 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Banking Bill |
Banking Bill |
The Committee consisted of the following Members:Alan
Sandall, Mick Hillyard, Committee
Clerks † attended the
Committee Public Bill CommitteeTuesday 28 October 2008(Morning)[Mr. Jim Hood in the Chair]Banking BillClause 167Overview Question
proposed, That the clause stand part of the
Bill. 10.30
am
The
Economic Secretary to the Treasury (Ian Pearson): It is a
pleasure to serve under your chairmanship for this part of the Bill,
Mr. Hood. Clause 167 provides an overview of part 5, which
enables the Bank of England to oversee certain systems for payments
between financial institutions. It might be convenient for the
Committee if I outlined what the clause
does. Payment
systems are networks for the electronic transfer of money or credit
between participating members, linking key financial firms to each
other. A typical payment system comprises a scheme company or an
incorporated association, members that are mainly, but not exclusively,
financial institutions, rules established by the scheme operator
covering such matters as settling claims—payment instructions,
for example—between members, a system in which members input
instructions to transfer payments and, in some cases, a separate,
related or unrelated, company providing infrastructure, such as
supporting IT
systems. The
vast majority of economic transactions involve some form of electronic
payment; for example, payment systems include those for the payment of
financial contracts, such as derivatives; automated payments, such as
direct debits; the system for clearing cheques; and systems used by the
Government for benefit payments. In some cases, payment systems are
embedded in clearing and settlement systems for transferring securities
and other financial products. Payment systems are, therefore, vital to
the functioning of financial services, markets and the wider
economy. The
interlinkages between payment systems, banks and other financial
intermediaries mean that any problems with payment systems have the
potential to spread quickly through the financial system, ultimately
affecting business and consumers. For example, problems in large
wholesale systems have the potential to lead to liquidity difficulties
for banks and to contagion in the markets. Problems in retail systems
may result in much inconvenience and hardship for considerable numbers
of people—for example, if benefit or salary payments cannot be
credited to people’s accounts. As such, robust and effective
systems for payments are essential to the proper functioning of the
financial markets and the economy.
Currently, the
Bank of England undertakes oversight of payment systems on a
non-statutory basis, focusing on promoting the robustness and
resilience of key UK payment systems. The Financial Services Authority
has a statutory responsibility under the Financial Services and Markets
Act 2000 for the regulation of recognised clearing houses that contain
embedded payment systems. The Bank of England’s responsibilities
and its operational role as a central bank naturally mean that it is
involved in the design, management and operation of high-value
inter-bank payment systems, which helps to ensure that those systems
are operated in a prudent and effective manner. However, the lack of
formal powers, including mechanisms for enforcement, limits the Bank of
England’s ability to ensure that payment systems are robust and
resilient. For example, the Bank of England’s ability to
regulate the operation of systems is largely dependent on what can be
achieved through dialogue with the management of payment systems and
its assessment of systems’ compliance with international
standards, published in the Bank of England’s annual payment
systems oversight
report. The
Government are therefore legislating to formalise the Bank of
England’s role in the oversight of payment systems, to ensure
that the Bank has the tools necessary to ensure that payment systems
are operated in a manner that minimises risks to financial stability
and disruptions to business and consumer interests. The provisions will
provide, in addition to an important tool for the maintenance of
financial stability, an important new statutory lever for the Bank of
England to use in fulfilling its new statutory objective for financial
stability, as provided for in part 7 of the
Bill. Mr.
Peter Bone (Wellingborough) (Con): The Minister did not
explain whether there has at any time been a problem with the systems.
Has current regulation ever failed? Has there ever been a problem with
the
system?
Ian
Pearson: We consulted on whether there should be a
statutory power for the Bank of England in those areas. The overall
response from the consultation exercise was that it was a good idea,
which is why we are proceeding with it in the
Bill. The
clauses we are to debate follow a logical structure. I hope that hon.
Members appreciate the recognition systems and the principles of
regulation, and how they will be enforced, if necessary. Clause 167
provides an overview of what we are trying to achieve with bank payment
systems by giving the Bank of England a statutory role. I commend the
clause to the
Committee. Mr.
David Gauke (South-West Hertfordshire) (Con): It is a
great pleasure to serve under your chairmanship, Mr. Hood.
As this is my first contribution in the main part of the Committee
stage, I declare an interest as a non-executive director of a
deposit-taking institution—although for clarity’s sake I
point out that it is not a payment system or a member of a payment
system.
I am grateful
to the Minister for setting out a brief introductory overview of the
part of the Bill relating to inter-bank payment systems. He is right to
highlight their importance. Figures produced by the Bank of England for
2003—there may be more up-to-date figures—state that the
value passing through UK payment systems
that year was £130 trillion, which is about 20 times the UK
annual gross domestic product. That is the equivalent of almost 50 per
cent. of GDP flowing through UK payment systems every business day. It
is clearly an important system, consisting of high-value transfers
between financial institutions but also more numerous, smaller
transfers between individuals and/or companies. The Minister set out
some of the circumstances, such as the payment and receipt of wages and
salaries, Government benefits, direct debits and cheques and debit and
credit card payments.
We recognise
the potential for systemic risk. The Bank of England and the
Government, too, have long recognised the potential for systemic risk
from failure within the payment systems. If there is a problem with one
there is likely to be a direct and rapid effect on other members. Even
if there is no systemic risk, a failure in a payment system may cause
considerable disruption to individuals. No politician would want to be
responsible for the failure to pay wages and salaries on
time.
We
are broadly supportive of the provisions but it might be helpful for
the Committee if I outlined some of the themes that we want to address
during this part of the Bill. As the Minister says, the Bill is
presented clearly and logically, which will be helpful to the
Committee. We will raise specific questions as we go through each
clause, but at this stage it might be helpful to highlight some of the
key issues.
The first
issue touches on the intervention made by my hon. Friend the Member for
Wellingborough. What assessment have the Government made of the
existing arrangements? As the Minister explained, the Bank of England
has performed an oversight role on a non-statutory basis for some time.
As the helpful Library note made
clear: “It
should be stressed that, to date, there has been no evidence that
existing systems have failed or are threats to future
stability.” Of
course, that is not to say that we should not look to make
improvements. I note the points about enforcement and so on. This may
be one of those cases where the roof is being fixed while the sun is
shining, to coin a phrase.
Mr.
Gauke: Well, the sun is shining over this particular roof,
even if not over most of the roofs nearby.
It would be
helpful if we had a sense of how effective non-statutory regulation has
been—for example, in the dialogue between some payment systems
and the Bank of England. The Bank has given examples of situations in
which, through dialogue, it persuaded some payment systems to make
particular changes. The settlement finality regulations are part of the
existing regulatory regime, even though it is on a non-statutory basis,
and we will discuss them with regard to our proposed amendments to
clause 171. The regulations provide payment systems with some
protection from insolvency law, which could disrupt them, but we will
discuss those issues later this morning.
The second
broad theme is the objective of the oversight. The Bank of
England’s payment systems oversight report for 2004
states: “The
main objective of the Bank’s payment systems oversight is to
assess and, if necessary, seek to ensure mitigation of risks to the
wider economy—‘systemic risk’.”
I suspect that the
Minister will say that one difference is that the Bank states that it
will “seek to ensure mitigation”—although of
course it could take a stronger line as a consequence of the
provisions. However, is the focus on addressing systemic risk? What is
the purpose of the regulations?
The Bank of
England’s 2004 report further states
that “efficiency
considerations also need to be
weighed”, which
leads me to a further theme—there can be conflict between safety
and efficiency. The Bank put it very
well: “The
Bank also recognises that designing and operating a payment system to
minimise systemic risk would be counterproductive if the system thereby
became so expensive or impractical to use that payment traffic migrated
to less safe
alternatives.” The
Minister will be aware of that danger. We will be seeking reassurance
in the debate that the operation of the measures will not result in a
less safe system because banks go elsewhere.
It is notable
that the Bank of England has previously expressed, perhaps rather
modestly, the limits of its oversight, noting
that “the
Bank as overseer, cannot guarantee that there will never be operational
failures of payment
systems”. Does
the Minister accept that the point applies equally to the new
arrangements—it is not about a guarantee, but about doing
everything that we can to eliminate risk—or would he go further
and say that payment systems will now be 100 per cent. safe?
On the
balance between safety and efficiency, concerns have been raised that
some of the enforcement provisions, which we will come to later this
morning, may be so draconian as to dissuade businesses or individuals
from being involved in payment systems. Are the costs for payment
systems likely to increase substantially? I want to stress that by
raising these questions we are not arguing against the provisions, but
we think that these are legitimate questions to put to the
Government.
The next
theme is the scope of the recognition regime. It focuses on payment
systems, but I hope that this morning it will become clearer whether
the clause will apply to all payment systems or only to the largest.
Will there be a differential application of the principles and codes of
practice, depending on the nature of the system? Until now the Bank of
England has adopted different approaches depending on the type, number
and value of payments made, the design of the system, and the potential
substitute means of making payments. It is notable that it has
particularly focused on CHAPS and CREST, then at the next level BACS,
CLS and LCH.Clearnet Ltd, followed by the Cheque and Credit Clearing
Company and LINK and finally debit and credit card systems. Will there
still be that differential approach and that flexibility? We will
probably debate those matters when we look at the principles and code
of
practice. 10.45
am What
the provision does not do is focus on payment system members, so it is
worth highlighting the role played by some major banks, which settle
payments for a large number of other banks. Not all banks are members
of payment systems and relatively few of
them are settlement banks. As the Bank of England has said, in some
respects the largest of the settlement member banks have the
characteristics of payment
systems. In
some other jurisdictions there is close supervision of payment members;
for example, system participants are obliged to provide information to
central banks. In the UK, the payment system is required to do that,
but in jurisdictions such as the US, Australia, Austria, Hong Kong and
Singapore the obligation to provide information applies to
participants. Central banks can also set membership conditions in
Australia, France, Hong Kong, Norway and Singapore. Will the Minister
say a little about
that? Another
area of potential risk relates to the infrastructure providers. It is
interesting that the Bank of England has highlighted the dependence of
all the network participants on a single supplier as the second
potential source of risk—the first being the systemic risk of a
problem in one payment system migrating to another. In particular,
SWIFT, which provides messaging services in support of CHAPS, is used
heavily in those circumstances. How will the provisions help us to
address that potential risk? I think the Minister will be able to
answer that
question. The
next theme—familiar to our debates on the Bill—is how the
tripartite arrangements will work in this area. Banks, principally
regulated by the FSA, are payment system members and play an important
role in those systems. The likes of CREST and
LCH.Clearnet—recognised clearing houses and investment
exchanges—are principally regulated by the FSA rather than the
Bank of England. How will the Bank work and co-operate with the FSA?
The Treasury will make the recognition orders—we will come to
that issue—but how will the relationship between those three
entities work? The question that we keep coming back to is, “Who
is in charge?” The greater the clarity about that, the
better. The
next related theme is the general role of the Bank of England. The Bank
has a role as an operator of real-time gross settlement
systems—at the heart of the CHAPS system—yet it is also
the regulatory body that will presumably supervise CHAPS. How do we
avoid a conflict of interest? We support the Bank of England’s
performing that role. There are good historical reasons why it should,
and the role is central to financial stability. Perhaps in dealing with
those points, the Minister will explain why the Government continued to
allow the Bank of England to play such a major role in the oversight of
payment systems, at a time when, generally, everything was handed over
to the
FSA. The
final theme touches on the international perspective. It is all very
well looking at payments within the UK, but we all know that there will
be a huge number of cross-border payments. In those circumstances, how
would the provisions that we are debating this morning play a role, and
how are the Government working with other central banks and financial
institutions to ensure that there is no systemic risk from a breakdown
in cross-border payment systems? We must not forget that
aspect.
I hope I have
been helpful to the Committee in outlining some broad concerns before
we turn to each of the provisions in detail. I do not necessarily
expect the Minister to respond to each and every one of those concerns
now, but I hope they provide a useful summary of some of the points
that we hope to raise over the
course of the morning. I reiterate that we are supportive of the
provisions but, as always, it is appropriate that they have proper
scrutiny, and that those who are studying the debate have a better
understanding of the intention and practicality of some of the measures
that we are debating.
Mr.
Brooks Newmark (Braintree) (Con): Like my hon. Friend the
Member for South-West Hertfordshire, I shall put down a few markers on
some issues that have come to light—not simply from listening to
the Minister, but from reading the explanatory notes and listening to
my hon. Friend.
Clause 167
imposes a statutory regime on inter-bank bank systems when currently
the Bank of England, as I understand it, oversees payment systems on a
non-statutory basis. The Government’s position seems to be
formalising the Bank of England’s role in creating stability,
which has to be a good thing. We have seen the huge systemic risk out
there, following the current crisis. The build-up we have before us
addresses many of the issues which have been raised, and highlighted,
by the current crisis, but it has also sought to address issues that
have been raised over a long time. It is therefore a good thing, as is
the ability of the Bank of England and the Government to make a quick
response to problems in the banking systems.
The Bill will
enable the Bank of England to retain power of informal oversight when
it considers it appropriate. It is that sort of language that I am
trying better to understand: what is “informal oversight”
and what does “appropriate” mean? I appreciate that is
not the language used in the explanatory notes or the Bill, but it is
the language I have heard people use when addressing the
clause.
Our
party’s position is clearly that formal regulation is a positive
thing, particularly when payment systems have a systemic risk. Recent
years have seen an explosion in the values and volume passing through
them, particularly in derivatives, which many people do not understand.
I draw the attention of Members to my register of interest; I have had
20 years’ significant experience in the banking system. One of
the problems is lack of understanding, particularly of derivatives,
which have caused some of the major problems relating to systemic risk
and, as we have seen, the fall-out from that.
The Minister
made a couple of points, using the words “robust” and
“resilience”, about the system that we are creating. Has
he thought about how to stress-test the system to see how robust and
resilient it is? He referred to oversight and tools, but I am curious
to know which tools he is talking about and what he meant by that term.
How will the tools cause “minimum
disruptions”—another phrase he used? Which groups did the
Minister consult when coming up with the proposal and what feedback did
he receive? It is important that we understand which issues were raised
and how the clause will deal with
them. My
hon. Friend the Member for South-West Hertfordshire talked about the
tripartite relationship between the FSA, the Treasury and the Bank of
England. That tripartite system broke down over Northern Rock. It
seemed as though everyone was pointing the finger at everyone else,
with no one taking responsibility. How will the provision fix that
situation?
Finally, my
hon. Friend referred to the important issue of cross-border
relationships. Given that the financial system is global, how do we
hope to enforce our legislation on foreign entities over which we do
not have as much control as we would like? We can try to fix things in
the UK, but how will that deal with systemic breakdowns in other
countries?
I want to
pick up on the relationship with the tripartite system to which the
hon. Member for South-West Hertfordshire referred. The clause describes
how part 5 of the Bill enables the Bank of England to oversee certain
systems. Later clauses cover interpretation and regulation, but I shall
touch on them now because it is important to understand where confusion
might
arise. Clause
170 allows the Treasury to impose recognition orders. Clause 172
requires it to consult the Bank of England and the FSA and the orders
can, of course, be revoked. Clause 174 covers the regulation
principles. The Bank of England publishes them, but it is required to
consult the Treasury. Clause 175 allows the Bank of England to deal
with the code of practice, which many people might consider more
important than the principles because it is the mechanics of the
process—the nuts and bolts—but nothing in the Bill says
that the Bank needs to consult the Treasury at that point. Under clause
176, the Bank of England—not the Treasury—may require an
operator to establish rules and, under clause 177, the Bank of England
can give direction. Clause 178 says that the Bank of England must have
regard to the action taken by the
FSA. The
interpretation and the regulations of the Bill set out a mix or a
balance between the action that the Treasury takes and that taken by
the Bank of England, sometimes in consultation with the Treasury and/or
the FSA, and sometimes not. I am trying to get to the bottom of the
Government’s thinking behind why various bits of responsibility
have been allocated to the Treasury or the Bank and why consultation is
required on certain elements, but not others. I accept that those
points touch on subsequent clauses, but I should be grateful if the
Minister would explain why the breakdown in responsibility and the
particular roles have been allocated in such a
way.
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