Enterprise and Lifelong Learning Committee,

Meeting date: Wednesday, May 10, 2000

Official Report 239KB pdf

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Subordinate Legislation

We move to item 4 on the agenda, which is the second opportunity that we have had to consider the Repayment of Student Loans (Scotland) Regulations 2000 (SSI 2000/110).

We are joined again by Gillian Thompson of the Scottish Executive enterprise and lifelong learning department and by Jim Logie of the office of the solicitor to the Scottish Executive. In addition to the material that we had before us last week when we considered this issue, members will have a note from the clerks, which summarises the report of the Subordinate Legislation Committee and the additional information from the Executive. There is a note from Gillian Thompson, dated May 2000, which contains follow-up points to our meeting of 3 May and the report of the Subordinate Legislation Committee. There is some other guidance on student loans. Gillian, would you like to say anything to the committee at this stage?

No.

The committee raised various points during its previous discussion, the first of which was whether the interest rate charged could be described as penal and whether it would be legally enforceable. We have had information from Gillian Thompson confirming it to be legally enforceable.

Secondly, we have had clarification about the powers that Parliament has to alter the income threshold for repayment under regulation 13. Some subsidiary information has been provided about the nature of the contract into which individuals entered when they took on student loans. It has been confirmed that there is no change to the contractual arrangements that individuals have entered into in that process.

We had to await the report of the Subordinate Legislation Committee, which said:

"The Committee draws the attention of the Parliament to this instrument on the grounds of an unusual or unexpected use of the powers and also on the grounds of defective drafting acknowledged by the Executive."

That is a technical point about the second part of the instrument, which the Executive has acknowledged and will take account of. The other views of the Subordinate Legislation Committee are also available for consideration.

Today, we must decide whether we will do anything with the statutory instrument—whether we feel the need to report to Parliament on any of its provisions or whether we are happy to endorse it at this stage. Are there any comments?

My query refers to the matter that I raised at the previous meeting about the penal interest rate. I appreciate the full explanation that has been given, but I have some questions. Although regulation 12 does not specifically refer to a contract, is not it the case that any student loan is regulated from the outset by some contract? Surely the student signs something.

That is quite correct. The application form that a student signs for a student loan amounts in effect to an undertaking by the student and is therefore a contract, as that term is usually understood in Scots law.

In an attempt to interpret regulation 12(3) in a legal context, may I ask whether you are saying that, although the founding relationship is contractual, it is superseded by an intervening statutory provision?

That is right. The contract that the student has is a hybrid one. There are some terms of the contract that one would recognise as traditional terms of a contract. There are undertakings in the application form and the supporting documentation that amount to terms of contract; they are what one would normally expect to find. On top of that, the provisions of the act and regulations affect the contract but are not necessarily part of it.

I get the impression that the regulation purports to bypass what has always been regarded under Scots law as an equitable provision in relation to interests. In other words, the law intervened to protect an oppressive relationship between a contracting party with strength on his side and a more vulnerable party with less strength on his. Any attempt by the stronger party to induce penal rates of interest, such as the 5 per centum liquidate penalty that used to be found in old forms of contract, would therefore be proscribed. I am slightly concerned that the Scottish Parliament appears to be imposing, through a statutory provision, an aspect or feature of regulation that, under Scots law, would be regarded as oppressive.

The explanation that you have given is the classic explanation for the justification of the Unfair Contract Terms Act 1977 and the regulations based on it. When that legislation was enacted, penal rates of interest were certainly one of the things that it attempted to strike at. Imposing penal rates of interest was seen as an unfair exercise of a dominant negotiating position, for want of a better expression.

The effect of the provision in question is that the interest rate that one would get by the multiple of three would be between 6 and 7 per cent. To determine whether something is penal, one has to consider its net effect. I believe that if we were challenged on the basis of an interest rate of 6 to 7 per cent being penal, we would probably be able to argue that it was not, because such an interest rate is well below the commercial going rate.

Interest rates fluctuate, however. The regulation refers not to a ceiling, but to

"three times the rate or rates".

I want to place on record the fact at I am deeply uneasy about that.

We have not formulated our comments on this subject.

I am grateful to Mr Logie for his clarification.

Your point is well noted.

The booklet that has been circulated entitled "Student Loans: Guidance on Terms and Conditions" states at the bottom of page 9 that the interest rate would be a maximum of the bank base rate plus 1 per cent. That is quite a high rate—7 or 8 per cent at the moment. Three times that is more than 20 per cent. I know that that is a maximum limit, but it is a bit disingenuous to suggest that the interest rate will necessarily be low.

Paragraph 3 of the Executive note that we have received from Gillian Thompson states:

"The Student Loan Company, acting on behalf of Scottish Ministers, has discretion in relation to applying penalties under Regulation 12. This is by reason of the use of the words ‘the Scottish Ministers may determine' in the regulation."

That means that the Scottish ministers and the loan company have discretion as to whether they decide to charge interest. However, the wording of the regulation leaves them no discretion in deciding what interest rate is applied. If they decide to charge interest, they must do so at an interest rate of 3 per cent.

At an interest rate three times the rate as defined in the regulations.

I stand corrected by another solicitor. Would it not be sensible to extend the discretion beyond determining whether interest should be applied to determining the rate at which it should be applied? The wording could be amended to "up to three times the rate". Would that not allow ministers more discretion and deal with the issue that Annabel Goldie has raised?

I am not sure whether the officials who are before us can address that issue. I do not want to put them in the position of answering a question that they are not empowered to answer.

We would need to consider the issue further.

We will leave it at that.

My only observation is that the rate of interest for student loans cannot exceed the retail prices index without the Westminster Parliament's agreement. That undertaking was given in the Teaching and Higher Education Act 1998. Although there is a reference in the regulations to a maximum level of interest, should the Executive want to increase the rate of interest above the level of inflation, it would have to seek agreement from the Westminster Parliament to do so.

That does not undermine the Executive's ability to apply an interest rate three times the rate as defined in the regulations.

No.

I refer to page 11 of the booklet, which is headed "Cancellation". Would regulation 8 of the statutory instrument be affected by the sequestration of the person in receipt of the student loan? Would the student loan be discharged automatically by sequestration, or would it remain a debt following the discharge of the debtor from sequestration?

I hesitate before answering because the principal student loans regulations contain provisions on sequestration that affect the manner of payments of student loans to students who have been sequestrated. However, sequestration does not cancel the liability to repay sums that have already been paid to them. A student loan is simply another debt that is taken into account in the sequestration.

I would be grateful if that could be clarified after you have had an opportunity to look into the matter.

Under existing procedure, the final discharge of the bankrupt would extinguish the student loan debt, along with any other unpaid debts.

I would have to go over the other regulations before I could provide a complete answer on that. We will provide some written advice on those points.

You will be relieved to hear that I am not a solicitor so I am not going to ask a difficult question. Page 15 of the student loans booklet makes clear what will happen if a student does not make the repayments; it includes the provisions for non-UK taxpayers. It says that the Student Loans Company "may increase" the amount of interest charged on the account. There already appears to be some flexibility in that paragraph.

The booklet that we have has a copyright of April 2000. However, the new scheme has been in operation for a couple of years. Did the students who signed up to the new loans system before April 2000 have a copy of a booklet similar to this one?

Yes, my copy was published in 1999; I noticed that the copy that you are holding has a different cover. However, the booklet contains the same material. We have been publishing such booklets since 1998. The starters in 1998 received a booklet that told a similar story.

Obviously, it is the responsibility of the individual student seeking a loan to look in the booklet that accompanies the application form. Was any other effort made to draw attention to those provisions?

The information is also contained in the literature that is issued with the application form by the Students Awards Agency for Scotland. The booklet is sent out from the agency when the student applies for a loan to ensure that they get something with the return of documents and so on. Information is also included in the students awards guidance document that goes with the application process. As Dr Murray says, it is the responsibility of the individual to read the material. We can produce the material, but I cannot put my hand on my heart and say that everyone will read it.

We have considered the instrument on two occasions and there are some technical issues on which we have asked for clarification. Those issues are not material to our consideration of the instrument, with the exception of the issue of the level of interest rates, which was raised by Annabel Goldie and Fergus Ewing.

The only proposal that seems to be emerging is to ask ministers to amend regulation 12(3) to say "shall bear interest up to three times the rate or rates" as defined in the regulation. Does the committee want to suggest that in its report to Parliament? Separately from our report, the Subordinate Legislation Committee will raise the points about which it has concerns. We do not need to report on those, but we should note the conclusions that that committee reached. Does the committee agree with that proposal?

Can I ask a question about the technical aspect?

Before you do, could I confirm that members agree to comment on the statutory instrument as I have just outlined?

Members indicated agreement.

Paragraph 2(c) of the Executive note lays out the question of dual interest. The final sentence does not make sense to me. Does the "Regulation 4(2)" that is referred to mean the Unfair Terms in Consumer Contracts Regulations 1999? In other words, is there a word missing between "and" and "would" in that paragraph?

Yes. That is a reference to the Unfair Terms in Consumer Contracts Regulations 1999. The words that immediately precede that reference are quoted from those regulations. The point is that there are several exceptions from the ambit of the Unfair Terms in Consumer Contracts Regulations 1999. A specific provision states that any contractual term that is effectively mandated by statute or regulatory provision is exempt from challenge under the Unfair Terms in Consumer Contracts Regulations 1999.

Therefore the "and" is superfluous. The sentence should read: "Regulation 4(2) of the Unfair Terms in Consumer Contracts Regulations 1999 would thus be inapplicable".

It is not regulation 4(2) that is inapplicable, but the Unfair Terms in Consumer Contracts Regulations 1999 as a whole, by virtue of regulation 4(2). I apologise for that error.

I thank Mr Logie and Ms Thompson for attending the committee. We will report to Parliament on the basis that we have agreed.

We come now to agenda item 5, which the committee agreed should be taken in private.

Meeting continued in private until 12:41.