Banking Bill

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Mr. Bone: It is a pleasure to serve under your chairmanship, Mr. Hood.
I start with a slightly different view of clause 167 even from that of Members of my Front Bench.
Mr. Gauke: Surely not.
Mr. Mark Hoban (Fareham) (Con): Not again.
Mr. Bone: I am unhappy to see regulations brought in, unless it can be proved that they should be brought in. The Government probably take the other view: regulations should be brought in, unless there is an overwhelming case that they should not be introduced. That is a difference between us from the start. I refer to “Yes Minister”, because it is the best example of how the Government work. If there was a failing in the banking system, the Governor of the Bank of England would ask his chairman and chief executive out to lunch and the problem would be sorted out. From the Minister’s introduction to the clause, it seems that the system has been working rather well and that there has never been any sign of a problem in the oversight of the payment system. It worries me that we may be regulating because of the present circumstances—because we think that we should be doing something—but actually it will make no difference whatever to the process or the security of the system. I hope that the Government will persuade me otherwise as we go through the clauses in detail, but that is my concern in principle.
My concern has some backing to it. Her Majesty’s Treasury produced a helpful impact assessment in October 2008, which states:
“The Authorities do not envisage that this provision will amount to a substantial change in practice.”
If there is no change in practice, why are we bothering to introduce regulations to make something happen? If it is already happening, there seems little point in bringing it in. It concerns me that the regulations do not have effect across the board, but are restricted to systematic or system-wide consequences. How is it determined in advance whether a bank or clearing house falls within those concerns? At this stage, I am not sure that I am totally in favour of the clause.
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Ian Pearson: I hope that I can persuade hon. Gentlemen of the importance of the clause. The debate has usefully set out the general principles that will be discussed under later clauses.
I will explain the background to this proposal. Since early last year, the authorities have been developing a clearer and more robust framework for the oversight of payment systems. That was part of the Government’s wider work to strengthen the framework for financial stability. I emphasise that these measures are not the result of problems in the payment system. However, we must take it into account that the characteristics and importance of payment systems could change, or that wholly new payment systems could develop and take on systemic importance. Given the importance of payment systems to the financial system, and therefore to wider financial stability and consumer protection, it is sensible to pass these measures as part of a package of proposals in the Bill.
I welcome the hon. Member for South-West Hertfordshire to his debut in the Committee. He asked about the scope of the measure and which systems would be covered. The consultation document identified CHAPS, Europea, LCH.Clearnet, BACS, Cheque and Credit Clearing, the faster payments service and the LINK scheme as areas that would be regarded as key wholesale inter-bank systems under the authority’s preliminary assessment. It is important to recognise that such systems process about £1.5 billion daily. That emphasises their systemic importance to our financial system and the UK economy.
I will make a few points on the remarks of the hon. Member for Dundee, East and others who talked about the architecture of the system. He was not making a debating point, but was genuinely interested in knowing how the architecture fits together. I will explain the general principles and we will cover the detail when discussing subsequent clauses, as the hon. Member for South-West Hertfordshire said.
The general principle is that in the first instance it is the responsibility of the Treasury, following consultation with the Bank of England and the FSA, to designate a payment system and make a recognition order under clause 170. It is the responsibility of the Bank of England to exercise oversight of the payment systems. That is clear in the Bill. As I explained earlier, that will put the Bank of England’s current responsibilities on a statutory footing, which we believe is the right and prudent thing to do. We want the Bank of England to consult as appropriate with the FSA, particularly where payment systems are embedded in recognised clearing houses or investment exchanges, which are also subjected to the FSA’s regulatory regime. That is why there will be a memorandum of understanding between the Bank and the FSA to ensure that there is no duplication and there is efficient regulation.
It is also important to stress that in all these instances the tripartite authorities will work closely together. There are clearly distinct roles for the Treasury, the Bank and the FSA in this, but we would expect close co-operation on a regular basis between the three organisations that make up the tripartite system.
Mr. Bone: Will the Minister give way?
Mr. Hoban: Will the Minister give way?
Ian Pearson: Before I give way to the hon. Member for Wellingborough I should tell him that the days are gone when the Bank of England gets a bank in and has a cosy chat. It is important that the tripartite authorities work closely together and have good relationships with the banks. There is a wider recognition that putting these arrangements on a statutory basis is the right way forward.
Mr. Bone: That is most helpful. We used the example of people getting around a lunch table and discussing matters. We are now trying to formalise this in some sort of memorandum of who does what and when. Is this Committee likely to be able to see a draft of that memorandum?
Ian Pearson: The Committee can see what is in the Bill. It sets out clear and distinct roles. The issue of a memorandum where the FSA regulates and the Bank of England regulates at the moment is pretty much a technical issue, which we would not expect to see in the Bill. I give way to the hon. Member for Fareham, who obviously cannot stay away from the Committee.
Mr. Hoban: I am drawn to it by the magnetism of the subject we have been discussing. The Minister talked about arrangements for the FSA to look at regulated investment exchanges and clearing houses, but a volume of transactions does not go through them, such as derivatives that are not traded through exchanges. How will he ensure that the payment systems that relate to them are covered by the Bill because they are an important volume of transactions in the wholesale market which, if we are looking at maintaining financial stability, ought to be covered in some way by these rules?
Ian Pearson: There are powers in the Bill that allow the Treasury, in consultation and having received advice from the Bank of England and the FSA, to recognise key wholesale inter-bank payment systems. I have given an indication of which payment systems of preliminary assessment would suggest that we would want them to be recognised. But we need to ensure that we have adequate coverage so that the Bank can discharge its responsibilities for financial stability appropriately.
Stewart Hosie: I presume that the Minister is talking about clause 170 where the Treasury makes the recognition order. I thank him for his previous explanation: the Treasury makes the recognition of the systems and the Bank then does the other bits. That is perfectly reasonable. The question posed by the hon. Member for Fareham is very important, given that London is one of the three key wholesale financial markets in the world. The Minister has just said that there is provision for the Treasury, through regulation or by order, to specify other systems that might come into this. Will he provide a little more detail? Does he have anything in mind? How would he go about putting a recognition order in place for one of those large wholesale systems that is not at the moment an official, recognised inter-bank system? How would that happen and what criteria would be used to do that?
Ian Pearson: We are talking about the general principles in this clause. We shall get on to those questions when we debate the relevant clauses. The hon. Gentleman also asked about who was consulted and what issues were raised. Consultees included the Bank of England, payment system operators, users of payment systems and the payments council, which is the representative body for payment systems. Everybody wanted to see clarity and responsibility in the system and we believe that the Bill achieves that. Overall, there was widespread support for the legislative proposals and we can proceed with confidence. The financial community broadly welcomes the thrust of what we are trying to do in part 5 of the Bill. No doubt, we will want to tease out some of the detail during this and other sittings.
Question put and agreed to.
Clause 167 ordered to stand part of the Bill.

Clause 168

Interpretation: “inter-bank payment system”
Mr. Gauke: I have two questions for the Minister. This is an interpretation clause and should not detain us for long. The clause relates to an inter-bank system. Subsection (1) refers to
“arrangements designed to facilitate or control the transfer of money between financial institutions who participate in the arrangements.”
I should be grateful if the Minister said a little more about money. We know that money includes credit, but the Bank of England publication, “Oversight of Payment Systems” from November 2000, states that
“‘money’ is regarded as cash (ie notes and coins issued by the central bank or government) and claims against credit institutions in the form of deposits.”
It continues:
“In the end, however, what is acceptable as ‘money’ is a matter of behaviour and the boundary could move.”
Does the Minister agree that money is a more flexible concept than it might first appear?
My second point is about subsection (5):
“A system is an inter-bank payment system for the purposes of this Part whether or not it operates wholly or partly in relation to persons or places outside the United Kingdom.”
That comes back to the territorial point that has been mentioned already. In order to fall within the regime, is it necessary for the operation of the payment system to be in the UK? Does it matter where the participants are? Is that the test? If so, this is a broad territorial test, and it could appear to cover any payment system anywhere in the world. I assume that the key point is the operation—where is that performed? If it is performed from the UK, will it be caught by the system so that it does not matter where participants are based?
Mr. Bone: On my hon. Friend’s last point, if I send money to America and there is a transfer between a British bank and its subsidiary in the US, is that part of the system? If the payment originates in the US and money is sent to me, will the regulations cover the bank over there? That is an important point.
Mr. Newmark: I, too, shall be brief. I am sorry to see that the hon. Member for Wolverhampton, South-West (Rob Marris) is not on the Committee. I know how assiduous he is with explanatory notes. Having learned my lessons from him, I will ask a couple of questions relating to points made in the explanatory notes. The first is about subsection (2), which states that if non-financial institutions participate, that will not prevent the process from being considered an inter-bank payment system. I am curious about what institutions the Minister has in mind when he talks about non-financial institutions. Why has that been raised, what red flags have given him concern about non-financial institutions and why are they being brought under the umbrella? I suspect I know why, but I am curious to hear his take on the matter.
My second question relates to subsection (5), but it approaches from a different angle to that taken by my hon. Friend the Member for South-West Hertfordshire. It relates to the issue of systems operating wholly or mainly outside the UK that are to be included and how we will deal with different regulatory environments. A provision might be interpreted as being right in the UK because it has an impact on what goes on in the UK, but how do we try to enforce policies with institutions under different regulatory regimes in other countries?
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Ian Pearson: I am happy to try to provide clarification for the hon. Gentleman. As the hon. Member for South-West Hertfordshire said, the clause defines the use of the term “inter-bank payment system” throughout part 5. He referred specifically to subsection (1), which defines the term “inter-bank payment system” for the purposes of the Bill and refers to the arrangements that enable the transfer of money. Subsection (4) confirms that that includes credit between participating financial institutions, which are defined in subsection (3) as banks and building societies. Let me be clear that the Bill will give us the flexibility to recognise new systems in the future, and we think it appropriate that we should be able to do so. Let me also be clear that that does not include internal bank systems or correspondent banking arrangements.
The hon. Gentleman also raised the issue of subsection (5), which will ensure that systems operating wholly or mainly in relation to persons or places outside the UK can be classed as inter-bank payment systems for the purposes of part 5. I shall give a little more detail on that because a few hon. Members questioned how the legislation would work. Recognised inter-bank payment systems that are wholly or partly based outside the UK might be systemically important for the UK financial system. Where that is the case, part 5 provides for the Treasury to recognise them and for the Bank of England to oversee them to the extent that that is possible. In most circumstances, that oversight would be delivered through the Bank of England’s participation in international co-operative agreements with other central banks, because that is the nature of things.
Clearly, we cannot regulate for the American banking system, as the hon. Member for Wellingborough hinted, but we can ensure that the Bank of England can participate in those international co-operative agreements and make the points that it needs to in order to discharge its responsibilities.
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