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A big question arises over waiting. Why not? I hope that the Minister will be able to answer this, but I suspect that it will be difficult for her. She maintains, of course, that the Bill is not connected to any particular intention to initiate an imminent sale, although a sale has already been budgeted for in this year’s CSR. Does the Minister truly, honestly and openly believe, amid the flurry of problems in the financial industry, some of which are unprecedented, that we will get the best possible deal for the taxpayer if the sale goes ahead at any time soon? Let us be honest: this Bill is being rushed through. The drafting has been subjected to constant last-minute improvements and there has obviously not been enough pre-legislative scrutiny. What is motivating this hurry? We suspect that it is the Government’s desperation to fill the holes in their budget. It is difficult to believe that the sale will not go through if value for money cannot be achieved, as the Minister claimed in Grand Committee, when the CSR has already taken into account the revenue that it would generate.
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We have spent a lot of time discussing and debating the notion of value for money, but the Government still refuse to put what they mean by it into legislation. We understand that a precise framework in the Bill would amount to giving away our hand before the game has begun. However, the actual changes we seek to make—an analysis of the current climate and so forth—are the most obvious things to do before any sale takes place. I appreciate the need to protect our interests and ensure value for money by not putting too much commercially sensitive information out in the open. I understand that that would be counter-productive, but not being open about how we determine the benefit to the taxpayer is dangerous.
Discussions outside the Chamber seem to indicate that the Government might be willing to consider the precepts in our amendment, but to have them applied retrospectively. Indeed, if I understand the position correctly, there is a chance that the Government will table an amendment at Third Reading outlining a value for money framework such as the one we propose in this amendment. It would be published with an assessment of the Government’s success in realising value for money one year after the first sale. The assessment would be made by independent bodies and published widely. If the Government would agree to drafting and tabling such an amendment, we would accept the concession and withdraw our amendment. In the mean time, I look forward to the Minister’s response.
Baroness Sharp of Guildford: My Lords, I have put my name to this amendment because we on these Benches also believe that it is vital that the Government secure value for money in the sale of these loans and live up to their promises to do so. As I mentioned in Committee, we are talking not of the odd million but of the odd billion. The hope is that we can sell forward part of the current portfolio of student loans and raise, as the noble Baroness, Lady Verma, has mentioned, some £3.4 billion this year. It would not be a bad sale, but what we are losing is not a matter of £10 million, £20 million or £30 million, although during Question Time today the Government said that it was impossible to find £30 million to provide fruit for children in nursery schools. Here we are talking about possibly making a bad sale and losing hundreds of millions, and it is therefore a vital issue.
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We should also be clear about what the alternative is. If the Government do not sell on the portfolio of student loans, or parts of it, they would retain the portfolio for themselves, which, as the noble Baroness, Lady Verma, said, is a major financial asset in their hands. As a result of holding this portfolio, they secure a steady and increasing stream of payments which can help to fund government expenditures in future. They are straightforward repayments. They are not high risk because the repayments are gathered up through the PAYE system by Her Majesty’s Revenue and Customs. The Government have lent money today and will receive a stream of repayments in the future. That is the alternative to selling on the portfolio.
Securitisation, or selling on the portfolio, would mean that instead of receiving a flow of income over
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Subsection (8)(d) of the amendment states that the Secretary of State shall,
- “assess the proceeds that look likely to be achieved in the transaction using full and clear market information and a comparison with keeping the loans on the Government books, in terms of both likely income flows and levels of risk”.
It seeks that the comparison should be made and that the Secretary of State should ensure that the income likely to be achieved is a better option than keeping the loans on the Government’s books. It is important to recognise that it is not impossible to keep the loans on the Government’s books and that that may be a better option, certainly in the short term, than selling them off. This is very much the point the noble Baroness, Lady Verma, made.
Given the state of the market at the moment and the cynicism about the processes of securitisation, quite frankly, what the Government can achieve will not be worth while. The rate of discount gives a much higher value to these risk factors than should be implicit. Securing value for money is about making a judgment about whether you are likely to achieve a rate of discount which is fairly close to the one used by the Treasury or whether the market is offering a rate of discount which at the moment would be regarded as unrealistic. I come back to the fact that we are talking not about the odd million but about hundreds of millions of pounds.
Having discussed the matter at some length with the Minister and the Bill team, I recognise that some elements of the amendment pose some problems for the Government. For example, it is not necessarily easy to ensure, as proposed new subsection (8)(a) requires, a competitive market for loans. The Minister might find preferable wording such as “the Secretary of State should satisfy himself that there is a competitive market for loans”.
I believe that the Minister is thinking about bringing forward a government amendment. Our proposal makes clear the kind of amendment that we on both sides of the Opposition want to see the Government bring forward. Given the principles the Government laid down about how they would secure value for money, we believe that this is a perfectly reasonable amendment.
Baroness Morgan of Drefelin: My Lords, I hope I can offer the noble Baronesses, Lady Verma and Lady Sharp, some concrete encouragement, in my few remarks here, that we should have a fruitful discussion at Third Reading on this matter.
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As we have heard, the amendment sets out the principles of how to ensure good value for money in any loan sale. The Government are wholeheartedly behind these reasons and endorse them. Indeed, they closely follow the principles that we have placed on the record during earlier stages of the Bill as central to our approach to loan sales. At this stage, however, we need to resist the amendment, and I shall take a few moments to explain that apparent paradox.
For each sale of student loans there will be a rigorous assessment of value for money. There is no question of a fire sale or of the Government not being prepared to wait. With regard to any continuation of the current market turbulence, as I said in Committee, so far as that turbulence translates into poor value for money of any sales of student loans, we would of course not go ahead with a sale at that time. I stress that again for the record.
Let me be clear: for the sale of student loans, there will be a rigorous assessment of value for money. If Ministers and the departmental accounting officer judge that a sale at any given time does not represent good value for money, it will not go ahead. That follows the required procedure used in every public sector organisation. We have set out the principles of our approach to value for money. I appreciate the concerns of the noble Baroness, Lady Sharp. We are talking about extremely large sums of money and I recognise the House’s concerns about the order of magnitude here, but our view is that these principles should not be translated into a set of statutory tests to be passed in advance of a sale. We think it is right for that judgment to be exercised by the accounting officer and the Government of the day, and for Parliament subsequently to scrutinise that judgment. If, in contrast, we create a set of legal tests to be met before a sale could be deemed lawful, we risk taking that decision away from the accounting officer and Government and taking away the security that Parliament will have to scrutinise the terms of that sale.
The amendment would significantly increase the level of uncertainty about the sales process for purchasers, something that will undermine the drive for value for money. Purchasers may feel uncertain about the prospect of a judge examining the particular considerations surrounding the sale, finding that the tests had not been set and potentially striking down the sale. Any such uncertainty could deter the purchasers or affect the price they would pay. Far from guaranteeing good value for money, which we are all aiming to achieve, the test in Amendment No. 2 could work against that aim. It would also undermine the responsibility of the accounting officer, which underpins current procedures for protecting public funds from misuse, but I reiterate that we are completely at one on the thrust of what the amendment is trying to achieve.
Over the long-term programme of sales, we envisage that the Government will be able to draw on the expertise of the National Audit Office evaluation and continuing parliamentary scrutiny to ensure the best possible approach to obtaining good value for money. Establishing a set of tests in primary legislation at the outset—
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Baroness Sharp of Guildford: My Lords, does the Minister not agree that on that basis it might be quite sensible, since the securitisation process is new because the previous set of student loans that were sold off were mortgage-style loans and were sold en bloc, to start off with a smaller sale rather than a larger one?
Baroness Morgan of Drefelin: My Lords, as the size of the student loan book grows, there will be tranches. I do not want to compromise any potential sale by saying what size a sale might be, but I understand the noble Baroness’s concerns. We are talking about a long-term programme in which a number of sales would take place. We would learn as the sales programmes went forward.
Baroness Sharp of Guildford: My Lords, as I understand it, the programme is for £3.4 billion of sales this financial year, £1.4 billion the next and £1.1 billion the year after that. It would seem sensible to reverse the order and go for £1.1 billion this year to see how it goes and to have the National Audit Office say, “OK, this is a good process”.
Baroness Morgan of Drefelin: My Lords, I do not want to prejudice the work of the sales arrangers, but those estimates were put together some time ago for the Comprehensive Spending Review under different conditions. It is not reasonable to say anything other than that the sales arrangers and the accounting officer in the department are committed to value for money, which involves thinking carefully about how the programme is structured and not just about sales as one-off items. It is a programme of sales. How we conduct the first sale will be important in terms of how the market responds. I appreciate the noble Baroness’s point. The figures that she quoted are estimates; they are not targets or commitments.
Over the long-term programme of sales, we envisage the Government being able to draw on expert advice and continuing parliamentary scrutiny to ensure the best possible approach to obtaining good value for money. Establishing a set of tests in primary legislation at the outset would deny the Government the flexibility to learn from the experience of the unfolding programme of sales.
I am happy to reiterate that the Government will report to Parliament after each sales transaction. If placing a commitment to that effect in the Bill in any way mitigates the concerns of the noble Baroness, Lady Verma, I am prepared to consider further whether the Government could bring forward an appropriate amendment at Third Reading. I hope that we will continue to discuss this important matter. On the basis of that commitment to consider it further, I hope that the noble Baroness will withdraw her amendment.
Baroness Verma: My Lords, I thank the Minister, although I remain cynical about the pressure that the Treasury will use to ensure that the sale goes ahead. I cannot see how a value-for-money framework that ensures that certain conditions are in place will create uncertainty in the market. The noble Baroness, Lady
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Amendment, by leave, withdrawn.
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Clause 2 [Sales: supplemental]:
Baroness Morgan of Drefelin moved Amendment No. 3:
“(4A) Transfer arrangements may include undertakings by the Secretary of State about the power to make loan regulations; in particular—
The noble Baroness said: My Lords, this group of amendments deals with possible future changes to terms and conditions with regard to student loans. Amendment No. 3 responds to the latest expert advice that we have received from our sales arranger, Deutsche Bank, as I stated in Grand Committee. We now believe that we need to amend the Bill to ensure a durable framework for making loan sales that will yield good value for money. In Grand Committee, the noble Baroness, Lady Verma, asked whether this amendment was about making the sale transaction commercially viable or ensuring that a sale would be a true sale under classification rules. The answer is that it is about both—and rightly so. For the loan sales programme to meet its objectives, it must both enable the Government of the day to get a price for the loans that represents good value for money and remove the loans from the Government’s balance sheet, releasing funds to meet government priorities.
For us to achieve good value for money, potential purchasers must understand what is being sold. Financial institutions are adept at valuing the economic and credit risks that we are seeking to transfer away from government by selling student loans. They will model how quickly they expect income-contingent repayments to be made, taking into account projections of graduate earnings, unemployment and other macroeconomic factors and demographic factors such as mortality. However, they cannot model the likelihood that Ministers will use their powers to change the conditions of repayment and the predicted cash flows to the special
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The Bill currently gives us one option to address the issue by providing for compensation to purchasers if future policy changes compromise the value of the transferred asset. We have been advised to allow for more than one way to address the issue and that the Government may achieve better value for money if they make undertakings about how terms and conditions may or may not be changed by future regulations. Investors may prefer that kind of certainty over the compensation mechanism and may discount their price to take account of any perceived uncertainties about how compensation may 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 one-off compensation. The amendment also gives some flexibility to cater for changes in the classification rules, which are currently being redrafted by Eurostat. Changes in these rules can have a material impact on the ability to offer compensation. We do not want future Governments to be in a position where their only means of addressing the future policy change becomes something that, under updated rules, prevents a true sale.
Making undertakings will not be about making changes to improve the lot of the purchaser; it will be about giving certainty about the current position and the Government’s intentions over time. If—and I underline the word “if”—the Government use undertakings in sale contracts, they will be made public as part of the sale process. Any changes to the regulations on which undertakings are given would have to be made in advance of the transaction, with usual parliamentary scrutiny.
If a Government gave undertakings as part of a sale, they would constrain future discretion on policy change affecting those sold loans, although not unreasonably, in that they would be committing only not to change terms in an unexpected way in the middle of a borrower’s period of repayment. Terms and conditions will remain as set by regulations and, as we have stated unequivocally, purchasers cannot alter those regulations, which are set by Parliament.
No borrower will be in a worse position for their loan having been sold and, in developing the amendment on undertakings, we have reflected on the importance of borrowers being fully reassured on that fact. That is why Amendment No. 6 will mean that, when amending the regulations, the Secretary of State must seek to ensure that borrowers will not be in a worse position as a consequence of their loan being sold. If the Bill is enacted, this provision will apply to all changes in regulations after a loan has been sold, not just where an undertaking may have been made. I hope that noble Lords will agree that Amendment No. 6 is a worthwhile strengthening of the statement already on the record and that it will give borrowers confidence that the commitment is intended to stand the test of time.
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I should mention that it has just been drawn to my attention that we will need to make a minor drafting addition to these two amendments, which should mirror the compensation arrangements in Clause 2(4) by covering regulations made under Section 186 of the Education Act 2002 as well as those regulations defined in the Bill as loan regulations. We will table relevant drafting amendments at Third Reading. I flag that up to the House now.
We are all working to ensure that this Bill provides the most effective framework for a programme of loan sales and that it protects borrowers properly. The amendments in the group represent an important strengthening in both these aspects. I beg to move.
Baroness Sharp of Guildford: My Lords, in Committee I indicated the unease on these Benches at the terms of this amendment. The Government propose the amendment because of advice from Deutsche Bank, their current arranger for the sale of loans later this year, on the mechanism for compensating any change in regulations as set out in Clause 2(4). The Bill states:
“Transfer arrangements may include provision for the Secretary of State to pay compensation to the loan purchaser to reflect regulations under section 186 of the Education Act 2002 ... (reduction of balances, &c.) ... in connection with amendments of loan regulators, or ... in other specified circumstances”.
The question is whether that provision is sufficient should there be changes in the loan regulations. At present the loan regulations are set. They require that, for example, the threshold for repayment is £15,000. The Government have made it clear that from 2010 that threshold for repayment will rise with the RPI. They also set repayments after the threshold at a marginal rate of 9 per cent of income.
Our main objection to these amendments is that they tie the hands of any future Government should they wish to change the terms of the repayments. Obviously, the 9 per cent rate of repayment required under the Bill affects a large number of people. The aim is that 50 per cent of the age cohort shall now go to university. Therefore, 50 per cent of young persons will in future be paying back their student loans. As we remarked in Committee, if one aggregates income tax, national insurance and the repayment of student loans, one finds that young people earning £20,000 to £22,000 per year are paying a higher marginal rate of tax than millionaires in this country. It is tough on them in current circumstances, when they are struggling to get into the property market, and a future Government may wish to change those terms in order to make life less tough.
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