 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Sale of Student Loans Bill |
Sale of Student Loans Bill |
The Committee consisted of the following Members:Hannah Weston, Celia
Blacklock, Committee Clerks
†
attended the
Committee
WitnessesBill
Rammell, MP, Minister for Lifelong Learning, Further and Higher
Education
, Department for Children, Schools and
Families
Michael
Hipkins, Director, Student Finance Strategy, Department for
Children, Schools and Families
Public Bill CommitteeTuesday 4 December 2007(Morning)[Miss Ann Begg in the Chair]Sale of Student Loans Bill10.30
am
The
Chairman:
Before we begin, I will make a few preliminary
announcements taking us through what we are going to do. I am happy for
hon. Members to remove their jackets. Will they ensure that their
mobile phones and pagers are turned off or switched to silent? I remind
the Committee that there is a money resolution in connection with the
Bill, copies of which are available in the room. I also remind hon.
Members that adequate notice should be given for amendments. As a
general rule, I do not intend to call starred
amendments.
As we are
still in the early days of taking oral evidence in Public Bill
Committees, it might help if I briefly explain what is proposed, so
that the procedure is clear. First, the Committee will be asked to
consider a programme motion, which is on the amendment paper, for which
debate is limited to half an hour. We will then proceed to a motion to
report written evidence. I am glad that the Minister has just come in
as he will propose the motions. They are followed by a motion to permit
the Committee to deliberate in private, in advance of the oral evidence
session. I hope that we can take all those stages
formally.
Assuming
that the motion is agreed to, the Committee will move into private
session. When we get through the formal part of our proceedings, we
will ask the public to withdraw and the Committee will decide how it
will ask questions. Once it has deliberated, the witnesses and members
of the public can come in. At that stage, the oral evidence session
will begin.
If the
Committee agrees to the programme motion, we will hear oral evidence
first. As there is only one set of witnesses, there has been a
discussion, through the usual channels, that if appropriate we will
take a 10-minute break and then go into the line-by-line consideration
of the Bill as part of this morning’s sitting. That has not
happened before in a Public Bill Committee, and it is up to the
Committee to agree to it. We have moved rooms to allow us that
flexibility, should the Committee so wish. If the Committee does not
agree to that, we will move into line-by-line scrutiny in the afternoon
sitting. Those are decisions for the
Committee.
That—
(1)
the Committee shall (in addition to its first meeting at 10.30 a.m. on
Tuesday 4th December)
meet—
(a) at
4.00 p.m. on Tuesday 4th
December;
(b) at 9.00
a.m. and 1.00 p.m. on Thursday 6th December;
(c) at 10.30 a.m. and 4.00 p.m.
on Tuesday 11th
December;
(2) the
Committee shall hear oral evidence from the Department for Innovation,
Universities and Skills on Tuesday 4th December, and the hearing of
that evidence shall (so far as not previously concluded) be brought to
a conclusion at 1.00
p.m.;
(3) the
proceedings on consideration of the Bill in Committee shall (so far as
not previously concluded) be brought to a conclusion at 7.00 p.m. on
Tuesday 11th
December.
I am
pleased to move the motion. The Programming Sub-Committee met and
agreed the timetable without opposition, and I hope that, on that
basis, we can approve it.
Question put and agreed
to.
Ordered,
That,
subject to the discretion of the Chairman, any written evidence
received by the Committee shall be reported to the House for
publication.—[Bill
Rammell.]
Motion made, and Question
proposed,
That,
at this and any subsequent meeting at which oral evidence is to be
heard, the Committee shall sit in private until the witnesses are
admitted.—[Bill
Rammell.]
Rob
Marris (Wolverhampton, South-West) (Lab): With regard to
the wording of the motion, what would be the procedure if, after
hearing the witnesses, the Committee wishes to sit in private, perhaps
to discuss the evidence? Could we proceed in that way? I am concerned
that if we pass the motion, we cannot subsequently sit in private in
that sitting after the witnesses have been admitted even if the
Committee wishes to do
so.
The
Chairman:
My understanding is that the answer is no.
Either we will suspend at that stage and move on to line-by-line
consideration, or we will come back in the afternoon sitting for
line-by-line consideration. It is possible for the Committee to decide
to take evidence from more witnesses as the Bill goes through the
Committee and to sit in private again then. However, this is a short
Bill and we do not have a lot of sittings. Coming back into a private
sitting to discuss what happened in the open sitting is not possible.
It will be up to hon. Members to debate the issues that are raised
during the public oral evidence
session.
Question
put and agreed
to.
10.36
am
The
Committee deliberated in
private.
10.44
am
On
resuming—
The
Chairman:
We are now in the open oral evidence session and
will hear from representatives of the Department for Innovation,
Universities and Skills. I welcome the witnesses. Bill Rammell, would
you like to introduce your colleague to the
Committee?
Bill
Rammell:
Mike Hipkins is the director of student
finance.
Q
1
Mr.
Robert Flello (Stoke-on-Trent, South) (Lab): The
issue of the face value of the student loan book is of concern and
interest to me. Historically, Governments of all persuasions have not
always been as successful as we might have wished in valuing assets
that have been sold off, whether one wants to look back to the 1980s or
more recently. My concern is about who has valued the student loan
book, and how you have made sure that that valuation is robust, so that
there is no vested interest in terms of the financial markets knowing
that they will ultimately pick up something that will make them a large
profit at the expense of the taxpayer. Finally, regarding the future
value of the student loan book, how have you projected forward to
ensure that its value in future is recognised in this current valuation
and that, for future sales, that value is
reflected?
Bill
Rammell:
I would say this, would I not, but I think
that, regarding this Government’s management of student loan
finance since 1997, we have a good track record of getting the
estimates correct. We already have a track record in respect of the
sale of the mortgage-style student loans, where I think that we
demonstrated value for money.
Clearly, the
Bill gives us enabling powers to undertake value-for-money assessments
over a long period of time and also to undertake sales of the student
loan book. In order to arrive at valuations, we have undertaken those
assessments internally and also with external advice, and consequently
we have robust estimates. However, within the context of having
enabling provisions, we have said within the forthcoming three-year
comprehensive spending review that we are looking to make sales to the
tune of £6.3 billion. Having said that, if we do not judge that
the market conditions are appropriate for those sales and we do not
think that we will get value for money, those sales will not go ahead.
Just because we are passing the legislation does not mean that the
sales will automatically take place within a certain time
scale.
Q
2
Sarah
Teather (Brent, East) (LD): May I ask a further question
on that subject? I wonder whether or not there has been any discussion
of the National Audit Office report into QinetiQ and, if there has
been, has that informed your deliberations about value for money for
the student loan
book?
Bill
Rammell:
We obviously look at all reports regarding
the sale of Government assets. However, what we are looking at here is
a particular type of sale where we have a robust track record. The sale
of the mortgage-style loans that took place in 1998 demonstrated value
for money, but I am not sitting here today saying that, by passing this
Bill, we will automatically undertake x amounts of sales within y
periods. It will depend on the market circumstances and on both the
internal advice and the external advice that we receive about market
conditions. If we cannot demonstrate value for money, the sales will
not
proceed.
The
Chairman:
I think Rob Wilson has a question that might be
slightly out of order in terms of the scope of the Bill. I will not
bring him in if it is not within its scope.
Q
3
Mr.
Rob Wilson (Reading, East) (Con): It is subsequent to what
the Minister just said. What are the procedures that you have
laid down in your Department to ensure that you achieve the best value
for
money?
Bill
Rammell:
We undertake detailed internal assessments
through my own officials in conjunction with those at the Treasury. We
have also sought external commercial advice about the way in which
these sales will be conducted. We will be appointing a sales adviser to
administer the establishment of the special purpose vehicle that will
be set up to take on board the loans that are sold. There will also be
a rigorous ongoing assessment of the market conditions to determine the
stage at which x amounts of loan finance are sold. Overseeing that
process, the National Audit Office has already indicated that it will
review the first tranche of sales and will be reporting to the Public
Accounts Committee. Within that context, there is a rigorous and robust
framework in place to ensure that we not only get value for money, but
demonstrate that we have achieved
it.
Q
4
Mr.
John Hayes (South Holland and The Deepings) (Con): Further
to that question and before I start my series of questions, what
mechanisms are in place to test market conditions? As other people
asking questions have made clear and as the Minister has said, this
matter is partly about track record, but it is also partly about market
conditions. It would not be beyond the wit of man to devise a set of
circumstances where you could test market conditions by
well-established mechanisms. Has that been
done?
Bill
Rammell:
Recently, there has been some market
volatility. While I think that there is still some market volatility,
there are indications that the situation is improving. It is crucial
that I make it clear that, while we indicated in the comprehensive
spending review that we intend to recoup £6.3 billion from these
sales over the next three-year period, that is not set in tablets of
stone. A major element of the internal and external advice that we will
receive will focus on the market conditions and whether they are ripe
for getting best value for money. If, according to both the internal
and external advice, that test is not proven and the bar is not passed,
the sales will not
proceed.
I am not
sitting here today saying definitively that we will reap £6.3
billion and engage in sales to reach that amount during the next
three-year comprehensive spending review. That is our intention, but it
is not set in tablets of stone. It will depend on the market
conditions.
Q
5
Mr.
Hayes:
The Minister has spoken of both
internal and external advice. Presumably it is
reasonable to ask him from where that advice has been sourced. One
wants to feel that the Government are taking the best possible expert
advice on this
matter.
Bill
Rammell:
Mike, do you want to go through the detail
of
that?
Michael
Hipkins:
There are three elements to understanding
how the value-for-money equation will work. The first is that the
market understands the nature of these loans because they are different
from consumer credit. We have to ensure that the market
understands their particular characteristics. The
second element is to ensure that the market is functioning properly,
with proper
competition.
The
third element is to do some form of value-for-money comparator, which I
think is the element to which you are referring. That is to do with
estimating the difference between the value for money of retaining the
loans on the Government’s balance sheet and selling them into
the market. That is a complex calculation and is about trying to
discount the future cash flows that will come from loan
repayments, as against a lump-sum payment coming to the
Government soon. Those are estimates rather than complete
answers.
We must also
factor it in that there will be some transfer of risk from the
Government to the private debt owners. That element of risk will have
to be given a financial value and factored into the equation. To do
that, we are getting advice from our colleagues in the Treasury,
speaking to the NAO and taking advice from commercial companies that
can help us in the overall sale
process.
Bill
Rammell:
I want to follow that up explicitly. For the
overall advisory process, we have engaged KPMG and in terms of
assessing the external market, we have engaged Morgan Stanley and
Goldman
Sachs.
Q
6
Mr.
Hayes:
So that someone else can get in, I will make this
my last question and give respite to the hard-pressed witnesses. The
point about advice and experience is presumably that the Government are
drawing on precedent. We have the precedent of the sale from 1998 and
1999. What specific lessons were drawn from that? What international
comparisons are there? Has this been done elsewhere and what can
reasonably be learned from that? The critical thing is that we get best
value for money, that we sell at the right time and that the matter is
managed as effectively as possible. It would be useful, therefore, to
get some feel for what the Government have learned from past experience
here and
elsewhere.
Bill
Rammell:
I will make some comments and Mike might
wish to follow up. Certainly, this is a different type of sale to the
1998 sale, which had an ongoing discount arrangement. That is built
into the sale price with these sales and that, in part, is because the
rules governing the accounting for Government debt have changed. If we
conducted this sale on the basis of the 1998 sale, we would not
demonstrate that we were transferring the debt from the public to the
private sector, so that is certainly different from what happened in
1998.
With regard to
international comparisons, it is difficult to draw analogies. There are
few examples of countries that have gone down the road that we have
taken, where the student finance system is derived from the public
sector. Obviously, there is a huge amount of student debt in the United
States, but that tends to be private debt, so I am not sure that there
are easily comparable international
examples.
Michael
Hipkins:
I will follow up on the lessons to learn
from previous debt sales. As the Minister said, there are significant
differences between 1998-99 and
now, but the continuing element is that there is an appetite in the
market to buy debt of that sort, and that makes us confident that there
will be a market for income-contingent student loans that will be sold
this time
around.
Q
7
Sarah
Teather:
I want to ask some further questions on the
answers that you have just given. First, on the point about
mortgage-style loans, could you give some indication of the level of
discount that was given, which you undertook to do after Second
Reading? Secondly, on the point about transferring risk, is not it the
case that if a student dies or goes bankrupt, the Government underwrite
that risk? To what extent are we really transferring risk to the
private
sector?
Bill
Rammell:
That is the key element that we are
transferring to the private sector. Through the competitive bidding
process, investors will make a judgment about the attrition
rate—for want of a better phrase—that will potentially
take place over the 25-year duration of the repayment of the student
debt. That will take into account factors such as how often students
are likely to earn more than £15,000 a year, above the
threshold, how often they are likely to be unemployed, how many of them
might be permanently disabled and how many of them might die. In those
circumstances, a judgment is reached on what is reasonable to put
forward as a proposal for the sale, and that is part of the way that we
demonstrate value for money.
Michael
Hipkins:
I think the loans will be sold with a set of
fixed terms and conditions, but there are elements of risk that will
transfer, as well. You mentioned that bankruptcy, death and permanent
disability are reasons for the loan to be cancelled as part of those
terms and conditions, but the risk associated with the loans is rather
wider than that.
On
mortgage-style loans, it is quite difficult to ascribe a precise
discount because the loans were sold for face value with an interest
rate subsidy that has been paid and continues to be paid because those
loans are not yet all paid off. Therefore, it is quite difficult to
ascribe a discount value. As the Minister mentioned, it would be unwise
to say what sort of a discount the Government are prepared to take on
loans this time around, before the loans sale process has not even
started.
Q
8
Angela
Watkinson (Upminster) (Con): I wonder if I could probe a
little further on how the figure of £18.1 billion was
calculated. Is that the value of current loans plus interest up to the
date at which that calculation was made, or is it current and any
future loans if they were to run to their full term, bearing in mind
the vagaries of the market and other complications? How were
comparisons made between the full term value and the possible sale
income of the bulk of the loans now? You have already explained how
complex those calculations are, but I am not clear what the
£18.1 billion represents.
11
am
Michael
Hipkins:
The £18.1 billion represents the loan
balances as of 1 April 2007. That is the English loan balances, of
which £17.1 billion is for income-contingent loans—the
new-style loans that will be sold,
rather than the old mortgage-style loans. It is the value of the
balances of the loans at that
point.
Q
9
Angela
Watkinson:
Will it be possible to compare the estimated
sum that will be realised from the sale, to the value of the loans if
they were to run for their full
term?
Michael
Hipkins:
Yes. That underpins the value-for-money
framework that I mentioned a few moments
ago.
Bill
Rammell:
That is the key comparator to be drawn as a
fundamental part of the value-for-money framework. The level of the
outstanding loan balances, given that we are in the early phase of the
income-contingent loan system, will expand rapidly over
time.
Q
10
Mr.
Hayes:
While we are on the subject of value, the 2007
Budget report—in paragraph 6.42, from memory—states that
the sale will yield some £6 billion. On Second Reading, the
Minister used a phrase such as “at the higher end” in
relation to that figure. It is a projection for 2010-11. I cannot
square that with the current face value of the book. Presumably, you
have made projections of how the face value will change over that
period. This is a dynamic situation, rather than a static one, so what
are those projections? We must have some feel for how the book will
change and grow over the period, which will affect the figure of
£6 billion, will it
not?
Bill
Rammell:
The £6.3 billion is a cautious
estimate; it is not set in tablets of stone. We have undertaken it
cautiously, on the basis that we have sufficient information on the
volume of sales needed to recoup that sum, and that we have enough
information from within the marketplace for that to take place. I made
the point on Second Reading that it would be unwise for us to make
public statements about either the expected face value of the loans to
be sold or the expected proceeds. Were we to do that, we would cut the
ground from under ourselves with regard to the competitive bidding
process.
Q
11
Mr.
Hayes:
Hence the use of terms such as
“around” and “at the higher end”, which are
sufficiently imprecise as not to give away commercially sensitive
details. Is that the
point?
Bill
Rammell:
I have to be honest—I would have to
check Hansard. I do not recall using the phrase “at the
higher end”. The point that I was trying to make was that it is
a cautious estimate of the proceeds that we think that we can gain over
three years. But we are not definitively as of today saying that we
will take forward those loan sales to achieve that sum of
money.
Michael
Hipkins:
In order to achieve the proceeds of
£6.3 billion, we will need to sell sufficient loans to cover
those proceeds. That is not the whole of the £17.1 billion that
is the income-contingent loan balances as of 1 April this year; it will
be as many of those loans as need to be sold. It is important to
understand that this is also a continuous process; the £17.1
billion will rise, we think, to £21 billion on 1 April 2008 and
to £25 billion on 1 April 2009. The Government plan a continuous
series of loan sales in order to manage this large, increasing
asset.
Q
12
Mr.
Hayes:
That is precisely the information I was trying to
get at. Essentially, the projected value of the book will grow, but the
figure of £6.3 billion will remain static. The question is: what
percentage of the face value do you sell? Is that where we are? There
is a determination to make £6 billion-ish regardless of what
percentage we
sell.
Michael
Hipkins:
The forecast figure of £6.3 billion
is for the whole of the 2008-09 to 2010-11 CSR period. Clearly, in the
next CSR period there will be further loan sales, and the value to be
derived from those is yet to be
determined.
Bill
Rammell:
I will not give the percentage figure today.
Were we to do that, we would reveal the discount that we would expect
to come about through the competitive bidding process. As part of the
value-for-money framework, I want to maximise the receipt for the
public
sector.
Q
13
Mr.
Wilson:
Can you give us some sort of guide as to what area
you are thinking of in terms of how much you will have to sell to raise
the £6.3 billion? I know that you do not want to give any
figures, but is there a framework that you are operating within on
which you could raise the veil and let us have a quick peep
at?
Bill
Rammell:
I am a polite Minister, but I am struggling
to avoid the word no. The value-for-money framework will need to
demonstrate that there is enough market information about the sales for
people to come forward and make reasonable proposals. We will have to
make a judgment about the volatility of the market and, crucially, we
will have to undertake a comparator between what the net current value
of the loans will be if they are sold as opposed to remaining on the
Government’s books. It would be extremely counter-productive
from a value-for-money perspective to give a greater indication than
that.
Q
14
Mr.
Wilson:
Would I be right in saying that in the previous
sales in 1998 and 1999, you lost about a third of the value? So we
would be talking about £9 billion-plus to raise £6
billion if we were to use the previous occasions as examples for this
sale.
Michael
Hipkins:
In some ways it is quite difficult to make a
direct comparison with the mortgage-style loan sales and the sales that
are proposed this time. The mortgage-style loan sale was just a
straight auction, but it was an auction with an interest rate subsidy
that continued throughout the life of those loans. We are not proposing
to sell the income-contingent student loans in that way. It is quite
difficult simply to make a straight comparison between one and the
other.
Q
15
Mr.
Hayes:
I am much more nervous about this than I was when
the questions began. We seem to have arrived at a situation whereby we
have a value of an asset that we are going to sell in parts. While
there may be a proper consideration in respect of value for money, if
we are determined to sell £6.3 billion-worth of loans, we can
vary the proportion that we sell to meet that target. That is very
risky, is it not, because in a normal sale the value would be set by
market conditions? This sale, regardless of market conditions, could be
designed to raise £6.3 billion and what will
vary is how much of it is sold. That is not a standard transactional
relationship. It gives me cause for concern. I wonder what your
comments are on
that.
Bill
Rammell:
With respect, I have been at pains both on
Second Reading and today to make it emphatically clear that the
£6.3 billion income projection during the current CSR period is
an estimate of the amount of money that we will gain. It is not a
guaranteed sum. If the market conditions are not appropriate and if we
cannot demonstrate value for money, the sale will not go
ahead.
Bill
Rammell:
Yes. Independent advice will inform our
analysis.
Q
17
Mr.
Wilson:
In that respect, you may find that during the sale
process you get some pressure from the Treasury to raise the funds that
it requires to fill black holes in the CSR. That pressure may force you
into selling the loans at a level at which you are unwilling to sell.
How will you stop the Treasury putting pressure on you to do
that?
Bill
Rammell:
As you would expect me to say, I do not
think that we have black holes within our spending plans. If we analyse
the Opposition’s spending plans, we find somewhat greater black
holes.
Q
18
Mr.
Wilson:
But if I may, Minister, you have already suggested
that £6.3 billion is in the three-year spending plans? If you
are therefore also saying that you may or may not raise that money,
that immediately leaves a hole in the spending review, because if you
do not raise the money, there is a deficit.
Bill
Rammell:
No, because if we are unable to achieve that
sum of income, there is a range of means by which the Treasury Red Book
can be squared: there could be greater than anticipated income from
other sources or committed expenditure might not be as high as was
anticipated, and ultimately the public sector net debt requirement
could increase while remaining within the golden rule framework. I am
confident that we have cautious and prudent estimates in these
proposals, and the value-for-money framework, on which the National
Audit Office will make a judgment that will be reported to the Public
Accounts Committee, will guide both my Department and the Treasury in
undertaking these sales.
Q
19
Mr.
Wilson:
Could I just say, Minister, that I am not that
reassured by what you say? In effect, you are saying that the black
hole will be dealt with either through cuts in expenditure—I
hope that I am correct in saying that—or because you expect to
get extra revenue from elsewhere. With the dark economic clouds hanging
around, it is highly unlikely that any black hole will be filled with
extra revenue from elsewhere. So I return to my main
point—
The
Chairman:
Order. May I remind the hon. Gentleman that we
must remain within the scope of the Bill? I think that going on to
Government spending
plans in general is a bit wide. If you would like to narrow your
questions to the Minister and not get into the more general point about
spending, that would be much
appreciated.
Bill
Rammell:
If I can just say so, Miss Begg, the
Government have an excellent track record in managing the public
finances over 10 years and I think that we would be able to carry that
forward, in major part because the estimates here are very
cautious—
Q
20
Mr.
Wilson:
One of the issues, Miss Begg, is that this is
almost a Treasury Bill rather than a further education Bill. Having
said that, I think that we can move on, because I have exhausted the
line of questioning that you will allow me to
make.
Q
21
Mr.
Flello:
I have a quick supplementary question to the
previous question, to try to get some clarity. Are we looking at a
capital receipt? You talked about income coming in, but would this sale
be a capital receipt to the Department and the Treasury rather than an
income receipt, and therefore have implications for that type of sale?
I will let you answer that question before I move on to my main
question.
Bill
Rammell:
It is an income receipt that is available to
be spent on a range of Government
priorities.
Q
22
Mr.
Flello:
To return to my previous line of questioning,
there is a concern in some quarters that, when Government assets are
sold—certainly, when one goes back 20 years—the financial
markets, for example the merchant banks, had two attempts to make some
money: one was in the form of additional profit from an asset that was
perhaps sold at undervalue; the other was that they could make money
from the advice that they gave and by presenting the asset to market.
Can you give me some information about what proportion of the value of
the sale you anticipate having to pay out in costs to make that sale?
Indeed, can you give me some information about the costs of the advice
that you are receiving from the independent advisers? Furthermore, how
are you testing those costs to ensure that they really are value for
money and that the taxpayer is not bearing a disproportionate cost as
against any other person putting something to
market?
Michael
Hipkins:
Perhaps I can take that question. Given the
size of the sale, the fees and other expenses that are charged by
advisers will be comparatively small. Having said that, we intend that
a competitive process will take place between those institutions that
aim to help us as a sales adviser. We think that that competitive
process will drive the expenses down to a reasonable
level.
Q
23
Mr.
Flello:
Given that there are not hundreds and hundreds of
merchant banks out there that would be able to put this type of package
together, what research are you doing—I appreciate that there
have not been many examples of this process in the past—to
ensure that this sale is comparable to other sales that have been put
through the merchant banks?
Michael
Hipkins:
As I said, we will use the competitive
process and the experience of our colleagues in the Treasury, who
undertake more asset sales than we do, to help us to decide who the
best sales adviser
is.
11.15
am
Bill
Rammell:
This Government are committed to a regime
that we brought forward with the introduction of the income-contingent
loans, that there will be no real rates of interest and the repayments
will start only above a threshold of £15,000 a year. We do not
intend to vary that, and it could be varied by any Government only with
explicit authority from this
House.
Bill
Rammell:
They would. The treatment of both the sold
loans and the loans that remain with the Government will be dealt with
in exactly the same way. The interest rate, the threshold, the
repayment terms and the maximum period for repayment will be exactly
the same, whether one’s debt is owned by the Government or by
the private
sector.
Q
26
Rob
Marris:
Is not the loan purchaser therefore going to be
buying a bit of a pig in a poke, because you are not surrendering the
power to change the loan rules retrospectively? You are specifically
keeping that power, so they will be buying into a bit of an unknown.
For example, a future Government could whack the threshold up to
earnings of £30,000 a
year.
Bill
Rammell:
Within the contract, there would have to be
a compensation clause to assure the private purchaser on that basis.
The implication of your question is: why should a private purchaser go
through with this process? Based on detailed external advice, we
believe that there is an appetite for this type of sale. It enables
investment organisations to diversify their portfolio and to get a
secure level of income over a period of time. In general terms,
graduates who are repaying their student loan finance are a sound
source of repayers. Taking all those factors into account, the advice
that we have indicates, and our judgment is, that there will be a
market for this sort of
sale.
Q
27
Rob
Marris:
What steps will you take to avoid the scandal that
we had with many of the early private finance initiative contracts,
where the contractors made the big money, not by delivering the service
or the goods directly, but by rebundling it and selling it on when
interest rates changed? Huge amounts of money were made by the private
sector at the expense of the taxpayer, simply by refinancing after the
PFI had been signed
off.
Bill
Rammell:
To be honest, I do not believe that the
circumstances with this approach are identical with or analogous to PFI
sales. Clearly, in the competitive bidding process, the purchaser makes
a judgment about the implicit discount rate and, yes, over the course
of time that can be an overestimate or an underestimate. I think that
through the competitive bidding process and
the other criteria that we are using, we will be able to
demonstrate value for money. However, the Government
no longer having to bear that risk by getting the private sector to
bear it over the longer term is one of the advantages to the Government
and the taxpayer that comes from this
approach.
Michael
Hipkins:
I think that the loans sale is not quite the
same as the PFI refinancing that you mentioned. However, we think that
there will be a process by which the loans are restructured and
securitised to be sold into the market in the form of bonds. We think
that there are advantages in doing that. It allows investors to buy
into a different sort of asset class. It allows for the matching of the
investor’s risk appetite. It also allows the adjustment of the
terms of the loans to what investors would like to buy. Those three
factors are important in adding value, compared with just selling the
loans straight. Those processes will be an important part of the sale
process.
The other
important element is the transfer of risk from the public sector to the
private sector. As I mentioned earlier, that is an important element of
the overall
deal.
Q
28
Rob
Marris:
I appreciate that, but many of the propositions
that you just advanced are precisely those that were advanced for PFI,
when many of us pointed out these sorts of difficulties. Sadly, those
difficulties came to pass. Windfall profits were made, particularly on
early PFI contracts, to the point where in later PFI contracts there
was a kind of clawback on refinancing windfall profits. I am asking
whether, to whomsoever you sell, you are going to put some kind of
windfall clawback in your sale agreements, in the event that the loan
purchaser, in a fast-changing marketplace, makes a windfall profit
through some sort of loan refinancing, just as happened with
PFI.
Bill
Rammell:
Were we to put in place such a mechanism, we
would not be transferring the risk in accounting terms from the public
to the private sector. The aim is genuinely to transfer that risk and
ensure that we get guaranteed income over the uncertainty—the
projections can go up and down over time—about the amount of
money gained through the ongoing income receipt from graduates repaying
their loans.
Based
upon the judgment that ministerial colleagues and I made after having
received external advice, we think that we can demonstrate good value
for money through that approach. However, as I said previously, this
measure is not a cast-iron commitment to sale today. Our aim is to
establish a set of enabling provisions that allow us to make the
judgments over a period of time, reach the conclusions and to ensure
that we can demonstrate value for
money.
Q
29
Rob
Marris:
With respect Minister, I suggest that you should
go back to your financial advisors, because you can transfer the risk
on a one-way bet so that, if things start to fall apart, the loan
purchaser will bear the cost, and if there is a windfall profit through
refinancing, the Government can claw back some of the profit. If you
have that kind of one-way bet, of course there will be a price to pay;
the sale proceeds will be lower because it will be riskier for the
loans purchaser. However, you can have precisely the kind of
arrangement that we have under current PFI, whereby if things go
belly-up, the PFI contractor has the problem, and if the contractor
refinances and gets a windfall, the taxpayer will get some of the money
back. I respectfully suggest that you go back to your advisors on that.
If they are telling you that you cannot go down that route because it
would not be transfer of risk, I suggest that they are wrong.
Bill
Rammell:
Within the value-for-money framework, I do
not think that we would be able to demonstrate value for money by
pursuing that approach in respect of those income-contingent loan
sales. That is why we are pursuing those sales in a way that is based
upon precedent, the detailed external advice that we have obtained and,
crucially, the principle that we want to transfer risk from the public
to the private sector. We want to be able to demonstrate that we will
get value for money through this action. I make the point again that
the sales will not go ahead unless we are confident that we can
demonstrate value for money, and the National Audit Office and the
Public Accounts Committee will be able to scrutinise the process that
we will
undertake.
Q
30
Mr.
Hayes:
I want to follow up on a number of the points
raised by Mr. Marris. I wonder whether you might have
considered placing those value-for-money criteria, which you assure us
are robust, on the face of the Bill. It seems to me that a repeating
theme in the questions that have been asked so far, and the absolute
essence of this, is ensuring value for money from the public
perspective. Given your stated determination, I wonder whether we ought
to be clearer about that up front. You are right, of course, that other
agencies will check—you mentioned the National Audit Office and
others will no doubt scrutinise and monitor it—but I wonder
whether that ought to be on the face of the Bill. Did you consider that
and would you consider
it?
Bill
Rammell:
I am not convinced that that needs to be on
the face of the Bill. However, on Second Reading I clearly and
explicitly read into Hansard the detail of the
value-for-money framework that would be undertaken, which gives
considerable reassurance on how those decisions will be
made.
Q
31
Mr.
Hayes:
Further to the previous questions, the advice that
you received on that will have included advice on the likely resale of
the debt. All the information that I have gleaned is that the debt is
likely to be resold in parts or in whole, as is normal practice. What
estimate have you made of the likelihood of that and what implications
does it have for the
sale?
Bill
Rammell:
I think that it is unlikely, although I
cannot guarantee it, that the loans will be resold; I have discussed
that in detail with officials. I say that, based upon the fact that we
envisage it taking place through the establishment via our sales
adviser of a special purpose vehicle to undertake the sales of the
loans. The funds will then be raised via a process of securitisation
and bonds against those sales. That will allow the trading of those
bonds on the markets. I think that that
should ensure a robust income stream. I cannot rule out that, at some
stage, the special purpose vehicle may be sold on, but I do not
anticipate it as a
likelihood.
Michael
Hipkins:
My understanding, if the securitisation
proceeds in the way in which we think that it may, is that the loans
will be sold to the special purpose vehicle, and there they will rest.
The bonds will be the tradable security from
that.
Q
32
Mr.
Hayes:
Would the prohibition, or the partial prohibition,
on resale be so injurious to the prospects of making the original deal
that it would be
unacceptable?
Bill
Rammell:
We have a number of tools at our disposal
for our protection if there were to be an onward sale, such as the
Secretary of State being a party to the sales
agreement.
Q
33
Mr.
Hayes:
Presumably, that is because of the sensitivity of
the product. We are dealing with a product that collectively can be
spoken of in the commercial terms we are using today, but that
individually matters a great deal to the people who take out the loans,
in terms of things such as collection and ongoing security. Is that the
purpose of the
protection?
Bill
Rammell:
Absolutely. We want to be able to
demonstrate, and for the reality to be, that a graduate repaying their
loan finance will see not one iota of difference in the way in which
that process is handled, whether their debt is owned by the Government
or by the private
sector.
Q
34
Mrs.
Nadine Dorries (Mid-Bedfordshire) (Con): Yesterday
afternoon I had the pleasure of attending the graduation ceremony at
Newcastle university. I notice that clause 1(4)(d) enables
“the Secretary of State to
require a loan purchaser to make specified arrangements in connection
with the administration of
loans”.
It surprised me
yesterday how many of the students, six months after
graduating, had not yet found employment. The statistics show that many
take up to a year to do
so.
Using that
provision, would it not be a good idea for the Secretary of State to
instruct the loan companies to provide some kind of respite gap for new
graduates, because while they are waiting to find employment, their
student loan is still clocking up interest? Would it not be a
good point at which to recognise that graduates are taking longer to
find employment? As this sale is going through at the moment should we
not put in some kind of provision to make things slightly easier for
students?
Bill
Rammell:
I do not think that there is any robust
evidence that graduates are taking longer to find employment. We have
increased and widened access to higher education—we have now
reached an access rate of about 43 per cent. for the under-30
population. The access rate has increased significantly, yet the
graduate earnings premium remains substantial and robust; on average,
over the course of their working life, it is worth about
£100,000 more, net of taxation, for a graduate than for someone
with two A-levels. I refute, based on that evidence, that graduates are
taking longer to find employment.
However, the Government have
already indicated that they intend to introduce, from next September,
exactly the kind of provision that you are proposing, whereby we would
institute a five-year repayment freeze for graduates on repayments of
the loan to be undertaken once they have graduated. On top of that, we
are substantially increasing the proportion of students who will be
able to access non-repayable grants. With the changes that we have
already made and those that we are introducing from next September, I
think that we have a fair and progressive system of student finance.
When that is put alongside the fact that applications for university
for the current year are up by 6 per cent., it demonstrates that the
system is
working.
The
Chairman:
We are moving into the dangerous territory of
student finance. Remember to remain within the scope of the
Bill.
11.30
pm
Q
35
Mrs.
Dorries:
Clause 1(4)(d) provides the Secretary of State
with the powers to instruct the loan company. I thought that it would
be an ideal instrument to use. On the five-year repayment freeze, would
interest continue to clock up over those five years?
Bill
Rammell:
It would be a five-year period during which
you would not have to repay your student
loan—
Bill
Rammell:
Yes, and it would mean that you would repay
for longer. But the intention is to give graduates some repayment
respite when they want to buy a flat or a house or to start a
family.
Q
36
Mr.
Flello:
I want to pick up on some of the points that my
hon. Friend Rob Marris raised. I echo what he said about having a
clause that ensured that there was a windfall back to the taxpayer if
anything was sold on.
My question relates to the
transfer of risk. Perhaps I misunderstood or misheard, but you talked
earlier about a contract clause being in place whereby if the threshold
was increased, there would be some compensation back to a purchaser.
That does not strike me as being a complete transfer of risk if there
is something in there that means that the taxpayer can be tapped up for
extra money or a compensation payment if the threshold is increased.
Given that there is not a complete transfer of risk, why is there not
something coming back the other way to ensure that if there is a
windfall, a compensatory payment is made the other
way?
Bill
Rammell:
At the moment the repayment threshold is
£15,000 a year. Were we to raise that to £25,000 a year,
it would have an enormous impact on the amounts of money that the loan
purchaser could expect back. Were we not to put in place such a
safeguard, I do not think that we would have a very
long queue of people saying that they were willing to undertake this
process and to purchase the debt from the Government’s
books.
Q
37
Mr.
Flello:
So effectively, all the potential for future
profit is transferred, but with less
risk.
Bill
Rammell:
No. The risk at the moment to the public
sector is the fact that we have to take an estimate over a long period
of time about how much money will come back to the Government. We have
to take account of a whole variety of factors such as the unemployment
rate among graduates, the number who will be earning above the
£15,000 threshold, the number who will die, and the number who
will be disabled. Taking all those vagaries into account from a
value-for-money perspective, we judge that if we get this right, it
will be a safer bet for the public purse to get that sum of income up
front, which can then be spent on a range of Government priorities.
That is the value-for-money assessment that we are
undertaking.
Q
38
Sarah
Teather:
Picking up on the points that the Minister began
to talk about with regard to onward sales, could he explain that in a
little more detail? I suspect that not every member of the Committee
understands all the terms that were used. Can he explain what
restrictions the Government intend to place on onward sales? The Bill
is a little vague—it uses the word “may”. When
would the Secretary of State’s prohibitions kick in? Would that
refer only to the onward sales of the special purpose vehicle, or would
any of those restrictions apply to the onward sale of bonds? Earlier,
we discussed the terms and conditions for borrowers; how will the
Government ensure that when the debt is sold on those terms and
conditions would always remain the same for the
borrower?
Bill
Rammell:
They would be part of the contract of sale
and legally enforceable. As I said earlier, a toolkit is available
within the Bill to enable this and future Governments to protect the
graduate interest. That may be by means of our enforcing the fact that
the Secretary of State should be a party to the onward sale agreement.
It may be by prohibiting further sales without the Secretary of
State’s agreement. Those mechanisms would enable us to ensure
that things that we put in the initial contract are apparent in
subsequent contracts, such as continuing to use the SLC for the
administration and chasing of debts, and having to have recourse to the
independent assessor. I think that that gives a strong degree of
reassurance.
Q
39
Sarah
Teather:
I am not sure that the Minister has answered my
question. I asked what criteria would mean that the Government would
bring that prohibition in on further sales. What are the reasons that
would cause the Minister to say that we are going to prohibit further
sales? I was asking him to explain the relationship with the special
purpose vehicle and whether it is only with that that those
prohibitions would kick
in.
Bill
Rammell:
We want to have a range of tools at our
disposal if and when the special purpose vehicle is sold on. I cannot
pre-empt every circumstance that could prevail at that
time.
Bill
Rammell:
Hold on. I have already made it clear that I
think it highly unlikely that the SPV will be sold on, so we are in to
the realms of speculation. We have a range of tools at our disposal
that will ensure that the kind of reassurances and commitments that we
have made through the contractual framework to protect the graduate
will be enforced. A starred amendment has been tabled on this issue and
when we get to the line by line stage in Committee, I will be happy to
address it and provide that reassurance. Mike will take up the point
about the difference between the SPV and the bond
sales.
Michael
Hipkins:
I wonder if it would be helpful to explain
what the borrowers whose debt is sold will see and experience. The Bill
provides that the Secretary of State can constrain the new owner to use
the Student Loans Company and HMRC to collect repayments in the same
way as is done now. Borrowers whose debt is sold will see exactly the
same terms and conditions, such as the £15,000 threshold, the 9
per cent. of the excess condition and the 25-year cut-off. All those
conditions will be reproduced for borrowers whose debt has been sold.
There will be no material difference between a borrower whose debt has
been sold and one whose debt has been retained by the Government. It
will still be HMRC collecting the repayments and the Student Loans
Company will still maintain the loan
accounts.
The
difference is in where the proceeds from the repayments will go. They
will be funnelled into the SPV that owns those debts and then
distributed as interest payments and principal payments to bond
holders. The constraints that will be put in the contract between the
Secretary of State and the owners of the debt—the special
purpose vehicle—will be the use of HMRC to collect and the
Student Loans Company to maintain the accounts. Also, all the terms and
conditions set out in statute and regulations will apply as much to the
sold loans as to the retained ones.
With regard to clause 3(6),
imagine at the moment that the sale process will be through
securitisation and a special purpose vehicle. That may be true this
year, next year and the year after that, but in five years’ time
it might be done by some other mechanism. Clause 3(6) provides a
variety of ways in which the requirements on the owner can be laid down
to ensure that the borrowers experience no material difference. The
reason that subsection (6) says transfer arrangements
“may” is that the Secretary of State will chose the
appropriate way for each case. It should not say that he will do all of
them, because they are
alternatives.
Q
40
Angela
Watkinson:
I want to pursue this line of questioning a
little further. Will the Minister confirm that the terms and conditions
attached to the sale of the first tranche of loans will be standard to
the sale of future tranches, and that they will not be open to
negotiation with different
purchasers?
Bill
Rammell:
Yes, unless the Government wish to do that.
Any future Government could undertake to do so. For instance, I know
that the Conservative party is committed to a commercial rate of
interest, which we are not. It is within the Government’s
discretion to vary it, but as long as they did not wish to change the
terms and conditions for both public sector debt and sold debt, the
same ones would be maintained through that
contractual process, even at subsequent sale periods. As Mike has made
clear, we would choose from a range of options available to us in the
Bill as to how we would enforce
that.
Q
41
Rob
Marris:
On that very issue, I will speak about the
arrangements of the declaration in clause 3(6). I am attracted to the
spirit of “shall” rather than “may”
applying to clause 3(6)(a);
namely:
“(6)
Transfer arrangements
shall—
(a)
prohibit the making of further transfer arrangements without the
Secretary of State’s
consent”.
I understand
that, regarding the other two limbs of that subsection, you may wish to
have “may” rather than “shall”, but I would
suggest that the Minister take another look at having a mandatory for
clause
3(6)(a).
Bill
Rammell:
I will address the point now rather than
later on, although I will doubtless address it later on, as well. I
have debated it at length with officials. When we were drawing up the
Bill, I asked why we did not enforce the provision, instead of putting
it as a discretion. Let me state for the record that clause 3(6) sets
out different possible ways in which the Government could ensure that
they are able to maintain protection for borrowers in the case of
onward sales of loans. Under the current classification rules, it is
not likely that we would include in the initial contract a prohibition
of transfer without the Secretary of State’s consent. That level
of control would probably not be consistent with making a proper sale
and transferring the asset from the public to the private sector, but
we want it in there as an option because those rules may alter over
time, so it is worth having the power to do so in the
future.
Rather, in
terms of enforcement, we expect to use one or other of the alternative
methods set out in clauses 3(6)(b) or (c) to ensure that the Secretary
of State is a party to any future contract. That will enable the
Government to ensure, for example, that a new purchaser continues to
use the SLC, as I said previously, and to make the same complaints
mechanism
available.
The terms
and conditions of the loans are protected because they are contained
within the regulations that would come before the House. I am happy to
put on the record that we will ensure that any onward sale contract
continues to protect the borrower fully. If we come to debate the
starred amendment, I would argue that we should resist it, as we cannot
be bound to use all the methods in the Bill. Indeed, I would argue that
it makes no sense to say that we must use two alternative ways of
achieving the end of ensuring that the Secretary of State is party to
the
contract.
Q
42
Rob
Marris:
I will not go much further on this matter, because
I do not want to pre-empt the debate that we may have if the amendment
becomes un-starred and is selected. However, I would again urge my hon.
Friend the Minister to take another look at decoupling clause 3(6)(a)
from subsections (6)(b) and (c), and at having a mandatory for the
former and a permissive for the latter
two.
Bill
Rammell:
Forgive me, but if we made clause 3(6)(a)
mandatory, we would not be able to transfer this asset from the public
to the private sector.
Michael
Hipkins:
That is the case under the current
classification rules, which may change. Under the current rules it
would be unwise to use clause 3(6)(a) because it would cut across the
proper transfer of the assets to the private sector. However,
if the classification rules were to change in the future, it might be
appropriate to use
3(6)(a).
Q
43
Rob
Marris:
Forgive me, but is the purpose to transfer assets
to the private sector or to raise money for the Government? I do not
elide the two, as you appear to be doing. I quite understand the desire
to raise current capital for the Government through a sale, but that is
a separate issue, albeit connected, from the issue to which you refer.
Which is the driving force of the Bill: raising money or transferring
assets to the private
sector?
11.45
am
Bill
Rammell:
It is not that there is an ideological
principle that we want to vest the assets with the private sector; it
is that we do not believe that it is the optimum use of Government
resources and the best value-for-money mechanism for the debts to be on
the Government’s books as opposed to the private
sector’s. It is about transferring that risk and generating an
income stream up front for the Government—the two are
related.
Q
44
Rob
Marris:
Therefore, one is a kind of income argument and
one is, in fact, an ideological argument. I understand your
position.
Bill
Rammell:
I do not think that the second is an
ideological argument. It is about the best means of securing the public
perspective.
Q
45
Mr.
Hayes:
Four or five questions arise from the exchanges
that have taken place. Is the reason for the sale essentially to
transfer risk, or is it about realising the financial benefit from the
sale of the
asset?
Michael
Hipkins:
The underlying reason for the sale is to
manage a public asset well. This is a large public asset as it stands;
we have mentioned that it is worth £17 billion now and will grow
to £25 billion in two years. The issue is how to manage that
asset in the best way. The argument is that two things can be done:
first, you can reduce the risk on the Government’s balance sheet
by selling the loans; and, secondly, you can at the same time helpfully
raise some income, which can be used for the Government’s other
spending
purposes.
Q
46
Mr.
Hayes:
Therefore, it is about both realising the value of
the asset and transferring the risk. The Minister, however, has made it
clear that the risk is very low, which makes the sale attractive. We
were told that the sale is attractive because we know where people are,
they have a good record of repayment and the actuarial issues that the
Minister talked about—death, disease and disability—are
entirely predictable. Therefore, this is a low-risk product for the
private purchaser, but we are selling it because it is a high-risk
product for the Government? Is that
correct?
Bill
Rammell:
It is not entirely predictable. Although we
have had some experience since 1998, this is still a relatively new
area for the Government. Although the
risk is lower than some others within the marketplace, our judgment is
that this level of risk, whatever it may be, is more appropriately
dealt with in the private sector than on the Government’s books.
However, we will go down that path only if the criteria that
demonstrate value for money are
met.
Q
47
Mr.
Hayes:
I understand that. The significance of value for
money and the need to be clear about the framework for ensuring it is
the repeated theme emerging from these questions. Perhaps we will
discuss that later when we scrutinise the Bill in more detail. Are the
Government being advised by Rothschild’s, as they were last
time?
Michael
Hipkins:
The process of selecting the
Government’s sale advisor is not yet
complete.
Q
48
Mr.
Hayes:
Okay. Presumably, for that reason, there is no
clear advice on the cost of the
sale.
Bill
Rammell:
In arriving at our current situation, we
have already sought and received external advice and, with regard to
the sales process, I have set out that we have already been advised by
KPMG, Goldman Sachs and Morgan
Stanley.
Q
49
Mr.
Hayes:
What is the estimate of the cost of the sale?
Obviously, the revenue will be the value realised in the sale minus the
cost, but we have been given no estimate of the
cost.
Michael
Hipkins:
As I said, we cannot estimate the cost of
the sale until we have been through the process of recruiting the sales
adviser, because part of the cost will be the fees that they charge the
Government. As I mentioned, the competitive process of appointing a
sale advisor will get us a competitive set of
fees.
Q
50
Mr.
Hayes:
I am sorry to interrogate you about this, but there
must be some notional view of the likely cost of the sale. For example,
the Minister talked about setting up a vehicle to ensure that the
matter is dealt with in the most appropriate way, for some of the
reasons that we are debating. Surely, there must be some notional feel
for what the cost of the sale will be.
Bill
Rammell:
With respect, we are in a competitive
bidding process at the moment. In my view, it makes no logical
financial sense from the public perspective to reveal our hand in
advance of that competitive process being
completed.
Q
51
Mr.
Hayes:
I am sorry, but I do not buy that at all. That is
perfectly true in terms of the value of the asset: it is absolutely
right that you want to be, to some extent, commercially sensitive about
the value and the likely price that would be paid for the asset.
However, that has no relevance to making an estimate about what it will
cost you to sell the asset, because whatever it costs you to sell it,
the people who bid for it will pay—I do not mean the cost of the
product, but the cost of the sale.
Bill
Rammell:
The cost of the administration, for want of
a better phrase?
Q
52
Mr.
Hayes:
Yes. The cost to you—the organisational
cost, the setting up cost and the marketing cost. All of those things
will have a cost. Obtaining advice has a cost. You said you have taken
advice and will continue to do so from a number of sources; you said
that you will establish a mechanism for selling the product, and you
said that you will market the product. All of those things have costs
and they may be very substantial costs; they may not be substantial
compared with the sum of £18 billion, but they are certainly not
insubstantial in relation to our scrutinising this matter with proper
diligence.
Bill
Rammell:
There is a difference here, I believe,
between the cost of the advice that we have already received and the
administration costs that will result from setting up the sales
adviser. I am happy to try to provide you with a figure on the first
issue; some of the costs of that have already been included in the
process. Can we try to get that
figure?
Michael
Hipkins:
Yes, we can. However, there is another
important point to make. Although there will clearly be a competitive
process for buying the assets in the end, there will also be a
competitive process for providing advice to the Government. It might
not be commercially sensible to say what the Government think that
price ought to be while that competitive process is under
way.
Bill
Rammell:
But to be helpful to the Committee, I can
say that there is a sum of money that has already been spent, and I see
no reason why we should not be able to provide that figure for
you.
Q
53
Mr.
Hayes:
That is most helpful. With your indulgence, Miss
Begg, can I just pursue this issue of resale? It is not inconceivable
that, if the product is resold, it will be resold to a body or
organisation underwritten by the Government. I accept that the Minister
says that that is unlikely, but it could happen. For example, I hate to
raise the name, to the embarrassment of the Minister, but the asset
could be resold to Northern Rock, could it not? There is nothing to
stop that happening. If the sale is restricted by the means that are in
the Bill, as I understand it, there is nothing to stop the asset being
sold to an organisation that is underwritten by the
Government.
Bill
Rammell:
I will not prejudge every individual
organisation and every individual circumstance. However, in the Bill we
have tools at our disposal. If the accounting classifications were to
change, the Secretary of State would have to be party to a sale
agreement, which provides an ability to approve the sale or not.
Similarly, the Secretary of State may prohibit the making of further
sales without his agreement. In both circumstances, the Secretary of
State effectively has a veto over any sale.
Q
54
Mr.
Hayes:
Yes, but the nub of what I thought that you said
earlier when answering questions from Labour Members was that the
principal reason for that veto was to protect the interests of those
graduates who were party to this process. Therefore, the reason that
you would have ongoing involvement was to ensure some of the things
that you were questioned about earlier—the way that debt would
be collected, the interest rate, and so on. I was not aware that the
Secretary of State’s involvement was to prohibit certain
commercial decisions.
What I am describing is a set
of commercial circumstances in which a purchaser might choose to resell
and would do so, presumably, according to market conditions. Are you
now saying that the Secretary of State would have ongoing powers to
stipulate to whom the asset may—or may not—be
resold?
Bill
Rammell:
To protect the graduate, there are a variety
of judgments that the Secretary of State will have to reach in order to
agree to a sale. The Secretary of State would want to ensure that we
are protecting the graduate through any onward sale. For the record, I
do not accept the implication of what you are saying about particular
organisations that may come forward to seek to
purchase.
Bill
Rammell:
I know why you use Northern
Rock.
Mr.
Hayes:
But it could be any organisation that was
underwritten or supported by or had some involvement from Government.
Any number of commercial organisations have a relationship with
Government that might make resale inappropriate or certainly
undesirable—not from the student’s perspective, although
that may also be true, but from the Government’s perspective, as
a matter of public policy. It seems to me that you will have a
reasonable amount of control over the first sale of the product, but
whether you will have any significant control over some of the
subsequent commercial activities, which might in the end be unhelpful
from a public interest perspective, bears further scrutiny. You must
have considered that in
detail.
Bill
Rammell:
The two principal tools at our disposal
enable the Secretary of State to reach a judgment on whether any onward
sale should take place, either by the Secretary of State, were the
rules of classification to change, being party to an onward sale
agreement or by the Secretary of State being able to prohibit further
sales without his or her agreement. That is fairly
robust.
Q
56
Mr.
Hayes:
Absolutely. So it is robust and the Secretary of
State will exercise, on advice of course, a commercial
judgment—not simply a judgment about the protection of
graduates, but a judgment about whether a particular resale is
appropriate in the public
interest?
Bill
Rammell:
The public interest is the same
as the graduate’s interest. Within that framework, the
Secretary of State would make those judgments under advice,
yes.
“HMRC
has temporarily suspended its data sharing operations with the SLC in
respect of student loans”.
Could you tell us what the current status
of that process
is?
Bill
Rammell:
It is still suspended. Let me reiterate for
the record what I said on Second Reading, because I am very conscious
that hon. Members will want to probe this area. I said,
“No breaches of data
protection protocols have occurred in respect of student loan
administration... we are certain that no data have gone
missing in respect of student loan
administration.”—[Official Report, 22 November
2007; Vol. 467, c. 1392.]
But
clearly, as a result of the two missing discs within HMRC, the
Chancellor of the Exchequer has rightly given instructions for a
Government-wide review of data-transmission processes. We are part of
that within the Student Loans Company, which is why that particular
mechanism is suspended for the
moment.
Bill
Rammell:
I would hope, within a reasonable period of
time. Progress is being made. I cannot give you a specific date today,
but I would hope, within a reasonable period of
time.
Q
59
Mr.
Marsden:
Fine. I am grateful for that and for the robust
repetition of what you said on Second Reading. However, recent events
inevitably raise the question whether provisions for data protection in
the Bill, which obviously was drafted before the particular problems
that we have had, remain sufficiently robust. Therefore, I wanted to
ask you on that front whether you have reviewed the provisions for data
protection in the Bill, what additional measures you have considered,
and what conclusions you have come to as to whether additional measures
are
necessary.
12
noon
Bill
Rammell:
Again, I made this point on Second Reading.
We are committing ourselves to a process that will not start until
April next year. Nevertheless, these are important and serious issues.
At the top of our priorities is the importance of maintaining the
security of personal information. In the context that no breaches of
the protocols have taken place, and we are certain that no data have
gone missing in respect of student loan administration, there was
nevertheless a Government-wide review initiated by the Chancellor. My
noble Friend, Lord Triesman, as the Minister responsible for the
Student Loans Company, immediately initiated a review of all our
procedures. That review is ongoing and I hope that within a reasonable
period of time we will reach conclusions—certainly well in
advance of any sales taking place next
year.
Q
60
Mr.
Marsden:
That is understood, but you will also understand
that the Committee, in scrutinising the Bill, wants to probe a little
further into what the hypothetical situation for robustness might be
when the Bill is finally enacted.
I am going
to press you further on the issue of encryption. I do not need to go
over this, but encryption was a key issue in the problems that took
place with the missing personal data on child benefit. I want,
therefore,
to ask you two specific questions, although I do not want to bamboozle
those of us who might not be as technically literate in such matters as
others. First, is the level of encryption envisaged for data protection
in respect of student loans similar to that which should have applied
in the case of Her Majesty’s Revenue and Customs and the missing
personal data relating to child benefit? Secondly, at what level within
your Department—or the Department that will eventually supervise
data protection and its potential transferral—will that
encryption be supervised? I appreciate that you may not be able to be
specific on those matters today; I do not know whether Mr.
Hipkins can help us further on that.
Bill
Rammell:
Let me try to give some reassurance. Before
the Committee met, I thought about areas that Members would have
concerns about and anticipated that this would be one such area. Let me
be clear and explicit: personal data is currently exchanged between the
SLC and owners of the old mortgage-style loans electronically, using a
secure virtual private network. That VPN is facilitated using an
internet protocol secure encrypted tunnel and that method of data
sharing is considered very robust by industry standards. Most people
who have passed comment on recent events would accept that to be the
case.
In respect of
the Bill, as we plan to require purchasers of income-contingent
repayment loans to use the SLC to administer and enforce the sold
loans, loan account data would not need to be transferred to the
purchasers for day-to-day purposes. In the event, however, that the
purchasers require access to data—for example, for audit
purposes—the method of data transfer would be secure and
encrypted. That should provide reassurance to hon. Members on that
account. As part of the Government-wide review, even though we are
certain that there have been no breaches of protocol at the SLC and no
data have gone missing, all processes are being
reviewed.
Q
61
Mr.
Marsden:
That is extremely helpful. The detail is helpful.
I am sure that those who are more technically literate than I am will
peruse some of those details carefully. I am sorry to have to refer
back to the HMRC case but, of course, it is the case on which the
questions are now being focused. You will recall that one of the
problems—I do not want to prejudge the outcome of any
inquiry—was that it was alleged that the material was sent
unencrypted by a junior official. Of course, that raises the question
of the level at which encryption will be authorised and supervised.
That is one question that I want to press with Mr.
Hipkins.
Michael
Hipkins:
SLC computer systems already have levels of
security such that the number of people who have access to the full
database is limited, and access to any means of copying parts of the
database on to moveable media is also limited. So there are already
systems in place to ensure that there is not free access to the whole
database or to means of downloading it on to moveable
media.
Michael
Hipkins:
The SLC is not a civil service organisation,
so its grades are different, but the highest level tends to be with the
analysts and some of the IT specialists.
Q
63
Mr.
Marsden:
That is helpful. May I move on to discuss some of
the issues relating to the release of data to potential purchasers? I
know that you have touched on this, but just to clarify the issue for
the Committee, could you tell us what sort of data you intend to
release to potential purchasers?
Bill
Rammell:
Clearly, a purchaser would need some
individualised information to make an assessment of the price they were
prepared to pay. That would be undertaken on an anonymised basis, so
there would be no personal details. We are also making it clear in the
Bill that the enforcement of repayments would be undertaken through the
Student Loans Company in the name of the private investor. Therefore,
for any of those mechanisms there would not be a need for the
individual’s information to be passed on to private investors.
The only circumstances in which there may be a need for individualised,
identified information would be in respect of audit and due process,
and that would be in a handful of cases, relatively speaking. Again,
the data protection framework would be in place. We are also increasing
the criminal penalties associated with the unwarranted releasing of
detailed personal data to third parties.
Q
64
Mr.
Marsden:
In drawing up the contract with the SLC, what
procedures are in place to obtain students’ consent for the
release of information, anonymised or otherwise?
Bill
Rammell:
The student, on graduation, must sign
certain consents.
Michael
Hipkins:
The SLC is bound by the Data Protection Act
1998, as others are, and the release of information to others is
controlled by that. Where information is for auditing, as the Minister
said, the details can often be anonymised.
Q
65
Mr.
Marsden:
Just to be clear, are students implicitly to
understand when they sign the contract that the data may be used
individually for audit purposes and collectively on an anonymised
basis, or is that explicitly stated in the contract that they
sign?
Michael
Hipkins:
I am afraid that I cannot remember the
detail of what the student signs, but I imagine that it will say that
the Student Loans Company agrees to be bound by the Data Protection Act
and all the protections that it brings.
Q
66
Mr.
Marsden:
It would be helpful to me and, I suspect, the
Committee if we could be provided with that information at some stage.
The only reason I am being pedantic is that concerns will be raised,
rightly or wrongly, about consent as we move into the private sector,
and it is important for the Committee to know precisely what situation
pertains. Would it be possible for you to give us that
information?
Bill
Rammell:
We can provide that.
Michael
Hipkins:
May I add, though, that for information that
comes from HMRC, there is already a so-called HMRC gateway from HMRC to
the SLC? There is a tighter level of control over those personal data,
and that will extend, through the Bill, to any debt
owner.
Q
67
Mr.
Marsden:
We have had some discussion about the
implications of selling on loan material, and I appreciate that you,
Minister, have said that, in your opinion, those implications are
likely to be less than has been suggested, for the various reasons that
you have given. Nevertheless, the issue may arise. If the situation
were such that there was a significant selling on of debt, where does
that leave us in terms of the people who buy the debt being obliged to
observe whatever protections and safeguards you have originally
specified to the original
purchasers?
Bill
Rammell:
That will be enforced and re-enforced at
every stage of a subsequent sale through the contractual process, and
will be overseen and bound by the regulations concerning student
finance that are passed within this
place.
Mr.
Marsden:
To be absolutely clear for the purposes of the
Committee, the fact that there may arise a situation, to use that
phrase, where an initial sale of a student loan chunk is subsequently
outsourced to another organisation, that will not affect the original
requirements in terms of data protection that were placed on the
original
purchaser.
Bill
Rammell:
Absolutely.
Q
68
Sarah
Teather:
I think that the Minister has answered our
questions, but I will just get him to clarify, to make sure that I have
completely understood. Can he say that no individual data will be
passed on if the graduate defaults on their loan payment—that no
individual data will be passed from HMRC or the Student Loans Company
to the owner of the
debt?
Bill
Rammell:
That is correct. We are specifying through
this process that the Student Loans Company would be the agent for the
private investor, or the special purpose vehicle, and that there need
not, in respect of those cases, be the passing on of that
detail.
Q
69
Sarah
Teather:
And there will not be? Are we clear that the data
protection legislation ensures that that is the
case?
Bill
Rammell:
This Bill ensures that, not the data
protection legislation.
Michael
Hipkins:
I think that it is right to say that when
the loan is sold to somebody else, that owner then has the right to the
information, but I think that what the Minister said is that, for all
practical purposes, with the Students Loans Company acting as the agent
of the debt owner, there will be no need to transfer data from the
Student Loans Company through to the debt owner, because the SLC will
do everything that the debt owner needs.
Bill
Rammell:
There is the caveat that I set out for audit
and for due diligence purposes, which would require that, but that is
going to be in a handful of cases, relatively
speaking.
Q
70
Mr.
Hayes:
We know from the history of collateralised debt
obligations that they are frequently sold on and broken into parts. It
is possible that that may mean that the product is sold
overseas to
companies beyond UK jurisdiction. Has the Minister
given that any consideration, and if so what
conclusions has he come
to?
Bill
Rammell:
Again, I might want to comment on this. I do
not think that there is the financial attraction in establishing, or
selling on, the special purpose vehicle that would generate the market
demand for that, but the sale and the exchange is going to take place
through the bond process.
Michael
Hipkins:
Yes, that is absolutely
right.
Michael
Hipkins:
The process was different in that case. It
was not sold to a special purpose vehicle. In the case of the
previous down-sales, it was sold to Rothschild, which then did the
securitisation. In this case, the sales adviser will do the
securitisation on behalf of the
Government.
Q
72
Mr.
Hayes:
Have we got a clear idea about what happened to the
debt? Are you saying that the purchaser still owns the whole of that
debt?
Michael
Hipkins:
I am not close enough to the detail to be
able to say what precise changes have taken place to the ownership of
the debt since it was first
sold.
Q
73
Mr.
Hayes:
Would it be useful to the Committee for the
Minister to come back with some details on that? That would,
presumably, reassure us, or indeed frighten us, about what might happen
in this case—hopefully, the former rather than the
latter.
Bill
Rammell:
I am happy to do that but, again, in the
mechanisms that we are setting out here, we would have an ability,
first, to agree or not to the onward sale and, secondly, to enforce the
terms and conditions so that, even if there were to be a subsequent
onward sale, the graduate would see no
difference.
Q
74
Mr.
Hayes:
Are those terms and conditions absolutely legally
binding on the initial purchaser and subsequent purchase in respect of
the anonymising of
data?
Michael
Hipkins:
Yes, that will be set ou+t in the
contract.
Q
75
Mr.
Hayes:
Again, for the benefit of the simple souls on the
Committee such as myself how will the data be anonymised? I do not
understand what form it will take. It might be useful to have a feel
for how that happens. Speaking as a former businessman, if I were to
buy a product I would want to know a fair bit about it, not only for
audit purposes, although I appreciate that point, but also to value it
from the perspective of a potential purchaser. There would have to be
some exposure to make an assessment of
risk.
12.15
pm
Bill
Rammell:
My understanding, and Mike may
want to supplement this, is that the kind of
information that would come forward is x person of y age with z income.
The information would not tell you that it was John
Hayes.
Q
76
Mr.
Hayes:
My wife had a letter from the Government this
morning, stating that her personal details had been cast to the four
winds. You will understand a certain sensitivity on my part and that of
my family in this respect.
Further to the questions that
were asked by Mr. Marsden, one appreciates that the contract
will be tight in the way that the Minister has described and that there
will further obligations on purchasers in the event of a resale.
However, what kind of consideration has been given to the compatibility
of systems, which was the cause of recent problems? We use fairly
primitive means of communication because no other means are available
to us. Any data that is transferred by less than secure mechanisms
regardless of intent can go astray. Have any lessons be learned, as
Mr. Marsden
asked?
Bill
Rammell:
I set out very clearly that the level of
encryption is substantial. From the reaction that I got from the
Committee, I gather that there was assent to the proposition that the
mechanisms were secure. Nevertheless, as the hon. Gentleman knows, we
as a Government take this very seriously, and have initiated a
cross-Government review of the processing and transmitting of data to
ensure that we can be as certain as possible that everything that
should be done is being done. That process of review, including
arrangements between HMRC and the Student Loans Company, is
ongoing.
Bill
Rammell:
The review looks at every aspect of data
transition across and without
Government.
Q
78
Mr.
Hayes:
An area that we have not explored is the timetable
and the scale of the sale. We understand that the debt will be sold in
portions. That was made clear both in the original statement of intent
in the Budget and in the debate on the Bill, but we do not have a clear
indication of the likely size of those portions or the anticipated
timetable. Although I appreciate that none of that is set in stone, I
assume that the Minister has reached some initial conclusions,
following advice that he has
received.
Bill
Rammell:
In respect of the £6.3 billion or
what?
Q
79
Mr.
Hayes:
We understand that the debt will be sold in chunks.
What size will the chunks be, and over what time do you expect the sale
to take place? Is 2010 a firm date and will the debt be sold in three
chunks over that period, or will bits be sold off on a monthly basis?
How will the sale
work?
Bill
Rammell:
Forgive me, enticing though the argument is,
I think that we are going back over the territory of forcing me to
reveal my hand over the face value of the loans that we are going to
sell in order to generate £6.3
billion.
Bill
Rammell:
Beyond the £6.3
billion?
Bill
Rammell:
No, we have not reached conclusions about
that, in major part because the Government examine three-year
projections of their forward finances through the CSR process. The Bill
will give us the ability to initiate an onward programme of sales. In
principle we could reach a situation where we sell all the student loan
book over time, but we shall mount a case-by-case series of judgments
within a robust value for money
framework.
Q
81
Mr.
Hayes:
The original intention stated in the Budget
was that the Government would raise £6 billion by the end of
2010-11. The exact quotation says “around” £6
billion, rather than at the higher end. The higher end came in on
Second Reading, I think. That suggests, does it not, that we are only
going to sell one chunk until 2010-11—the first part of the
sale? Is that still the
case?
Michael
Hipkins:
The pre-Budget report indicated figures for
each of the three years from 2008-09 to 2010-11, with an indication of
what proceeds might be taken in each of those years. The frequency and
size of sales are issues that we shall need to discuss with our sales
adviser. Those issues are yet to be
determined.
Q
82
Mr.
Hayes:
So in fact, if we have in place a robust value for
money framework, we might not sell anything by 2010-11, or if the
market conditions are such that we feel it is desirable to offer more
of the loan book, we might sell more than that first portion. The
Government’s plans in that regard are entirely flexible and the
Bill will enable legislation to give those plans life. Is that
fair?
Bill
Rammell:
It is certainly conceivable that we could
end up, at the end of the three years, not selling anything, but I do
not anticipate that that will be the case. Despite recent volatility,
we think that there are improvements and that we can reasonably judge
that we will be able to undertake sales starting in 2008-09. However,
an important point of principle is that if the market conditions were
not appropriate for us and we could not demonstrate value for money,
the sales would not go
ahead.
Q
83
Mr.
Hayes:
Returning to the value for money framework, I
pushed the Minister earlier on whether that might form part of the Bill
itself, or at least part of guidance. We have returned to it time and
time again this morning, and it is critical to the essence of the Bill
and the determination of all Members to get the best possible outcome.
Will it be in guidance? How can the value for money framework be
absolutely enshrined in further considerations? You will understand
that people more sceptical than me will argue that with substantial,
£24.2 billion public sector borrowing—£6.7 billion
up on last year—there will be a temptation to cash in. I have no
doubts about the Minister’s integrity in that regard, but a
value for money framework would give him the extra security of knowing
that he was protected from the ravages of the
Treasury.
Bill
Rammell:
I made the point earlier that Treasury
Ministers are bound by the value for money framework in exactly the
same way as I am. On Second Reading, I deliberately and explicitly read
into Hansard the value
for money framework within which the judgments will be made. That is on
the record. Both the National Audit Office and ultimately the Public
Accounts Committee will examine that statement and criteria when they
judge whether we have demonstrated value for money after the sale
process. That gives robust protection and ensures that, even if we were
not minded to do so—and I assure the hon. Gentleman that we
are—we would take account of the value for money
framework.
Q
84
Mr.
Hayes:
That kind of approach would apply to any Government
at any time, and we would all suffer from similar pressures in those
circumstances. Given that the Minister set out the framework in
Hansard on Second Reading and has emphasised it strongly
today—I have no doubt that he will do so ad nauseam as the
Committee’s proceedings continue—why not append it to the
Bill, at the very least in the form of guidance? I do not understand
the objection to that.
Bill
Rammell:
I honestly do not think that it is
necessary.
Michael
Hipkins:
There is a general responsibility for
Ministers on the one hand, and for the Department’s accounting
office on the other hand, for obtaining the best value for money for
the taxpayer, as with any transaction. That applies as much to the sale
of student loans as to anything else, so there is an existing and
explicit responsibility and
accountability.
Q
85
Mr.
Hayes:
I do not want to be unnecessarily partisan, but one
thinks of QinetiQ and of the sale of the gold
reserves. At the end of the day, it is understandable that people are
nervous about Governments per se—I will be entirely even-handed
about this—when it comes to realising the value of assets.
Anything more that we can do to be absolutely certain is desirable from
a public interest perspective.
Bill
Rammell:
I understand the argument that is being put
forward but, with respect, I do not accept it. The clear setting-out of
the value for money framework, against which we will be judged, gives a
robust mechanism to ensure that the public get value for money in
respect of these sales.
Q
86
Angela
Watkinson:
I am sorry to press even further on this
specific point, but the term, “value for money” is to a
degree a subjective one. Will the Minister help by explaining just how
one does the calculation of the bottom line, below which a sale would
not proceed because it would be judged not to provide value for
money?
Bill
Rammell:
It is probably worth while restating what I
set out on Second Reading with respect to value for money. The Bill is
about enabling a long-term programme of student loan sales, so we need
to think about market conditions over the longer term, not just the
short term. As far as any continuation of the current market turbulence
translating into poor value for money of any sales of student loans, if
those circumstances prevailed, we would not go ahead with the sale at
that time. I also said that part of the value for money assessment will
involve gathering full and clear market information and, crucially,
assessing the value of keeping the loans in the public sector on our
balance sheet. We need to do that in order to be able to compare bids
for selling the loans against the value of holding them. Assessing
those values requires a number of projections that estimate the level
of repayments that would be made by borrowers stretching far into the
future. We will estimate the rate at which graduates will repay and the
number of loans that will be written off because, for example, the
borrower has become permanently disabled. Those projections have to be
based on assumptions and estimates, so there is a degree of risk built
into them.
In
assessing value for money, we also need to take into account the value
of transferring that risk from the public sector to the person or the
organisation who buys the loan—that is not something that lends
itself to easy quantification. As a result, the assessment will need to
consider a range of values based on differing assumptions and estimates
of risk. That is only one part of the value for money test; the others
include ensuring that the sale is competitive and that it takes place
under normal market conditions. It also entails ensuring that potential
bidders have enough information to make good bids—that is an
important requirement, so we will make a judgment about what type of
loans in general are initially being sold—and ensuring that
there is a genuine transference of risk from Government to the
purchasers. That is the framework within which we will make judgments.
It is also the framework against which the NAO, the PAC and others will
be able to judge us in the longer-term, once the sales have taken
place.
Q
87
Mr.
Wilson:
Following on from the questions of my two hon.
Friends, I wonder if I might tease out a little more information and
perhaps fill a few gaps. I know that the Minister has been here for a
couple of hours now, so he is probably beginning to feel a bit
tired.
Bill
Rammell:
I have a glass of water, I hasten to add.
Mr.
Wilson:
I want to ask the Minister how the Government will
go about selecting the loans that will be sold. Is there a selection
process? Is it going to be random? Will you look at selling high-risk
groups first or the low-risk groups first? How exactly are you going to
do
it?
12.30
pm
Bill
Rammell:
I shall say something, and Mike might want
to follow up. Clearly, we want to engage initially with loans where we
can demonstrate a good track record of graduates repaying, so that the
purchaser has confidence in the proposals and we can generate the
maximum income. We would certainly want to ensure a good element of
those kinds of sales initially. It will not be on a random
basis. We will make judgments about—this fits
in with the value-for-money framework—the best ways in which to
generate the
maximum return.
Michael
Hipkins:
One of the issues is about whether a loan
purchaser can make a good judgment about the value of a loan, which
will be based mainly on the
track record. Those loans could be valued more precisely. There is no
intention to allow purchasers to say, “I would like loans from
graduates from such and such a university or from graduates doing such
and such a subject”. In that respect, we expect a random draw
from the loan book. Having said that, there might be circumstances in
which you would want to exclude loans. That might be the case if the
loan balance is rather small—say less than
£100—and typically would be paid off in the normal way
rather quickly. It might be sensible to exclude those loans. However,
the general principle is that the loans should be able to be valued by
the purchaser on the basis of a track record. That might mean loans a
year or two into repayment, which would result in a rolling programme
whereby, each year, when the next batch of sales comes in, you bring in
an extra set of
loans.
Q
89
Mr.
Wilson:
That would suggest that you expect there to be
diminishing returns as you sell one tranche after
another.
Bill
Rammell:
No.
Q
90
Mr.
Wilson:
Presumably, if you sell the ones with a track
record first, as you go through the
loans—
Bill
Rammell:
I believe that with the subsequent tranches
we will have demonstrated a good track record of returns. However, that
will not necessarily be so. We are still in the initial stages of the
income-contingent loans, some of which will need longer to demonstrate
a strong track record. That does not mean that I do not believe that
that track record will become evident.
Q
91
Mr.
Wilson:
But one of the reasons for selling the loans and
getting them off the Government’s books is to move the risk to
the private sector. From what you say, it sounds as if we will be left
with the biggest risks still on our books. That does not sound like a
fantastic deal for the
taxpayer.
Michael
Hipkins:
Let me be clear about this. We discussed
with our sale’s adviser how to get the loans on to the market. I
said that it might turn out that the advice is to leave a period
between when a graduate is due to repay and when the loan is put on to
the market. New loans will be due for repayment every year. It is not
as if there is a fixed pot of loans and that we will sell the nice ones
first and be left with the rest. As the loans process continues, as new
ones come on every year, and with greater experience of how they
perform over time, we could gradually sell more and
more.
Q
92
Mr.
Wilson:
But you are still going to sell the ones with the
best track record, which will be the lowest risks to the
purchaser.
Michael
Hipkins:
No, that is not what I was saying. I said
that you might delay the sale of some loans, but you would still sell
them in the
end.
Bill
Rammell:
Not because inherently they are greater
risks, but because, owing to where they are in the repayment cycle,
they cannot demonstrate a secure track record. That does not mean that
they will not one day demonstrate a track
record.
Q
93
Mr.
Wilson:
I am not clear about this, so let us go back over
it. You will be selling loans first that have a track record and which,
therefore, will be a low risk to the purchaser. That is what you said,
Minister. However, subsequently, I feel that Mr. Hipkins has
backtracked.
Michael
Hipkins:
May I draw the distinction between low-risk
loans and loans about which it is difficult to establish a track
record? Those are two distinct things. The Minister was not saying that
it is the Government’s intention to sell the low-risk loans. It
is the Government’s intention to sell all of the loans, but to
bring those loans to sale when there is enough known about them for the
risk to be properly calculated by a potential
purchaser.
Q
94
Mr.
Wilson:
If you know that there are high-risk loans and you
have information about them, are you going to try to sell those
loans?
Bill
Rammell:
Can you define what you mean by high-risk
loans?
Q
95
Mr.
Wilson:
If somebody has a sporadic level of repayment of
their loan and it is therefore regarded as a higher risk for a
potential purchaser, will you try to sell such a loan in the tranches
that you sell
off?
Bill
Rammell:
The default process under the
income-contingent repayment system is fairly difficult to achieve
because it is very clear that repayments are made through HMRC when you
are in work and earning more than £15,000. In the very small
number of cases where there is a default, it is the responsibility of
Government and whoever owns the debt to deal with that through the
Student Loans
Company.
The
difference is not between high risk and low risk for determining in
what order the sales take place; it is about which loans have a
sufficient track record of repayment. Those who have just graduated
from university and started their repayments in April the following
year will not have demonstrated themselves to be robust repayers. In no
sense does that mean that they will not achieve that status. It simply
means that it is too early in their repayment profile for them to have
demonstrated
it.
Q
96
Mr.
Wilson:
No, but people can have a good or a bad track
record of repaying. You will have gathered the information on both of
those categories. I am trying to get at how you intend to include both
of those in the sale process and
when.
Michael
Hipkins:
Both of those sorts of loan would be in the
sales process. A point I made earlier in the sitting is that we want
the potential purchasers of loans to understand the sort of asset that
will underpin the bonds that they will buy. Part of that is
understanding how undergraduates’ salaries change over time and
what the range of graduates’ salaries are. We have some track
record for the portfolio overall. The intention is not to distinguish
between loans that are low risk and high risk and to sell one category
and not the other. The intention is to sell all of the loans. In order
to get a good price for the loans, the purchasers have to understand
them. We are talking about the process of
ensuring that they understand how the loans perform in the generality so
that they can put the right price on
them.
Q
97
Mr.
Wilson:
I will move on, although we might have to return
to that issue at some point in the next few days. Will graduates be
informed when their loan is sold
on?
Bill
Rammell:
Yes. As soon as the sales have taken place,
graduates will be written to through the Student Loans Company
informing them of the fact that the sale has taken place and reassuring
them that nothing will change in the terms and conditions and the
repayment
processes.
Q
98
Mr.
Wilson:
Have you seen any rise in the number of individual
voluntary arrangements being made by graduates who have taken out these
loans?
Bill
Rammell:
There has been an increase. However, that is
not due to an increase in graduate indebtedness and default, but to the
way that the IVAs
operate.
Michael
Hipkins:
There has been a general increase in IVAs
and some of the people who apply for an IVA have a student loan in
their loan
portfolio.
Q
99
Mr.
Wilson:
Do you expect those numbers to increase at all?
Can you give a rough estimate as to how big an increase there has
been?
Bill
Rammell:
I am happy to provide that information
during the course of the Committee.
Q
100
Mr.
Wilson:
Are you at all worried about student
organisations advising graduates that they may want to go along the IVA
route if there is a particular Government policy that they do not like
with regard to the sale of these
loans?
Bill
Rammell:
That would not be desirable or necessary. I
have made it abundantly clear during these discussions that the terms
and conditions and the effect on the borrower are exactly the same,
whether the debt is owned by the private sector or the
Government.
Q
101
Mr.
Wilson:
I have one final question, which returns to the
issue of value for money and the concerns that have been expressed by a
number of hon. Members. There are various tranches to each sale. Can
you give us an assurance that there will be a report in the House about
the value for money achieved which will be independently looked at and
commented on by the National Audit Office?
Bill
Rammell:
The National Audit Office has its own way of
reporting to Parliament, as it does through the Public Accounts
Committee. I can give a reassurance that, just as my predecessors
reported to Parliament on the sale of mortgage-style loans, exactly the
same thing would happen with respect to these sales and future
sales.
Q
102
Rob
Marris:
Rather more prosaically I want to return to clause
4(3) and the loan regulations which, as I understand, say that a
Secretary of State can pay the bidding costs of a loan purchaser. Is
that what it is designed to say? I am not sure why it is in the
Bill.
The reason I raise the matter
now, rather than during the course of the Bill, is because I thought
that we might have a debate to clarify it a little. If it says what I
think it does, then I have reservations about it. I wanted an
explanation on it, but I may have misinterpreted its import. I
see the Minister scratching his head, so I will carry on. It seems to
say that the Secretary of State can reimburse the successful bidder for
their bidding costs because of the high cost of bidding, for example on
PFI contracts, although we are not going to rehearse that discussion
again. However, in recent years it has happened that the Government
will, on occasion, reimburse the bidding costs for a PFI contract for
those bidders who are not successful. Clause 4(3) does not say
that.
Michael
Hipkins:
The measure is meant to reproduce what
happens now with the Secretary of State. If an individual borrower
defaults and causes the Secretary of State to spend money in order to
pursue that default—that would be through the Student Loans
Company—that additional expense can be reclaimed from the
borrower. That is what happens now with Government-owned debt. Clause
4(3) extends that to privately owned debt. If an expense is caused by
an individual borrower defaulting, that expense can also be reclaimed
by the private debt owner. It simply puts the Secretary of State and
the private debt owner on the same footing.
Michael
Hipkins:
I am sorry. The present situation is that if
a borrower defaults and causes the Secretary of State expense in
reclaiming the defaulted payment, that additional expense can be
claimed from the borrower. The clause extends that facility to the debt
owner if the debt is sold. It puts the debt owner on the same footing
as the Secretary of State is now, in the event that an individual goes
into default and causes costs in the recovery of that debt. It is not
to do with the cost of making a bid.
Bill
Rammell:
To paraphrase, it is the equivalent of the
awarding of costs.
Q
103
Rob
Marris:
I understand it now. It might have helped if that
explanation had been in the explanatory notes—I cannot find it
in there—and if the second line of the subsection had referred
to reimbursement by the borrower of the costs or expenses incurred. It
appears maladroitly worded, but I now understand what it
means.
Bill
Rammell:
I accept that, and if, during the formal
part of the proceedings, that point were to be made, we could clarify
it for the record.
12.45
pm
Q
104
Sarah
Teather:
In the absence of my colleague Mark Williams, I
should like to ask about Wales. What representations has the Minister
received from Welsh Ministers on the Bill? Was consideration given to
providing a framework, rather than the mirror powers in the
Bill?
Bill
Rammell:
I have not received representations from my
colleagues in the Welsh Assembly. However, my understanding is that
they are content with this
approach.
Bill
Rammell:
Those discussions have been undertaken at
official level, and this is certainly not about the granting of
legislative power. The Assembly already has responsibility for student
loans. This is about the granting of Executive power to carry out the
sales of loans if that is what the Welsh Assembly Government choose to
do.
Q
106
Sarah
Teather:
What estimate has been made of the value of the
student loan book in Wales? If the asset is sold on, will the proceeds
be made available to the Welsh Assembly, or will they come to the
Treasury?
Bill
Rammell:
The estimate as of 1 April 2007 in respect
of Wales was £1.1 billion. As in England, moneys going from any
sales of the Welsh loan book are expected to transfer to the
Consolidated Fund with no direct financial gain to the Welsh
block.
Q
107
Mr.
Hayes:
I have just two or three final questions. Will the
Minister confirm that there is no intention to involve anyone else
besides the Student Loans Company in the collection of
repayments?
Bill
Rammell:
That is correct.
Michael
Hipkins:
HMRC.
Bill
Rammell:
Yes.
Bill
Rammell:
It will be enforced through the
contract—and, actually, the choice of the Student Loans
Company.
Michael
Hipkins:
The point in terms of legislating for the
long term is that the Student Loans Company might not exist in the long
term, so there needs to be flexibility in the Bill to specify
collection by whomever the Secretary of State would like. The intention
is that it will be HMRC in conjunction with the
SLC.
Bill
Rammell:
For the record let me make it abundantly
clear: we have no plans to do away with the Student Loans Company. We
intend it to continue with the processing and administration of loans
in respect of both Government and private sector
debt.
“In particular,
regulations or arrangements may provide
for—
(a) collection by a
person acting on behalf of a loan
purchaser”.
Thus, not
only is the thing that the Minister has assured us of not in the Bill;
the opposite is in the Bill.
Michael
Hipkins:
Let me clarify clause 5(2)(a). For the most
part, collections are made through HMRC, alongside income tax and
national insurance. However, some borrowers wish to make additional
payments over and above the requirements. If they do that, they make
payments direct to the SLC. So the provision allows that to continue
for people whose loans have been sold.
Michael
Hipkins:
If a borrower wants to make a payment over
and above what they are required to do through HMRC, they can do so,
but they do so through the SLC, which would make the payment either to
the Government, in the case of a retained loan, or to the loan
purchaser, in the case of a sold loan. The clause allows those two
things to continue to
happen.
Q
110
Mr.
Hayes:
Time prohibits further exploration of that, but
there is another, related issue. As hon. Members will know, British
students’ repayments are currently made through deduction of
wages by Her Majesty’s Revenue and Customs, but overseas
students are dealt with by the Student Loans Company. What is the
record of default and repayment in respect of debts administered by the
Student Loans Company, compared with those administered by Her
Majesty’s Revenue and
Customs?
Bill
Rammell:
We do not yet have a track record because
the ability of students of other European Union countries to access the
fee loans came in only in 2006, and the repayment will not start until
2009. However, we have rightly been concerned about such matters and,
in particular, we will be looking at EC regulation 14/2001—from
memory—which enables us to take a case against a student in
default elsewhere in the European Union through the British courts, but
for the repayment to be enforced through the courts within his or her
own country. We are rightly seeking to ensure that we can retrieve any
defaults from students wherever they may
reside.
Q
111
Mr.
Hayes:
Given the greater challenges associated with that,
which the Minister has recognised and is dealing with, will that part
of the debt be attractive to purchasers? If I were selling or buying
the debt, I would not touch it with a
bargepole.
Bill
Rammell:
You might touch it with a bargepole when you
were able to see evidence that the repayment mechanisms were robust. I
believe that those repayment mechanisms are robust, but clearly we are
not yet at the stage of students on a large-scale basis repaying in
that
way.
Q
112
Mr.
Hayes:
Given the chronology that the Minister discussed in
relation to questions asked by one of my hon. Friends, it is unlikely
that that portion of the facebook will be sold at the outset. It simply
would not have a track record of repayment. It would not be
sufficiently proven to be an attractive part of the
sale.
Bill
Rammell:
Not because it cannot be proven to be
attractive over the longer run, but the evidence is not there yet. The
earlier question tempted me to go down that route, but I anticipated
correctly that the hon. Gentleman would want to scrutinise me on
it.
Q
113
Mr.
Hayes:
So the answer is that we have yet to discover quite
how it will work out, but we are determined to put in robust mechanisms
to ensure that it works out properly and that it is unlikely to form an
early part of any transaction involving the
debt.
Bill
Rammell:
The latter part is correct. It is not that
we do not have confidence in the mechanisms that have been put in
place, but that they have not had time to demonstrate their
effectiveness. We have put in—and rightly so—different
thresholds according to which European Union country the graduate
resides in. In other countries where average earnings are significantly
lower than in this country, having a £15,000 per year repayment
threshold might mean that the graduate never reached the repayment
level. That is why we brought in a variated threshold based on the cost
of living and the wages index within individual countries to ensure
that, on a fair basis, if a person had a reasonable standard of living
equivalent to £15,000 a year in respect of prices and the cost
of living within that country, he or she would nevertheless start
repaying.
Q
114
Mr.
Hayes:
Moving swiftly from overseas to the Principality of
Wales, what representations has the Minister received about the way in
which the Bill extends the powers of the Welsh Assembly? I am
particularly sensitive about the matter, given our earlier worries
about Wales under different legislation. I have put that as
euphemistically as I
can.
Bill
Rammell:
It is an area about which I am sensitive,
given that the hon. Gentleman said that I had “form” on
the issue on Second Reading. That question was asked by the hon. Member
for Brent, East. There has been discussion between my officials and
those at the Welsh Assembly. The matter is about the
transference of Executive power to enact the sales. The responsibility
already resides with the Welsh Assembly, and my clear understanding is
that colleagues there are content with the process that we are
undertaking.
Further
consideration adjourned.—[
Mr. Michael
Foster.
]
Adjourned
accordingly at five minutes to One o’clock till this day at Four
o’clock.
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