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Sale of Students Loans Bill

moved Amendment No. 3: 3: Clause 2, page 2, line 32, 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 (c.30) (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: 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 purpose vehicle. That is a political risk, not an economic one, and investors will find it hard to value. If potential purchasers believe that the Government may alter an asset in an unpredictable way after selling it, this will seriously reduce what they will pay. 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. 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.