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Amendment No. 21 concerns the exemption in the Commissioners for Revenue and Customs Act 2005 that enables student loan repayments collected by HMRC through the tax system to come back to the Secretary of State to be set against the loans themselves, rather than being treated as payment of tax. The amendment aims to make Clause 5(5) more specific. The exemption covers,
- “sums required to be paid to a Minister of the Crown by virtue of an enactment relating to financial support for students”.
So with the current wording of the Bill, if enacted, the exempt sums would be those,
- “required to be paid to a Minister of the Crown or other person by virtue of an enactment relating to financial support for students”.
This overall wording makes clear that this is a specific and narrow change, which is necessary to allow money to flow to purchasers who will be entitled to repayments by virtue of the sales contract and the repayment regulations and pursuant to this present Bill. That is the nature of the specification that applies to “other persons” in this context. If we ever should wish it to be the case, an agent of the Secretary of State could in any event be the recipient of repayments on the Secretary of State’s behalf, so it is not necessary for that to be set out in the Bill. In the
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Amendment No. 20 is a minor amendment. As the Explanatory Notes on Clause 5 set out, and as I have just mentioned, there is a presumption in the Bill that all moneys paid by borrowers relating to sold loans should be paid to the loan purchaser. The presumption is currently qualified by the cross-reference in Clause 5(4) to Clause 2(2), so that the transfer arrangements—the sales contracts—may provide for exceptions. However, we now consider that this precise cross-reference is not the clearest way of saying that the transfer arrangements in general could provide that some moneys would still be due to the Government after a sale; for example, penalties relating to compliance with the tax system. To provide greater clarity, the amendment therefore expands the scope of the cross-reference to Clause 2 as a whole. This amendment would do no more than fulfil what we originally intended.
Baroness Sharp of Guildford: I am grateful to the Minister for his spelling out of these things. As I suggested, my amendments were probing amendments to seek clarification, and the Minister has given us considerable clarification. The one issue I raise is on Amendment No. 9, about transfer arrangements in Clause 2(3), which states
I suggest that it should be “specify”—
and so forth. As the Minister explained, the main repayments are covered by subsections (1) and (2), but there are perhaps other elements of payments that must be made. He also made it clear that, within the contract with any purchaser, it would be clear—the word the Minister used—who collates these revenues. It is a minor issue of semantics, granted, but the term “specify” covers that. The contract will have to specify this, because it will be made clear. Why we cannot have the same wording in the Bill, I do not know. Granted, that it does not really make much difference and I am not going to quibble about it. Nevertheless, it seems to me that it will be specified. To call a spade a spade, if you are going to specify it you might as well say so in the Bill.
The answer to the amendments of the noble Baroness, Lady Verma, wanting to include the name of the Student Loans Company, came as I expected. I have to admit that I had not appreciated that it was a private company. I had thought that it was a public company, but am interested that it is private. On Amendment No. 21, the Minister is right that there is no need to spell it out at greater length.
Baroness Verma: Like the noble Baroness, Lady Sharp, I did not think that it was a private company.
Lord Tunnicliffe: It may be helpful to know that we own it. Nevertheless, my understanding is that it was created under private company law.
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Baroness Verma: I will have to go back and get some more questions for the Minister on that because I am slightly thrown.
Lord Tunnicliffe: We own the shares.
Baroness Verma: Returning to the two amendments tabled in my name, it is important for clarity to the purchaser that the company from which they are purchasing is placed in the Bill. I believe that putting “agent” in, because somebody might purchase them in future, gives great uncertainty to the sale. It is worrying that the Government are not prepared to put “the Student Loans Company”. I know that it is only a small change, but it is useful for future purchasers to know that they are dealing directly with the Student Loans Company because that, as far as I am aware, is the body through which these sales will take place.
Lord Tunnicliffe: The SLC is a non-departmental public body as well as a private company. The key thing is that it is not established by statute so, technically, it could die. Purchasers will buy from the Secretary of State, not the Student Loans Company.
Baroness Verma: This gets even more confusing. All along, we have been clearly told that the loans would be sold through the Student Loans Company. Therefore, the Student Loans Company owns the loans. Purchasers will be purchasing from the Student Loans Company. We have suddenly been told that it is a private company, but the Government own it.
Lord Tunnicliffe: The Secretary of State owns the loans. He will sell the loans. The SLC services them. It provides a service to the Secretary of State. It never owns the loans.
Baroness Verma: Forgive me for persisting. I will take back the information I have got today, mull over it and perhaps put some questions to the Minister.
Baroness Sharp of Guildford: I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Morgan of Drefelin moved Amendment No. 10:
“(4A) Transfer arrangements may include undertakings by the Secretary of State about the power to make loan regulations; in particular—
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The noble Baroness said: I feel that I should politely let the Committee know that I have rather a long speaking note that I will try to get through as clearly as possible. Amendment No. 10 concerns detail on the options for the operation of the sales transaction. I have written regarding this amendment to all noble Lords who took part in Second Reading, and I hope that I can develop the points I made in that letter. In developing the potential sales programme, the Government have engaged with a number of external advisers from the financial and legal sectors as well as experts in my department and Her Majesty’s Treasury. We have appointed Deutsche Bank to act as sales arranger for the first round of sales in the coming year and have appointed Lovells, the commercial lawyers, to act for us in the sale.
As with any transaction as complex and novel as this, the blueprint for how the sales will be conducted can evolve over time, drawing on advice that the Government receive during the development of the programme. Based on the expert advice of our sales arranger, we now believe that some amendment is necessary to the provisions in the Bill to ensure that potential purchasers can fully understand our future intentions and what they would be buying. That clarity of understanding on the potential purchasers’ part is a prerequisite for us to be able to achieve good value for money.
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I need to set out again that, in selling student loans, the Government intend to transfer risk to a purchaser. Those risks include, as we know well, the uncertainty about future graduate earnings, graduate unemployment and other macro-economic factors that are not in the Government’s power to control. Investors need to assess the value of the loans, taking into account those risks and a range of factors, such as how loans are deducted from payroll alongside income tax and national insurance contributions.
At the same time, we have been clear throughout that, regardless of whether a borrower’s loan is sold to a private purchaser or retained in the public sector, decisions about the terms and conditions of their loan remain with the Government, who retain the ability to make changes to those loans after they have been taken out, through the mechanism of regulations, as we have already discussed, and as is the case now. Investors can include in their financial calculations risks around graduate salaries and repayment mechanisms, but what investors will find hard to assess or model is the likelihood that Ministers will, in the future, use their powers to change the conditions of repayment in a way that alters the predicted cash flows to the special-purpose vehicle. That is not an economic risk; it is more of a political risk and, as such, one that investors will find hard to value.
In general, purchasers want maximum certainty about what they are buying so that they can make a reliable assessment of the potential performance of,
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Clause 2(4) presently contemplates addressing this issue by providing in sales contracts for compensation to be payable to purchasers in the event of future policy changes that compromise the value of the transferred asset. While we still wish to retain this as an option for proposed transactions, we have been advised that it would be wise to allow for more than one way to address this issue.
The amendment enables another method of giving purchasers greater certainty on Ministers’ future intentions by giving the Secretary of State the power, through regulations, to give undertakings in the sales transaction about how terms and conditions might or might not be changed in future. For example, he could undertake that the repayment threshold will be uprated in a certain way, in line with publicly stated policy, and he could give an undertaking about how the interest rate will be determined each year. Such commitments can provide certainty for both parties—purchaser and borrower alike—and remove concerns about unexpected changes. In the event that a Secretary of State sought to alter terms and conditions for sold loans in a way that cut across such undertakings, a purchaser could pursue a claim against the Government in public and private law.
The Government might be able to achieve better value for money by giving an undertaking about future treatment of a particular repayment parameter rather than by promising a one-off compensation payment. Investors may discount the value they would accord to the loan book to take account of any uncertainties—or perceived uncertainties—about how compensation might be made. In making their investment decision they may have placed value on a particular expected size and timing of cash flows, which may be altered by a one-off compensation payment. The amendment gives future Governments the flexibility to secure the best value for money. It is an additional tool, if you like.
The Bill enables a long-term programme of sales, which is another reason why flexibility in the Government’s options is important. Classification rules are currently being redrafted and changes in those rules over time could have a material impact on the ability to offer compensation for all such changes. We do not want to put future Governments in a position where the only means they have to address the issue of future policy change became something that, under future rules, led to the transaction not counting as a true sale. We know that this is a real risk, as the classification rules have changed significantly since the previous sales of student loans a decade ago and we would not now be able to sell student loans in the way we did then.
The amendment gives the Government the powers they need to pursue good value for money in the transaction. If a Government gave undertakings as part of a sale, they would be constraining future discretion on policy change affecting those loans, but not unreasonably, in that they would only be committing not to change terms in an unexpected way
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I should make it plain that, in making undertakings, the Government would not be agreeing with the purchaser of the loans to make specified changes to benefit purchasers after the sale. The purpose will not be to improve the lot of the purchaser, but to give certainty about the current position and about the Government’s intentions over time. If the Government pursue the route of using undertakings in sale contracts, the proposed undertakings will be made public as part of the sale process.
I welcome the opportunity of Amendment No. 15 to clarify the distinction we are making between loan regulations and loan arrangements. The term “loan arrangements” is used to denote those parts of the agreement between the borrower and the Secretary of State as lender that are not determined by regulations; we have already discussed this in part. The arrangements are contractual arrangements deriving from the completion of the loan application form, the signing of the usual declaration by the borrower, the acceptance of the application and the provision of the loan. Examples of these would be acceptance of an obligation to repay the loan or acceptance that the ordinary civil courts have jurisdiction over any enforcement actions.
Although we are making specific provision that future changes in loan regulations will apply to sold loans as well as to unsold loans, we do not see that it would be necessary or desirable for the Secretary of State to have any place in the future amendment of contractual arrangements between the borrower and the loan purchaser, who would have taken the Secretary of State’s place as the lender. It is a necessary part of the sale that the parties to the contract moving forward are the borrower and the purchaser. The substantive provisions of the loan contract will continue to be contained in and derived from the regulations. As with any contractual arrangement, the two parties involved could by agreement amend those parts of the arrangements not deriving from the regulations, and we do not need to legislate for them to be able to do so. It is important to recall, however, that neither party may amend these arrangements unilaterally. The purchaser would need the consent of every borrower to make changes to its portfolio, and the technical nature of those terms makes it unlikely that this would be of interest to them.
The Bill already has at Clause 2(7) the powers necessary to make amendments to the loan arrangements that are consequential on the sale—for example, substituting the loan purchaser’s details for the Secretary of State as lender. On that basis, I hope that the noble Baroness, Lady Sharp, will consider withdrawing Amendment No. 15.
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I am going to close in a minute—I promise. It is important to ensure that we have clarity about the meaning of terms in this rather technical Bill, as the noble Baroness, Lady Sharp, indicated with Amendment No. 16, to accompany the proposed Amendment No. 15 to Clause 4(4). Various terms in the Bill are “defined terms”. The location of their definitions is set out in Clause 9. “Loan arrangements” is one such term, and the definition at Clause 1(4)(b) applies to all references to that phrase contained in the Bill. I hope that that is helpful and that, with that explanation, she will feel able to withdraw her amendment.
Amendment No. 17 picks up the clear commitment that the Government have given throughout the stages of the Bill so far, in your Lordships' House and in another place, that loans sales will not affect the borrower. We know that groups representing students and parliamentarians alike attach great importance to this commitment. Our proposed amendment concerning a power to give undertakings in sale contracts about how terms and conditions may or may not be changed has prompted us to ensure that our commitment to parity of treatment is put clearly in the Bill. We believe that that is necessary to give current and future borrowers full confidence that loan sales will not affect them adversely.
Proposed Clause 4(6) will mean that the Secretary of State must seek to ensure that disparity between borrowers does not arise as a consequence only of their loan being sold or retained. If the Bill is enacted, the provision will apply to all changes in regulations thereafter, not just in cases where an undertaking may have been made in a sales contract. As such, I hope that noble Lords will agree that this amendment is a worthwhile strengthening of the statement that we have already put on the record, which will give borrowers confidence that the commitment is intended to stand the test of time. I beg to move.
Baroness Sharp of Guildford: I shall start by addressing Amendments Nos. 10 and 17 and then come back to Amendments Nos. 15 and 16, which stand in my name.
Government Amendment No. 10 is important because it provides for the Secretary of State to give undertakings which are enforceable by law and in law that bind his successors to a particular course of action. We recognise how difficult it may be in present circumstances of the money markets to persuade buyers to buy tranches of these student loans. As the Minister explains, they must give these undertakings to give greater certainty about future payment conditions. As things stand, the Bill provides for the Secretary of State to compensate any purchaser should changes arise, such as raising the repayment threshold or altering the repayment rate. Should the Government decide to change either of those, it is provided within the Bill that the Government shall compensate the purchaser for any such changes that they introduce.
The advice received from Deutsche Bank as the adviser to the Government about sales within the next year or so was that the mechanism for giving compensation was not enough and that such changes
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Our reservations about these undertakings come mainly because we are unhappy about the degree to which they tie the hands of future Governments. Let us take the repayment rate. Given that it is paid through the PAYE system to Her Majesty’s Revenue and Customs, it amounts de facto to a form of graduate tax to be paid by young graduates. Indeed, many of those advocating loans and repayments in our debates on the Higher Education Bill talked about this system being a form of graduate tax. I remember a long discussion with Nick Barr from the London School of Economics, who was the author of these ideas. He said, “Margaret, you’ve got to realise that it amounts to a form of graduate tax”. Be that as it may, we know that very many young graduates these days are finding life extremely tough. Most of them earn more than £15,000 and so are above the threshold at which one starts repaying loans, but many are not earning much more than £25,000. On those earnings, they have to pay not only income tax—which I admit has gone down from 22 per cent to 20 per cent, but it is still only a 2 per cent reduction—national insurance of 10 per cent and then, on top of that, the 9 per cent repayment of their graduate loan. Many of these young graduates, earning quite probably between £20,000 and £25,000, are hitting a marginal rate of tax of 41 per cent, which is higher than we charge millionaires.
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The problem with these undertakings is that, should a future Government wish to introduce different repayment rates to make it easier for young graduates, many of whom are also in the housing market and face problems of trying to get mortgages and so forth, they tie the hands of future Governments in relation to the loans that have been sold off. I presume that they do not tie their hands in relation to new tranches of loan because there would be specific undertakings in relation to each of them.
I do not doubt that the Minister will recognise that, as with the PFI deals, one is talking long term; one is talking 25 years. It is very unlikely that the Government will not change within the next 25 years and the hands of future Governments will be tied. The Minister spoke about giving future Governments flexibility to secure best value, but the Bill also provides a very inflexible instrument and gives them very little choice. This raises an issue of principle. I have discussed it at some length with my Treasury team and we are agreed that we are not happy with the provisions as they stand.
Amendments Nos. 15 and 16 are minor amendments, which seek clarification. It might have been better to have spoken to them earlier with the second group of amendments, since they pick up the issue that I raised then; namely, the difference between loan regulations and loan arrangements. I am grateful to the Minister for having clarified that.
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