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Sale of Student Loans Bill

moved Amendment No. 10: 10: Clause 2, page 2, line 30, at end insert— ““(4A) Transfer arrangements may include undertakings by the Secretary of State about the power to make loan regulations; in particular— (a) the Secretary of State may undertake to exercise the power so as to achieve a specified result, (b) the Secretary of State may undertake not to exercise the power so as to achieve a specified result, (c) the Secretary of State may undertake to follow, or not to follow, a specified procedure in connection with the power, (d) the Secretary of State may give undertakings about the indices, information or other matters to be used or considered for the purposes of section 22(4)(a)(i) of the Teaching and Higher Education Act 1998 (interest rate to maintain real-terms value of outstanding amounts), and (e) a loan purchaser may enforce an undertaking by way of legal proceedings in public law, private law or both.”” 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 potential purchasers’ part is a prerequisite for us to be able to achieve good value for money. 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, and risks associated with, those investments. If potential purchasers believe that the Government may change the nature of an asset after selling it in a way that cannot be predicted, that will seriously reduce the amount they are prepared to pay for it. 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 ins that. 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 in the middle of a borrower’s period of repayment. No borrower will be in a worse position for their loan having been sold. Amendment No. 17, which I will come to shortly and which is in a sense an intrinsic part of these provisions, would make this explicit in the Bill. Terms and conditions will remain as set by regulations and, as we have stated unequivocally, purchasers will not have discretion to alter them. I should make 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. Whereas 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. 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.