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It is clear in Clause 1(4)(b) that the loan purchaser inherits a repayment regime laid down by loan regulations or arrangements for those issues which cannot be covered by them. It struck me that there might be issues of substance there which it would be necessary to allow for in any amendments to loan regulations. However, I accept the Minister’s point. This is not a substantive amendment in any sense. However, we on these Benches are not happy with the commitment to undertakings as proposed by Amendment No. 10.
Baroness Verma: I wholeheartedly agree with the noble Baroness, Lady Sharp, about how this impacts on students. With the cost of living going up and everything else, students are facing higher tax bills than most millionaires. The Government and the Minister need to seriously look at that.
The government amendments in this group are very strange. For a start, they are so open-ended that there is little that the Secretary of State would not be empowered to do with regard to the sale of student loans, including altering the terms of the loan and specifying various terms of the sale. Perhaps the Minister could outline any powers regarding the terms of the student loans and the sale of the loan book that the Secretary of State would be prevented from exercising. Is there anything that he or she cannot do?
The purpose of these amendments is not entirely clear. They seem to have two potentially very different purposes. First, the letter that I gratefully received from the Minister said that this amendment was inspired by consultation with Deutsche Bank. The consultation, as I understand it, was on what mechanisms needed to be included to ensure that loans were commercially viable. The whole business of selling off the student loan book is complicated by the fact that the Government are doing the selling and that changes in government policy might affect the product on offer. In commercial terms, a purchaser then faces the unquantifiable risk of changes in government policy which could have real effects on cash flows.
Any savvy negotiator seeking to purchase these loans would surely pounce on this unquantifiable risk to drive down the price and thus jeopardise our ability to get value for money. Is this amendment intended to make the loan book more commercially attractive by dampening the degree of unquantifiable risk and effectively saying that if it is changed it will be changed only in certain ways? If that is the case, there seem to be several problems.
First, there is absolutely no specificity as to what a Secretary of State would promise; that is, what terms of sale would be appropriate. Would it take the form of agreeing only to change the terms of student loans along with the RPI? Could it be an agreement on any other index of inflation? What promises is the Secretary of State likely to make? Under this amendment, it seems that he or she could make any promise he or she wanted, and do so in private. While I appreciate that this is commercially sensitive and therefore cannot be public, and that the way in which
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Secondly, agreeing that the loan book, or even just a particular tranche of loans, will change only in certain ways binds the hands of future Secretaries of State to amend education policy as he or she and the people of this country who elected him or her see fit. That seems particularly dangerous. Will the Minister unravel the paradox that places a firm commitment on the purchaser on the one side and the sovereignty of Parliament on the other? Are the two mutually exclusive? However, increasing commercial viability of the loan might not be the only reason that this amendment has been brought forward, although it seems unlikely that Deutsche Bank can, or should, be allowed to advise on anything else.
The other issue concerns the ONS and the ability to classify these sales as genuine because there has been a transfer of risk. There was no mention of that in the letter I received from the Minister. The current mechanism in the Bill which provides for compensation to purchasers whose cash flow is affected by changes in government policy means that the purchaser is not taking much of a risk. As I mentioned before, the rate of default is fairly low; thus the Government would essentially be saying to purchasers that they will fix any mess they cause, once again placing the Treasury coffers in the firing line. I understand that the Government have been in consultation with the ONS regarding whether this compensation mechanism would mean that the sale of the loan book would be a genuine sale. Will the Minister outline in detail the results of that consultation? If the consultation has not been completed, does the Minister not agree that it is hugely irresponsible to make this law without such guarantees? Is this amendment intended to get around this hitch by giving assurances to purchasers so that they will be willing to take on the risk, and therefore firmly get this debt off the government books? Essentially, is the heart of this amendment about making the loan book more attractive, or is it about the genuine transfer of risk from the public accounts to the private sector?
Baroness Sharp of Guildford: We, too, are also extremely unhappy at the open-ended nature of this amendment. It seems in many senses to give powers to the Secretary of State to do things or not do things more or less as he or she wishes. We are not happy to lob through these provisions.
Baroness Morgan of Drefelin: I thank the noble Baronesses for their comments. I hope I can come back with some reassurances. The noble Baroness, Lady Verma, asked what the objective of the amendment is. We have said on a number of occasions that it is about creating as much certainty as possible for potential purchasers so that they can properly value the loans. By reducing uncertainty, we reduce the likelihood that the value of the loans
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With regard to transparency, which is very important, as I said, any agreed undertaking would be made public as part of the sale so there would be transparency about agreements. Parliament can repeal any Act it likes at any time, so the constitutional issue about the sovereignty of Parliament and our role as parliamentarians is not affected. I understand the noble Baroness’s concerns. This is not something we would consider lightly, but we will not be able to achieve value for money if purchasers face uncertainty because the asset they had bought could fundamentally change. That is what the instrument of compensation is for. Therefore, this represents another option. We need to be clear that we are referring to making undertakings about the loans that are sold. For sold loans, it would not be possible for terms and conditions to change in the middle of their repayments. These undertaking refer to sold loans.
4.15 pm
In the same group, we have talked about including our commitment to ensure that students whose loans have been sold are not treated less favourably. We need to be clear that future Governments could still change eligibility and entitlement for new loans; for example, the levels of grant and loan, and the income thresholds, for receiving them. The Government have made a public commitment that in 2010, the threshold for repayment will increase with RPI.
The noble Baroness, Lady Verma, asked about the classification of sale. The Office for National Statistics follows guidance from Eurostat in setting out the classification rules for a true sale. Eurostat is reviewing its guidance, which may change, and may change again over time. Giving undertakings is another way to reassure loan purchasers that they are not exposed to political risks while taking on economic risks. I know that the noble Baronesses, Lady Verma and Lady Sharp, are aware of these points.
I have found this discussion very useful, but I need to come back to the original motivation for laying these amendments, which are about creating certainty for potential purchasers. We are talking about possible undertakings being made on the treatment of sold loans. As for future Governments, as we know, and as I am trying to stress throughout our discussions, we are talking about a rolling programme of the sales of student loans going forward, which would be a feature of the student loan book. We need to have all the instruments at our disposal to ensure that we achieve the value for money that Members of the Committee were espousing the need for earlier.
In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
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Lord Tunnicliffe: I beg to move that the Committee do now adjourn during pleasure until 4.29 pm.
Moved accordingly, and, on Question, Motion agreed to.
[The Sitting was adjourned from 4.19 to 4.29 pm.]
The Deputy Chairman of Committees (Lord Brougham and Vaux): I should advise the Committee that if Amendment No. 12 is agreed to I cannot call Amendment No. 13.
Baroness Verma moved Amendment No. 11:
The noble Baroness said: Clause 3 concerns the onward sale of the loans. It gives the purchaser the right to sell loans to another buyer after the initial sale. Of course, we have received some assurances regarding certain limitations on this power, but there still need to be further safeguards. Collateralised debt is the subject of much media attention these days and we all know how often loans are repackaged and sold off to a multitude of other actors. There is no guarantee that we will even know who they are. Indeed, they could be out of the jurisdiction of the Secretary of State, opening up limitless problems concerning control of the debt obligations and the terms and conditions from the students’ point of view. Also, some students could find themselves unprotected by English law. An international student who has returned home faces the possibility that the return on the debt could be demanded at a faster rate.
The effects of this provision, as I am sure that the Minister would agree, would be unfair, but how are we expected to control it? Does the Minister not think that there should be mechanisms in place to prevent this? To address this issue, we propose placing a duty on the Secretary of State to satisfy one of two conditions—that the arrangements include a prohibition of transfer to those outside the control of the Secretary of State or the prohibition of further transfer arrangements under which rights in respect to student loans are transferred to multiple purchasers. We strongly feel that there needs to be some protection on the conditions of onward sale; otherwise there is no way in which to guarantee that this will not have a terrible and unfair effect on students—or is this clause designed to address similar issues that I raised above, regarding the ONS? Is it in the Bill simply to make the sales genuine? Does the Minister anticipate Clause 3 ever being used? If that is the case, it is even more dangerous. If there are no safeguards and no real intention of powers in the clause being exercised, what happens if someone tries?
This is a particularly worrying aspect of the Bill and I hope that the Minister will be able to give further assurances and support our attempts to protect students’ interests. I beg to move.
Baroness Sharp of Guildford: I shall speak to Amendment No. 13, which is in my name. In doing so, I seek to clarify the situation. The purchaser of the
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Baroness Morgan of Drefelin: Yes.
Baroness Sharp of Guildford: My amendment is one of those little amendments that changes “may” to “shall”. It refers to subsection (6), in which the transfer arrangements “may” prohibit, and so on. The question is whether it should be “shall”. The issue was discussed at some length in the other place, the main objection to it being “shall” relates to the classification. It is another piece of business under Eurostat and ONS rules. For example, if,
is “shall”, it counts as being within the public sector and the debt and, therefore, the risks are not transferred; whereas if it is “may”, the debt can be transferred over. We have “may” rather than “shall” entirely because of this quirk of meaning, interpretation and definition within the framework of our statistics regulations.
That seems a very poor reason for not having “shall” because, on the whole, it would be a good idea if it was made clear. If we are setting up the special-purpose vehicle, the student loans will be serviced by the Student Loans Company, which is, as we know, a public company and so forth. It is all really rather unsatisfactory if they can in fact then be sold on, perhaps to some multinational agency which is not the slightest bit concerned about the welfare of the students. Although there are reservations within the Bill, it might well get out of hand. “Shall” is therefore a better word to have here than “may”.
In general, I have quite a lot of sympathy with the amendment of the noble Baroness, Lady Verma, which effectively picks up the same point: it is important to try to keep tabs on who may buy up these loans. In the multinational monetary markets, it would be unfortunate if an Enron bought up these loans, and we would, on the whole, prefer not to see one doing so. So I have some sympathy with Amendments Nos. 11 and 12, and not much with the excuse that this is how “public sector” is currently defined. We really ought to query that, and it should not drive how we draft legislation.
Baroness Morgan of Drefelin: As we have heard, this group of amendments addresses onward sales. First, I think that we all share the underlying aim behind each of these amendments. We all want to ensure that borrowers are as much protected in further transfer arrangements as they are when the loan is first sold. We are all rightly keen that there should be no detrimental impact on borrowers, either resulting from the initial sale by the Government or in
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It is important to say that an onward sale of the loans is extremely unlikely. The loans will be owned, as we have established, by a special-purpose company, and it is the bonds that the company issues that will be traded. The selling on of the legal title to the loans, as opposed to the economic rights to income flows derived from the loans, is an unusual event. None the less, with ownership of the loans comes the possibility of being able to sell the loans, so Clause 3 caters for this possibility. We cannot sell the loans without this possibility arising.
Before addressing each individual amendment, I remind Members of the Committee of the key protections that borrowers will enjoy under this Bill.
The main protection for borrowers will remain in place even without Clause 3(6). Purchasers will not have the power unilaterally to change the terms and conditions of student loans. Clause 3(6) has been included in the Bill to provide an additional level of protection, and would, for example, enable the Secretary of State to ensure that borrowers whose loans had been sold could access the same complaints procedures as those with loans retained by the Government.
Amendment No. 11 addresses options for methods by which the Secretary of State can be a party to onward sales, so ensuring that the Government have flexibility to provide protection for borrowers in future sales. I understand the amendment intends to make it mandatory to follow one or other of the alternative approaches set out in Clause 3(6)(b) and (c), although as currently drafted it would make both mandatory, which would not work.
I have not judged it necessary to make such a provision about onwards sales mandatory in initial sales contracts, following the general approach of the Bill in enabling a range of issues to be covered in the transfer arrangements. But we consider that such a proposal could work provided that it was clearly about using one of the possible alternative approaches to this particular issue and catered for the possibility that another contractual device to achieve the same end may be more appropriate, or become so in the future. I am happy to take the matter away and consider whether a government amendment could be tabled on Report that preserves the options we need within a mandatory provision. On that basis, I hope that the noble Baroness, Lady Verma, will withdraw Amendment No. 11.
Amendment No. 12proposes some additional prohibitions about onward sales. As I have already said, we think that it is unlikely that the loans themselves will be sold on, but purchasers must have the right to do so. Even if loans were sold on, we do not expect a significant fragmentation, and, as my honourable friend the Minister for Higher Education and Lifelong Learning has made clear in debate in another place, the Government would ensure that
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We cannot exert substantial control over to whom purchasers might sell loans in the future, even though I must stress that we see that as extremely unlikely. Once we have sold an asset it belongs to someone else, and we cannot decide whether it is sold again or whether a subsequent purchaser will be resident in England and Wales. Indeed, EU law would in any event prevent us confining ownership to an organisation in England and Wales. The loans are governed by English law, wherever a purchaser may happen to be. Given the way loan repayments are collected, through PAYE, it is hard to see how the location of a purchaser could have any effect on the borrower or how a purchaser could somehow evade the Secretary of State and yet still obtain his money.
Attempting to constrain onward sale would also harm the prospects of meeting the objectives that we believe are widely shared. In seeking to prevent sales to multiple purchasers, the amendment would only allow any purchaser to sell all of their holding of loans to one further purchaser. That may impact on the price achieved and be a significant barrier to achieving good value for money. Critically, trying to exert substantial control over matters such as onward sale would mean that the initial transaction would not constitute a sale and would not make funds available for investment in other priorities.
We cannot have it both ways and must recognise that if we sell assets, they belong to someone else to dispose of. To try to control onward transfer in the way envisaged by Amendment No. 12 would make it likely that the loans would be classified as remaining on the Government’s books. We should keep in the forefront of our minds that the Bill will not give purchasers the right to change terms and conditions of the loans; and so this right could not be transferred to a further purchaser as part of an onward sale. That is the borrowers’ primary protection. On that basis, I hope that the noble Baroness will feel able to withdraw Amendment No. 12.
4.45 pm
Amendment No. 13, moved by the noble Baroness, Lady Sharp, could have some undesirable and perhaps unintended consequences. It would require the Secretary of State, if pursuing one of the alternative options for protecting borrowers through onward sales, to enforce the terms of such a contract in all circumstances. In some circumstances the Secretary of State might want to intervene, if some right of the borrower was potentially at risk. It cannot be right, however, for the Secretary of State to be concerned in all cases with the bargains reached by commercial entities between themselves, much less for him to have to enforce them against one or other party on an assumption of who may be at fault. The Government must be able to retain the right to consider whether, and in what way, to respond to any suggestion of a breach, depending on the type and manner of the breach. It would not be right for the Government to have to step into all issues surrounding onward contracts. I hope that the noble Baroness will agree not to move the amendment, given that reassurance.
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Finally, Amendment No. 14 is a government amendment, offering clarification on how the Bill addresses onward sales. It has always been our intention that Clause 3, which deals with onward sales of loans or “further transfer arrangements”, related to the transfer of legal title of the loans. Our expert advisers tell us that we need to distinguish in this clause between the transfer of title, where we need to protect borrowers, and the technical creation and onward transfer of equitable rights—rights to the repayments—to the various other parties that occurs in setting up the special-purpose vehicle and securitising the loans. To seek to regulate this division of equitable interests would be both unnecessary and unworkable given the complexity of the structures. It is the legal owner only who has a relationship with the borrower and with the student finance system as servicer.
If we do not make that distinction, potential purchasers and investors may be deterred from participating in loan sales in the mistaken belief that the Secretary of State will need to be a party to all the transfers and onward transfer of equitable rights that can take place in the context of a securitisation. We are talking about the onward sale of bonds rather than the title of loans.
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