Sale of Student Loans Bill

I am writing to you as Chair of the Joint Committee on Human Rights, in response to the Committee's fifteenth report of the current session, which includes coverage of the Sale of Student Loans Bill. I acknowledge the Committee's comments about the extent to which we have made it explicit that purchasers will not have the right to alter terms and conditions of sold loans, and note its conclusion not to recommend any amendment to the Bill on that issue, given the statements the Government put on the record during passage through House of Commons stages of the Bill.

Given the Committee's particular interest in the issue of future changes to terms and conditions, I am writing to draw your attention to amendments to the Bill we are tabling today that touch upon this issue. Lords Committee is on Thursday 8 May.

The amendments spring from discussion we have had with our recently-appointed sales arranger (a team from Deutsche Bank), which is helping us prepare for student loan sales in 2008-09. We want to take advantage of their expert advice to ensure that we have provisions in the Bill that are clearly understood by potential investors and will thus facilitate a sale that can yield good value for money for the taxpayer.

The issue of greatest substance concerns the Government's ability to amend Regulations affecting the terms and conditions of all loans. Purchasers will have no ability to alter terms and conditions of sold loans, and the Government will retain this power to vary them. In asset sales of this kind it is unusual for potential purchasers to face the prospect of such change, so we have had to consider how to handle the concerns that they might have that a future Government could, for example, raise the repayment threshold in a way that would reduce the repayment flows to which the purchaser would be entitled.

At present, we have a provision in the Bill for compensating purchasers if we were to change terms and conditions of loans after the sale in a way that adversely affected the repayment cash flows from the purchasers' perspective. Because we are legislating for a long-term programme of sales and want to ensure sales achieve good value for money, we think we ought to have at our disposal more than one way in which investors can be given confidence that a change in the terms and conditions of repaying the loans will not affect the value of the assets they have bought. So we are bringing forward an amendment to Clause 2 that would enable the Government to make undertakings at the point of sale about how specific loan terms and conditions for sold loans would or would not be altered by future changes to regulations.

Such undertakings might be needed to provide sufficient certainty to enable purchasers to value the loan assets with confidence - and that confidence would be a pre-requisite for Government to achieve a price that was not discounted on the grounds of an unquantifiable risk about future policy decisions. For example, we might give an undertaking about the repayment threshold, making into an enforceable commitment the current publicly-stated policy intention to keep the threshold at £15,000 a year until 2010, and then increase it in line with RPI; or undertake not to alter the 9% repayment rate.

To be clear, we would not be abandoning the idea of a compensation mechanism for policy change, but giving Ministers the ability to make undertakings would provide flexibility to adopt different approaches to ensure good value for money.

We recognise, as does the Committee, the importance of our commitment that no-one should be treated differently if their loan has been sold. So we would need to be quite clear that if Government gave an undertaking not to alter one or more terms and conditions for loans that were sold, or to alter them only in pre-arranged ways, it would also apply to comparable unsold loans. In view of this, and bearing in mind the emphasis given in earlier debate and by the Committee that we should make our reassurances as concrete as possible, we are tabling a specific amendment to Clause 4 to put a commitment on the face of the Bill that such parity of treatment will be the aim of how the Government approaches any future change to regulations.

There are also three minor points of clarification on which we are considering amendments, with a view in particular to ensuring that potential purchasers are in no doubt about what we intend. These do not relate to the Committee's main area of interest, but for completeness, I describe them below.

First, as the Explanatory Notes on Clause 5 set out, there is a presumption in the Bill that all monies relating to sold loans should be paid to the loan purchaser. The presumption is qualified by the cross-reference in Clause 5(4) to Clause 2(2), so that the transfer arrangements (sales contracts) may provide for exceptions, but we now consider that this provision is not the clearest way of saying that the transfer arrangements could provide for some payments (for example penalties in the tax regime about inaccurate returns) still returning to Government after a sale. So we have proposed a minor drafting change to the cross-reference to expand its scope to the whole of Clause 2. The amendment does no more than fulfil what we originally intended.

Second, our intention in dealing with onward sales - or "further transfer arrangements" - has been to ensure that borrowers remain protected if the legal title to their loans is sold on. But our advisors tell us we need to distinguish between the transfer of title (where we need to protect borrowers) and the technical onward transfer of equitable rights - rights to the repayments - to the various parties that occurs in setting up the Special Purpose Vehicle and the securitisation. These arrangements are ones we don't need to regulate or participate in so as to protect borrowers and it would make the securitisation process unworkable if we did. It Is only the legal owner who has the relationship with the borrower and with the student finance system as servicer. We are tabling an amendment to Clause 3 to clarify what we intend and to ensure that we do not restrict the sale of the assets more than is necessary.

Third, and a consequence of this second clarifying amendment, we have tabled an amendment to Clause 6 about HMRC data to make sure that we do not exclude from its scope those parties we are excluding from Clause 3. We need this to enable potential purchasers and those who would have equitable interests in the SPV to be able to examine the anonymised data used in the modelling of our Sales Arranger to decide whether to invest.

If you would like any further clarification, please get in touch with me, or contact the Bill Manager.