This is very interesting - Hansard: (apologies for the amount of reading)
Public Accounts Committee - Minutes of Evidence
Why would anyone buy this debt?
Can terms and conditions be changed
www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/886/131211.htm
Well worth reading:
Q43 Mr Bacon: Can I clarify something else? I have just found this on the internet, so goodness knows it may be wrong, but apparently all student loan agreements carry the following clause, which looks like it is lifted from somewhere, so is probably correct: "You must agree to repay your loan in line with the regulations that apply at the time the repayments are due and as they are amended. The regulations may be replaced by later regulations." The narrative on the website goes on to say: "As such, students ‘are told to sign an open-ended loan agreement where the interest rates and term of repayment can change, at any moment in time, at the whim of government, without the need to [pass] legislation.’" Is that correct? Is that a fair summary of the current position?
Martin Donnelly: The Government does have the ability to change certain terms of the loan, including, for example, the level of indexation. I don’t know, Mick, whether we always require secondary legislation or the way we would have to do that.
Mick Laverty: I am not sure, but I don’t believe we do.
Q44 Mr Bacon: No, the implication is that you must repay it in line with the regulations that apply at the time that the repayments are due and that those regulations may be amended and then you would be obliged to follow the new amended regulations. That is correct, isn’t it? The existing structure provides for that without having to come back and do a piece of delegated legislation and get a statutory instrument or anything like that. Is that correct?
Mick Laverty: That’s correct.
Q45 Mr Bacon: Okay. Fine, I am just checking. So if you were then to sell the book, what freedom would somebody buying the book have? That is not you the Government as the person who is owed the money, but the person who now owns the book, it having been purchased by them? What freedom would they have to alter the terms and conditions after they had bought the book? Would they have any freedom at all?
Martin Donnelly: The plan would be to sell tranches of the loans and the terms-this is an issue that we need to be clear about as we go through the preparatory process-would be set. So the point about the people buying the loans is that they would not have a say in what those terms were. But the question of what we have to say about what we would be prepared to commit to do or not to do is one of the issues that is in the value-for-money calculation we have to make.
Q46 Mr Bacon: Yes, I understand that. But the moment you sell a particular tranche of debt, the terms and conditions upon which it is sold are set in stone. They are crystallised and the buyer of that debt buys them on those terms and that is it; they cannot change them. Correct?
Martin Donnelly: We have to be clear about what those terms are, yes.
Q47 Mr Bacon: Sorry, am I correct in what I just said? You were shaking and nodding, and that does not get recorded in the transcript. Can we just be clear that the person buying the debt buys it on set terms and conditions that cannot subsequently be changed by the new owner of the debt? Is that correct?
Martin Donnelly: Yes.
Mr Bacon: Okay. Thank you.
Amyas Morse: I am curious to know why someone would buy this and then what they would do. If somebody buys a tranche of debt, will they be able to approach some of the borrowers and offer them the chance to make an early payment to commute the debt completely? That might make a lot of sense from a commercial point of view.
Mr Bacon: Yes.
Martin Donnelly: I can’t give you any more detail because we have not done the work.
Amyas Morse: I realise that.
Martin Donnelly: But my expectation is that we will work on the basis that they take this on given terms and that the student borrowers who are, after all, very important in this and those repaying as ex-students will not notice the difference in terms of who owns the loan book.
Q48 Mr Bacon: But let me pursue this for one more second. Let us imagine a student loan repayer who has not got a job for the time being or has missed a payment or two for some reason and has breached the terms and conditions. That presumably could trigger certain events in the small print. It is possible that the new owner of the debt might decide to sell the debt on to somebody else, perhaps a debt collector. It is possible, depending on the terms and conditions and the small print, that the person who has bought the debt finds it is not very good because the student seems to be out of work quite a lot of the time and the payments are not routine and regular. So they want to get shot of it, and they sell it to somebody else, perhaps at a deep discount. Are there circumstances where, if they did that and sold it at a discount, the student borrower could be told that they had a legal obligation to pay the debt to this new person and that the total they now owed-say it had been £27,000-would be half that, but they had to pay it by next Tuesday? Is that the sort of risk that these students could suddenly find themselves under?
Martin Donnelly: No. We are looking at a financing operation here.
Mick Laverty: I wonder whether I could provide some clarity. The working assumption is that it will use the same model as we used for the mortgage-style loans. So when the mortgage-style loans were sold, the terms and conditions for a student were fixed, and they were fixed at no detriment to the student. To answer the point made earlier, if the buyer of that loan subsequently decided to cut a deal with the student to get a payment and commute some of the loan, that was entirely up to them. The working assumption is that the ICR loans would do the same. A student will be protected and that protection will last if the loan is sold on. That is the working assumption.
Q49 Chair: Okay. Let me move from that specifically student interest to the taxpayer interest on the sale of loans. The two previous sales, probably under the previous Government, had to be subsidised, did they not? There was a subsidy.
Martin Donnelly: In the previous repayment of the mortgage-style student loan tranche?
Q50 Chair: In the mortgage style, there was a subsidy, was there not?
Martin Donnelly: Yes. That is correct.
Q51 Chair: Thank you. So it cost the taxpayer to offload the loan. How does that help the taxpayer? You have just sold another tranche of the mortgage style.
Martin Donnelly: Yes, we have sold the final 17%.
Q52 Chair: For how much?
Martin Donnelly: For £160 million.
Q53 Chair: And what was the book value?
Mick Laverty: The face value was £890 million.
Q54 Chair: So how does that represent value for money?
Martin Donnelly: It represents value for money because we went through a very transparent process of seeking competing bids for this loan book.
Q55 Chair: No, forget about the bids. If we are selling for £160 million something that is worth £890 million, how does that represent value for money? I am sure the process was completely above board; we will ask about that in a minute. But how does getting rid of that for £160 million-short-term money into the bank, with a book value of £890 million-represent value for money? Explain it to me.
Martin Donnelly: Because the book value does not represent the actual value. What we had were the last distressed loans of the large portfolio.
Q60 Chair: Does the company to which you sold-Erudio-have the power to change the terms of the loans?
Mick Laverty: No. The terms of the loans are fixed at the point of sale.
Q61 Chair: How many bidders did you have?
Mick Laverty: Ten.
Q62 Chair: What were the subsidies involved in that deal?
Martin Donnelly: There were no subsidies involved.
Q63 Justin Tomlinson: This is the oldest part of the debt, so in effect this will include a lot of people who are lost in the system and never going to pay. To be fair, it is also from the time when people were not necessarily paying out of PAYE. This was the voluntary contributions, wasn’t it?
Mick Laverty: That is correct. This is the rump of the loans book. The last bulk MS loans were issued in 2000.
Sitting suspended for a Division in the House.
On resuming-
Q64 Chair: We are going to move on.*