruments at our disposal to ensure that we achieve the value for money that Members of the Committee were espousing the need for earlier.
In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I should advise the Committee that if Amendment No. 12 is agreed to I cannot call Amendment No. 13.
11: Clause 3, page 3, line 20, at end insert—
“( ) Transfer arrangements shall—”
The noble Baroness said: Clause 3 concerns the onward sale of the loans. It gives the purchaser the right to sell loans to another buyer after the initial sale. Of course, we have received some assurances regarding certain limitations on this power, but there still need to be further safeguards. Collateralised debt is the subject of much media attention these days and we all know how often loans are repackaged and sold off to a multitude of other actors. There is no guarantee that we will even know who they are. Indeed, they could be out of the jurisdiction of the Secretary of State, opening up limitless problems concerning control of the debt obligations and the terms and conditions from the students’ point of view. Also, some students could find themselves unprotected by English law. An international student who has returned home faces the possibility that the return on the debt could be demanded at a faster rate.
The effects of this provision, as I am sure that the Minister would agree, would be unfair, but how are we expected to control it? Does the Minister not think that there should be mechanisms in place to prevent this? To address this issue, we propose placing a duty on the Secretary of State to satisfy one of two conditions—that the arrangements include a prohibition of transfer to those outside the control of the Secretary of State or the prohibition of further transfer arrangements under which rights in respect to student loans are transferred to multiple purchasers. We strongly feel that there needs to be some protection on the conditions of onward sale; otherwise there is no way in which to guarantee that this will not have a terrible and unfair effect on students—or is this clause designed to address similar issues that I raised above, regarding the ONS? Is it in the Bill simply to make the sales genuine? Does the Minister anticipate Clause 3 ever being used? If that is the case, it is even more dangerous. If there are no safeguards and no real intention of powers in the clause being exercised, what happens if someone tries?
This is a particularly worrying aspect of the Bill and I hope that the Minister will be able to give further assurances and support our attempts to protect students’ interests. I beg to move.
I shall speak to Amendment No. 13, which is in my name. In doing so, I seek to clarify the situation. The purchaser of the loans is, as I understand it, the special-purpose vehicle—in effect, the equivalent of Granite. As the Minister explained, the special-purpose vehicle will rebundle the loans into different tranches which will then be sold on as bonds. Effectively we will be making bonds out of them and selling them on. In so far as there is a special transfer here, it would be that the special-purpose vehicle was sold on. Am I right in assuming that that is the case?
My amendment is one of those little amendments that changes “may” to “shall”. It refers to subsection (6), in which the transfer arrangements “may” prohibit, and so on. The question is whether it should be “shall”. The issue was discussed at some length in the other place, the main objection to it being “shall” relates to the classification. It is another piece of business under Eurostat and ONS rules. For example, if,
“prohibit the making of further transfer arrangements without the Secretary of State’s consent”
is “shall”, it counts as being within the public sector and the debt and, therefore, the risks are not transferred; whereas if it is “may”, the debt can be transferred over. We have “may” rather than “shall” entirely because of this quirk of meaning, interpretation and definition within the framework of our statistics regulations.
That seems a very poor reason for not having “shall” because, on the whole, it would be a good idea if it was made clear. If we are setting up the special-purpose vehicle, the student loans will be serviced by the Student Loans Company, which is, as we know, a public company and so forth. It is all really rather unsatisfactory if they can in fact then be sold on, perhaps to some multinational agency which is not the slightest bit concerned about the welfare of the students. Although there are reservations within the Bill, it might well get out of hand. “Shall” is therefore a better word to have here than “may”.
In general, I have quite a lot of sympathy with the amendment of the noble Baroness, Lady Verma, which effectively picks up the same point: it is important to try to keep tabs on who may buy up these loans. In the multinational monetary markets, it would be unfortunate if an Enron bought up these loans, and we would, on the whole, prefer not to see one doing so. So I have some sympathy with Amendments Nos. 11 and 12, and not much with the excuse that this is how “public sector” is currently defined. We really ought to query that, and it should not drive how we draft legislation.
As we have heard, this group of amendments addresses onward sales. First, I think that we all share the underlying aim behind each of these amendments. We all want to ensure that borrowers are as much protected in further transfer arrangements as they are when the loan is first sold. We are all rightly keen that there should be no detrimental impact on borrowers, either resulting from the initial sale by the Government or in the event that the purchaser then sold the loans on. I do not believe that there are any significant differences of principle between us in this debate, but rather a consideration of the best way of giving effect to this aim.
It is important to say that an onward sale of the loans is extremely unlikely. The loans will be owned, as we have established, by a special-purpose company, and it is the bonds that the company issues that will be traded. The selling on of the legal title to the loans, as opposed to the economic rights to income flows derived from the loans, is an unusual event. None the less, with ownership of the loans comes the possibility of being able to sell the loans, so Clause 3 caters for this possibility. We cannot sell the loans without this possibility arising.
Before addressing each individual amendment, I remind Members of the Committee of the key protections that borrowers will enjoy under this Bill.
The main protection for borrowers will remain in place even without Clause 3(6). Purchasers will not have the power unilaterally to change the terms and conditions of student loans. Clause 3(6) has been included in the Bill to provide an additional level of protection, and would, for example, enable the Secretary of State to ensure that borrowers whose loans had been sold could access the same complaints procedures as those with loans retained by the Government.
Amendment No. 11 addresses options for methods by which the Secretary of State can be a party to onward sales, so ensuring that the Government have flexibility to provide protection for borrowers in future sales. I understand the amendment intends to make it mandatory to follow one or other of the alternative approaches set out in Clause 3(6)(b) and (c), although as currently drafted it would make both mandatory, which would not work.
I have not judged it necessary to make such a provision about onwards sales mandatory in initial sales contracts, following the general approach of the Bill in enabling a range of issues to be covered in the transfer arrangements. But we consider that such a proposal could work provided that it was clearly about using one of the possible alternative approaches to this particular issue and catered for the possibility that another contractual device to achieve the same end may be more appropriate, or become so in the future. I am happy to take the matter away and consider whether a government amendment could be tabled on Report that preserves the options we need within a mandatory provision. On that basis, I hope that the noble Baroness, Lady Verma, will withdraw Amendment No. 11.
Amendment No. 12 proposes some additional prohibitions about onward sales. As I have already said, we think that it is unlikely that the loans themselves will be sold on, but purchasers must have the right to do so. Even if loans were sold on, we do not expect a significant fragmentation, and, as my honourable friend the Minister for Higher Education and Lifelong Learning has made clear in debate in another place, the Government would ensure that there was a notification clause in any sale or onward sale contract, so there is no question of losing track of loans or purchasers.
We cannot exert substantial control over to whom purchasers might sell loans in the future, even though I must stress that we see that as extremely unlikely. Once we have sold an asset it belongs to someone else, and we cannot decide whether it is sold again or whether a subsequent purchaser will be resident in England and Wales. Indeed, EU law would in any event prevent us confining ownership to an organisation in England and Wales. The loans are governed by English law, wherever a purchaser may happen to be. Given the way loan repayments are collected, through PAYE, it is hard to see how the location of a purchaser could have any effect on the borrower or how a purchaser could somehow evade the Secretary of State and yet still obtain his money.
Attempting to constrain onward sale would also harm the prospects of meeting the objectives that we believe are widely shared. In seeking to prevent sales to multiple purchasers, the amendment would only allow any purchaser to sell all of their holding of loans to one further purchaser. That may impact on the price achieved and be a significant barrier to achieving good value for money. Critically, trying to exert substantial control over matters such as onward sale would mean that the initial transaction would not constitute a sale and would not make funds available for investment in other priorities.
We cannot have it both ways and must recognise that if we sell assets, they belong to someone else to dispose of. To try to control onward transfer in the way envisaged by Amendment No. 12 would make it likely that the loans would be classified as remaining on the Government’s books. We should keep in the forefront of our minds that the Bill will not give purchasers the right to change terms and conditions of the loans; and so this right could not be transferred to a further purchaser as part of an onward sale. That is the borrowers’ primary protection. On that basis, I hope that the noble Baroness will feel able to withdraw Amendment No. 12.
Amendment No. 13, moved by the noble Baroness, Lady Sharp, could have some undesirable and perhaps unintended consequences. It would require the Secretary of State, if pursuing one of the alternative options for protecting borrowers through onward sales, to enforce the terms of such a contract in all circumstances. In some circumstances the Secretary of State might want to intervene, if some right of the borrower was potentially at risk. It cannot be right, however, for the Secretary of State to be concerned in all cases with the bargains reached by commercial entities between themselves, much less for him to have to enforce them against one or other party on an assumption of who may be at fault. The Government must be able to retain the right to consider whether, and in what way, to respond to any suggestion of a breach, depending on the type and manner of the breach. It would not be right for the Government to have to step into all issues surrounding onward contracts. I hope that the noble Baroness will agree not to move the amendment, given that reassurance.
Finally, Amendment No. 14 is a government amendment, offering clarification on how the Bill addresses onward sales. It has always been our intention that Clause 3, which deals with onward sales of loans or “further transfer arrangements”, related to the transfer of legal title of the loans. Our expert advisers tell us that we need to distinguish in this clause between the transfer of title, where we need to protect borrowers, and the technical creation and onward transfer of equitable rights—rights to the repayments—to the various other parties that occurs in setting up the special-purpose vehicle and securitising the loans. To seek to regulate this division of equitable interests would be both unnecessary and unworkable given the complexity of the structures. It is the legal owner only who has a relationship with the borrower and with the student finance system as servicer.
If we do not make that distinction, potential purchasers and investors may be deterred from participating in loan sales in the mistaken belief that the Secretary of State will need to be a party to all the transfers and onward transfer of equitable rights that can take place in the context of a securitisation. We are talking about the onward sale of bonds rather than the title of loans.
Proposed new subsection 3(8) is simply a clarification that the clause does not apply to these types of transfer. I hope that that amendment will prove acceptable. I beg to move.
I am grateful to the Minister for her response. I see that gremlins have got into the amendments. I confess that I did not check it on the Marshalled List, but the amendment that I had proposed refers to:
“Page 3, line 18 “transfer arrangements shall”.
That picks up the point that the Minister answered in relation to the amendment tabled by the noble Baroness, Lady Verma. I note that her amendment relates to line 20, and so refers to subsection (5)(b) and (c) and not to paragraph (a), whereas my amendment related to paragraphs (a), (b) and (c).
I am grateful to the Minister for replying to the amendment as put down in the Marshalled List. I conceived a more or less nonsense amendment, and I apologise for wasting her time. These issues of onward transfer are difficult. I take the Minister’s point entirely that it is an unlikely event but that the Government have to provide for it. If the loan portfolio or special-purchase vehicle were to be bought up by an overseas body would that be a bad thing or not?
It is very difficult to tell. Many of these Middle Eastern states—and China, for that matter—are running large investment organisations. In many senses it would seem not ideal that it should be held by them, but in the modern global village in which we live it could well be.
I shall look with interest at what the Minister said. I shall consider whether it is worth bringing back the amendment that I meant to table.
I, too, thank the Minister for her responses. The noble Baroness, Lady Sharp, raises some important points about SPVs. The control of borrowers and their loans will go into their hands on multiple sales. It is difficult to see how the Government will be able to put enough safeguards in to be able to assure us that terms and conditions will not be changed. Although the Minister stipulates very eloquently. I have difficulty in envisaging that in the long term with multiple sales.
I thank the Minister for taking away Amendment No. 11 to have a rethink about it. I think that when she has seen the points that we have made about the amendment she will, perhaps, be inclined to see it our way. While the Minister may be able to track the loans, once a loan is sold and is no longer in the Government’s control, what happens to the loan? While it appears that the Secretary of State cannot be involved in every loan sale, there must be some mechanisms in place for tracking loans and monitoring their outcomes.
There will be provisions in the contract to ensure that the Secretary of State is notified of any onward sale, so we will know that an onward sale has been made and where. I stress that the trade and the buying and selling will be of the bonds. The title and ownership of the loans will stay with the special purpose vehicle. One can never say never, but we believe that it is extremely likely that they will stay with the special purpose vehicle and that the buying and selling that happens will be of the bonds themselves. I know that the noble Baroness appreciates that point, but I wanted to emphasise it again.
I thank the Minister for that clarification. However, the worry that we have on our Benches, as the noble Baroness, Lady Sharp, has on hers, is that there will be multiple sales and there will be no control from the Secretary of State, even if they are sold in bonds, if those bonds are traded on the stock market with all the ups and downs. The difficulty is that we do not have enough assurances from the Minister. I look forward to reading in Hansard what has been said today. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 12 and 13 not moved.]
14: Clause 3, page 3, line 27, at end insert—
“(8) References in this section to the further transfer of transferred rights do not include references to arrangements under which—
(a) transferred rights become held on trust, (b) other equitable interests are created or transferred in relation to transferred rights, or(c) securities are granted in respect of transferred rights.”
On Question, amendment agreed to.
Clause 3, as amended, agreed to.
Clause 4 [Loan regulations]:
[Amendments Nos. 15 to 17 not moved.]
Clause 4 agreed to.
Clause 5 [Repayment]:
[Amendments Nos. 18 and 19 not moved.]
20: Clause 5, page 4, line 13, leave out “2(2)” and insert “2”
On Question, amendment agreed to.
[Amendment No. 21 not moved.]
Clause 5, as amended, agreed to.
Clause 6 [Information]:
22: Clause 6, page 4, line 18, leave out “In relation to transferred loans,”
23: Clause 6, page 4, line 22, leave out from “with” to end of line 23 and insert “loans that have been or may be transferred (including onward disclosure by virtue of subsection (4)).”
24: Clause 6, page 4, line 32, leave out from “disclosure” to “, and” in line 33 and insert “for purposes in connection with loans that have been or may be transferred”
25: Clause 6, page 4, line 35, at end insert—
“(4A) The reference in subsection (4)(b) to an agent includes an auditor.”
On Question, amendments agreed to.
[Amendment No. 26 not moved.]
Clause 6, as amended, agreed to.
Clauses 7 to 13 agreed to.
Bill reported with amendments.
The Committee adjourned at 4.55 pm