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The Government have a duty to obtain value for money in all that they do, and all sales of student loans will be subject to a rigorous assessment in that respect. If Ministers and departmental accounting officers are not satisfied that a sale at a given time represents good value for money, it will not go ahead. It is right that the Government have clearly set out for the record the principles of their approach to value for money, but we should not take the unusual step of translating those principles into a set of statutory tests, as Amendment No. 6 would do.
The Government have published forecasts of the anticipated receipts from the proposed sales programme over the period of the Comprehensive Spending Review. They total £6.3 billion: that is, £3.4 billion in 2008-09; £1.3 billion in 2009-10; and £1.6 billion in 2010-11. These amounts are forecasts rather than commitments. The Government are committed to the student loans sale programme, but only if it represents good value for money. We have made it clear that these are estimates, and that the actual profile will be subject to market conditions.
The noble Baroness referred to market turbulence. The Bill is about enabling a long-term programme of student loans sales, so we need to think about market conditions over the long run. As for any continuation of the current market turbulence translating into poor value for money in any sales, we would not go ahead with a sale in that case. It is important for the Committee to understand that we are not talking about one sale; we are talking about an ongoing programme of sales. Every year, the student loan book is increasing in value as there are more students, particularly with the widening participation agenda. We need to appreciate that this is an ongoing enabling Bill.
The noble Baroness, Lady Sharp, raised the question of repayment track records. The whole point of the sale of student loans is to transfer the risk away from the Government. As she suggests, it would be counterproductive if the Government were left holding the riskiest loans and those with a poor repayment profile. We are talking about loans of a particular vintage, regardless of their repayment history. When it comes to the securitisation process and the creation of bonds, perhaps the riskier profile
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Baroness Sharp of Guildford: What happens if the purchaser stipulates that it wants to have loans where there is a good repayment history?
Baroness Morgan of Drefelin: When we talk about the purchaser, we are talking about the special-purpose vehicle that will purchase the tranche of loans of a particular vintage. We are not selecting loans for sale based on the individual characteristic of loans or borrowers, but by category, such as being in the repayment phase. Purchasers will have no say on which loans are available for them to buy.
Baroness Sharp of Guildford: Suppose the purchaser says that it will make the purchase only if those are the loans in the basket? Will the Government refuse to make the deal?
Baroness Morgan of Drefelin: That calls into question whether that purchaser wants to be part of the securitisation process. If it does not want to be part of it, we will not be able to accommodate it.
Returning to the amendment tabled by the noble Baroness, Lady Verma, the principles are not precise enough to serve the function of a set of tests that must be met before a transaction can go ahead, although we agree with them. Decisions on value for money will always be matters of judgment that are rightly taken by the Government of the day. While it is right that after any sale there should be scrutiny of how the Government have addressed the principles we have set out, it is not sensible to attempt to turn these principles into specific legal tests. There will be a sales programme going forward, and we expect that there will be scrutiny as each sale happens. We are all in agreement, for example, that a competitive market must be generated, but there is an element of subjectivity in any such assessment. I do not believe that we should create a process whereby there could be the prospect of having to prove beyond challenge that a test on such matters of judgment has been met before proceeding with a transaction. The issues simply do not lend themselves to that approach.
We envisage a long-term programme of sales and the value-for-money judgment on each transaction will, of course, be open to parliamentary scrutiny in the usual way. I am happy to reiterate for the record that the Government will report to Parliament after each sales transaction and the National Audit Office will, no doubt, report to the Committee of Public Accounts on this sales programme.
The continuing scrutiny will be most valuable in helping the Government to ensure good value for money in the long term. We certainly would not want to establish an exclusive list of tests at the start of a long-term programme of sales. We will want to be able to build on the experience of sales transactions—for example, using any evaluations by the National
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I turn to the perhaps tongue-in-cheek amendment of the noble Baroness, Lady Sharp, but it was a matter to which we gave proper consideration. Amendment No. 7 proposes a competitive procedure for conducting the sale of student loans and seeks to ensure maximum value for money for the taxpayer. I am sure that that is what she was driving at. If all future loan sales were to be conducted by way of an auction, I would have no difficulty in welcoming this amendment. In those circumstances, I think that we would be looking for rather more then three different bids and would certainly want to ensure that there was no collusion between bidders. However, the Bill is intended to enable a long-term programme of sales, and I do not think that the proposed amendment will work for the full range of possible ways that a sale might be undertaken. In particular, it will not work for the model we are planning to employ for the first sale: sale by securitisation.
I indicated in debate on the previous group of amendments that in making a sale the Government do not expect that any financial institution would want to own the loans. Our current plans are, therefore, that the loans will be securitised. This is a process by which a special-purpose company is created to issue bonds which trade in the financial markets. Those bonds are backed by the income received from the student loan repayments. The special-purpose company buys the portfolio of student loans from the Government, and the price it pays is based on the finance it can raise from the sale of bonds.
It is important to note that real competition is built into this process. Rather than comparing three or more bids from potential purchasers of the loans to achieve the best price, the Government’s income from the sale depends on a market in which investors at large will be bidding to buy bonds. It will be important to ensure that there is a genuinely competitive market for the bonds. This is a judgment that the Government of the day, drawing on professional advice, will have to make for each sale in this long-term programme of sales we have been talking about. A key element of that will be to ensure that there is sufficient information available about the loan portfolio for investors to be able to model how the loans might perform. That comes back to the discussions we had earlier about the importance of the anonymised data.
Securitisation can help maximise value for money by widening the potential range of investors. Different investors will be interested in different tranches of securities that will have differing levels of risk and return. Pension funds and banks, for example, may want the relatively secure investment of the triple-A bonds, whereas other investors, such as fund managers, may prefer the relatively greater risks but higher returns of the lower tranches. It is also possible to interest a much wider range of investors in purchasing tradable securities than in purchasing a
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It is possible that a future Government may decide that, in the particular economic circumstances of the time, they can get the best value for money from a sale by auction rather than by securitisation. In that situation, a Government would, of course, ensure that a competitive process takes place. I would not like to attempt to foresee all possible future circumstances, but I would expect that process to include substantially more than three competing bids. Although it may have been a tongue-in-cheek amendment, I can assure the noble Baroness that we take all amendments very seriously. I hope that with the discussion we have had the noble Baroness will consider withdrawing her amendment.
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Baroness Verma: I thank the Minister for trying to allay our fears. However, I am not an economist like the noble Baroness, Lady Sharp, but a businesswoman. Anybody in business would have set criteria to meet in the current climate, and I do not think that the Government are meeting them. I tried very hard to listen carefully to what the Minister said, but I do not feel convinced that the Government should not put my amendment in the Bill. It would give a good framework for purchasers and the Government to be able to work against to achieve a good value-for-money sale. It is difficult to be convinced that statements and investigations after a sale would be useful.
Baroness Morgan of Drefelin: We are talking about a programme of sales, not a big, one-off sale. In truth, each sale will, no doubt, result in an enormous amount of scrutiny and poring over the process. As the noble Baroness, Lady Sharp, said, that will be retrospective, but because we are talking about an enormously valuable ongoing book, learning will be taken from each sale process. One accepts that one cannot prejudge the conditions of a sale as it is a commercial transaction and we have to get the best possible deal for the taxpayer. It would be very difficult to give away key negotiating points before a sale negotiation. We are all concerned about the same issue, but does the noble Baroness accept at all that we may have to look at things retrospectively?
Baroness Verma: I thank the Minister for that. My point is that I have a great concern that the current climate is not right for a sale. Unfortunately, the Government are in a position in which they need the finances. The worry would be that perhaps if the sales were done in haste in the wrong current climate, they would not fetch the best value.
I return to the point that I raised in my amendment. Perhaps the Minister could go back and look at the framework in the amendment and at whether parts of it could not be considered a little more closely. The cynical view in the world outside might be that the sale will be hasty and that it will not be best value for the taxpayer.
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I shall go back and read carefully in Hansard what the Minister said, but I am not convinced. I hope that I shall get more positive responses from her at some point.
Baroness Sharp of Guildford: I share the reservations expressed by the noble Baroness, Lady Verma, on this issue. It is important that there are some criteria by which value for money is judged. On these Benches, as on those of the Opposition, it is well understood that the Government have a big hole in their forecasts of public sector revenues, which they need to fill, and this is a very useful way in which to fill that hole.
In a sense, carrying the whole process to its absurd extreme, it would be possible for the Government to securitise the future Inland Revenue income tax streams of revenue and raise quite a lot of money. One could argue that that is what the national debt partly is, that we are borrowing money on the expectation that we can meet the costs of servicing it over time.
On Amendment No. 7, I understand the difference between the securitisation process and the process of negotiating with a number of competitive bidders for a block of loans. As I understand it, when the Government sold off the mortgage-style loans in 1999, the deal done with Nationwide and Deutsche Bank was a one-off sale. There were a number of competitive bidders, and Nationwide and Deutsche Bank were successful in buying up that block of loans.
This is, of course, a very different process, very similar to that used by Northern Rock when it created Granite as its special-purpose vehicle and used it to sell on a number of bonds based on its mortgages. We saw with Granite the difficulty of selling on some of the sub-prime blocks of mortgages. I therefore come back to my point about risk management, and the fact that the Government might be left with the riskier tranches of loans. The Government say that they might be more attractive to certain members of the market, but they may not be attractive to any part of the market. Certainly, given the present difficulty with the sub-prime market, it is likely that they would not be attractive to any part of the market and that the better loans would be more attractive.
On the core issue of how we secure value for money, we need something in the Bill that enables the public to feel reassured that the Government are seeking it. We shall go on looking for some way of doing that.
Baroness Verma: As I have said, I will go back and have a good read of this. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 2 [Sales: supplemental]:
Baroness Sharp of Guildford moved Amendment No. 8:
Clause 2, page 2, line 19, at end insert “by such organisation as may be specified by the Secretary of State”
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The noble Baroness said: I speak also to Amendments Nos. 9 and 21 which are tabled in my name. None of these amendments is substantive, in that they are all intended to clarify who is collecting or benefiting from payments made in respect of these loans.
Amendment No. 8 merely clarifies who is responsible for collecting the repayments and makes clear that the Secretary of State needs to specify who shall take on that role. In this respect, it refers to Clause 5 which deals with repayments, and brings in Amendments Nos. 18 and 19 tabled by the noble Baroness, Lady Verma. For her part, she is anxious to call a spade a spade and makes it clear that the Student Loans Company will collect the repayments. I know of the reluctance of parliamentary draftsmen to name any government agency in the Bill on the grounds that it may not exist in the future. However, it is noteworthy that Clause 5(2)(b) names Her Majesty’s Commissioners for Revenue and Customs, even though they have been through an organisational and name change in the past few years. They may yet change again under future Governments. I have played along with the convention in Amendment No. 8 and not named names.
Perhaps I may speak to Amendment No. 21, because it is linked to Amendment No. 8. It is a clarifying amendment. “Or other person” is very vague. Accepting the convention that the agent is the Student Loans Company or Her Majesty's Revenue and Customs, the amendment asks that, if it is to be someone else, they should be specified by the Secretary of State.
Amendment No. 9 is more substantive. We on these Benches are unhappy with the vagueness of “may include”. It is important in transfer deals of this type that it is clear at the outset who is entitled to interest payments, penalties or other charges which arise from, for example, slow payment or non-payment of repayments due. “May include” is much too vague. These things need to be specified clearly in advance, which is what Amendment No. 9 asks for. I beg to move.
Baroness Verma: I shall be brief. The noble Baroness, Lady Sharp, is right: I call a spade a spade. The Bill specifies particular rights and powers that will be the remit of the agent concerned—which, of course, is the Student Loans Company. Why is this not explicit? Does this degree of ambiguity mean that the Government envisage someone else having recourse to the powers? We want to get rid of any potential ambiguities which might slip through parliamentary nets and have unintended consequences. Will the Minister explain precisely what this part of the Bill means?
Lord Tunnicliffe: This group of amendments covers repayment and collection arrangements after sales have been made. The manner in which repayments are collected and administered is a key facet of the borrowers’ experience, and noble Lords are right to seek reassurance that those borrowers whose loans are sold will notice no material difference as a result of the loan sale.
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Clause 1(4)(d) of the Bill is designed to give the Secretary of State the power to specify in the sales contract which organisation may administer the loans for purchasers. Clause 2(2) gives the Secretary of State power to set down in that contract that he will make sure that repayments due to loan purchasers get to him, and provide for the manner of that repayment—for all loans, unsold and sold alike.
All repayments are collected in the same way, through employers and HM Revenue and Customs, or through the Student Loans Company for direct or additional repayments. The Government then ensure that the right moneys go to the purchasers of sold loans. Purchasers will not be able to appoint collection agents of their own choosing. Collection of repayments through the tax system will remain as now, and the administration of loans will remain with the Student Loans Company. This collection system is a key feature of the loans, which we expect to be attractive to investors.
I turn to Amendment No. 8. It is logical that repayments can be gathered on behalf of the Secretary of State only by an organisation that he has specifically authorised to gather such repayments. It will not be possible for purchasers to decide to use an alternative mechanism from that stipulated under Clause 1(4)(d), nor do we think that such a prospect would be attractive to them. The intention behind Amendment No. 8 is already catered for by the existing wording in the Bill. I therefore urge the noble Baroness to withdraw this amendment.
Amendment No. 9 relates to who will be entitled to moneys of different types connected with loans that have been sold. In general, repayments of principal, interest and any other moneys due in relation to a loan would go to the owner of that loan, which is the presumption set out in Clause 5(3). But there may be some payments, such as penalties relating to compliance with the tax system, where it may not be appropriate or possible for moneys collected to be directed to the purchaser. The current drafting of the Bill means that, as part of the negotiated sales contract, there may be arrangements made for certain moneys that differ from this main presumption.
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In practice, of course, the sales contract will be clear about all such matters, one way or the other, because of the operation of the presumption in default of specific provision. As such, we believe that we do not need to legislate that the contract must contain this specific item, and I urge the noble Baroness not to press her amendment.
Amendment No. 18 seeks to ensure that the SLC and HMRC will be the only organisations involved in the collection of repayments of sold student loans. As my honourable friend in the other place made clear, the Government very much share the view that the SLC should continue to fulfil those functions it currently performs in respect of both sold and unsold loans. In fact, this Bill allows the Government to specify in the sales contract the identity of the party by whom sold loans will be administered following a sale—our intention being that SLC will perform this
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There are two primary reasons why it would consequently be problematic to name the SLC in the Bill. First, as the SLC is a private limited company, not a statutory body like the HMRC, like any company it may in future cease to exist. Clearly, this is an unlikely scenario but, to allow for a sustainable programme of sales to develop, the provisions of this Bill will need to continue to be workable in the event this scenario were ever to occur. So the drafting would have to provide for this possibility in any event, and so allow for the possibility of someone else undertaking this role.
Secondly, and in a similar vein, the Bill is designed to be flexible so as to cater for any wider changes in the administration of the student loans system in the future. As this Bill seeks to enable a sustainable programme of sales, it needs to allow for changes to the system to be made. I reiterate the Government’s clear intention: the SLC will continue to administer all student loans, including the process of collecting repayments, and this will not be affected by the sales process.
Amendment No. 19, like Amendment No. 18, seeks to ensure that the SLC is named in this Bill as the only organisation that will administer sold student loans. This amendment in particular seeks to constrain the identity of the party that is able to make payments to a purchaser of money due to them. However, for the reasons I have already given in respect of Amendment No. 18, it is problematic to name the SLC in the Bill as the Bill needs to retain flexibility to be able to cater for any future changes, however unlikely. I therefore urge the noble Baroness not to press the two amendments.
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