Mr.
Gauke: I am grateful to the Minister, because what he has
just said is helpful. For further clarity, is he saying that the
Treasury will not seek a recognition order in respect of a payment
system that is regulated by another central bank? Is he saying that it
will not go that far, but that the Bank of England will undertake a
role in oversight? I am not quite clear about that. I note his point
about not wanting to regulate things that are regulated by another
central bank, but is he saying that there will not be a recognition
order for such a payment
system?
Ian
Pearson: I am clearly saying the latter. We think that in
most circumstances it will be appropriate that oversight is delivered
through the Bank of England’s participation in international
co-operative arrangements. It is not right to say that that will be the
case in each and every circumstance, because I cannot anticipate what
future circumstances might be. However, the normal way of things is
that we would discuss such matters with other central banks as part of
the normal arrangements. I hope that answer provides clarity to the
Committee. Question
put and agreed
to. Clause
168 ordered to stand part of the
Bill.
Clause
169Interpretation:
other
expressions Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke: My intervention on this clause will be even more
brief and concerns the terminology used of the operator and manager of
a system. Before I entered this place, I was a solicitor specialising
in regulatory matters. Unfortunately, I did not specialise in this area
but in collective investment schemes. Over the years I worked in that
field, I was never entirely comfortable that I understood the
difference between operating and managing a collective investment
scheme. The clause uses the terminology of operating and managing a
payment system. Perhaps the Minister will enlighten the Committee on
the difference between the two. As far as I can see, both are swept up
under the definition of “operator” for these
purposes.
Ian
Pearson: The clause defines various terms used throughout
part 5, as the hon. Gentleman indicated. In particular, subsection (a)
defines the term “operator” of an inter-bank payment
system to which the provisions of this part apply if the inter-bank
system is recognised by the Treasury under clause 170. It is a sensible
and straightforward provision. Subsection (b) allows
that “a
reference to the operation of a system includes a reference to its
management”. Subsection
(c) defines references to the UK financial system in the same terms as
section 3(2) of FSMA, which
states: “‘The
financial system’ means the financial system operating in the
United Kingdom and
includes— (a)
financial markets and exchanges;
(b) regulated
activities; and
(c) other
activities connected with financial markets and
exchanges.” I
do not think that I need go into detail on subsections (d) or
(e). The
clause makes it clear how we interpret the terms used. It is pretty
straightforward and is understood by the financial community that
considers these things
closely. Question
put and agreed
to. Clause
169 ordered to stand part of the
Bill.
Clause
170Recognition
order Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke: I will leave the issue of which payment systems
will be recognised until we discuss clause 171. However, I have one or
two questions on clause
170. First,
as the hon. Member for Dundee, East said, the recognition order is made
by the Treasury. Presumably, because it is an order it must be made by
the Treasury and cannot be made by the Bank of England. Will the
Minister explain what the role of the Bank of England will be in
determining whether a recognition order is appropriate? This issue
relates to the discussions we have had on the relationship between the
parties to the tripartite
arrangement. Subsection
(2)
states: “A
recognition order must specify in as much detail as is reasonably
practicable the arrangements which constitute the inter-bank payment
system.” The
terminology “in
as much detail as is reasonably practicable”
is somewhat vague. It
may be the best that can be done in the circumstances. Does the
Minister anticipate difficulties in specifying what is covered? I do
not think that there will be, but I should be grateful for his
thoughts. Subsection
(3) makes the interesting point:
“The
Treasury may not specify an inter-bank system operated solely by the
Bank of
England.” Following
the example of my hon. Friend the Member for Braintree, I too have
looked at the explanatory notes on the clause. Paragraph 381 is
interesting: “The
Bank of England has a central role in relation to certain payment
systems. In particular, it operates the Real Time Gross Settlement
System and it acts as an infrastructure provider in relation to
CHAPS.” I
am sure that subsection (3) is not preventing the Treasury from
specifying a system that is partly operated by the Bank of England,
because that would cover some of the main payment systems being
addressed. The terminology clearly refers to inter-bank systems
operated “solely” by the Bank of England, while the
explanatory notes say
that “the
Bank of England could step in and provide payment system
services.” In
the light of recent events, we consider that less unlikely than in the
past—the Government or a Government agency performing such a
major role in this
area.
Mr.
Newmark: My hon. Friend is titillating me, because he is
skirting around the key phrase in paragraph 381. I would underline the
part about the possibility of the Bank of England “in some
circumstances” stepping in. I am curious about that central
question, which I ask through my hon. Friend. What does the Minister
think such circumstances might be? What advice does he have? What
situations is he thinking
about?
Mr.
Gauke: I am grateful to my hon. Friend, although I do not
know whether I should apologise for titillating him or not. I was going
to come to that very
point. It
is noticeable that, in some jurisdictions, the performance of a payment
system is performed by a central bank, essentially, rather than by
private entities that are regulated. It might be helpful to the
Committee if the Minister indicated whether the Government considered
nationalising payment systems. For the avoidance of doubt, he could
explain why he thinks that nationalisation is a bad idea. We are with
the Government in viewing a regulatory system, rather than
nationalisation, as appropriate, but perhaps the Minister would
elaborate.
Mr.
Newmark: It was not the issue of nationalisation that
crossed my mind. However, the explanatory notes say
that “in
some circumstances, the Bank of England could step
in”. I
assume that the Minister does not think that “could step
in” means nationalisation; it just means to enforce some
regulation, which we are trying to impose through the Bill. Or am I
incorrect, and my hon. Friend correct—that it is nationalisation
or
nothing?
Mr.
Gauke: Again I am grateful to my hon. Friend. My reading
was that, if the Government provide the payment system services, they
are essentially performing
that role, which is what happens in some jurisdictions. The Government
are maintaining that option, although not on the face of the Bill. They
do not need to do so in the Bill, but the explanatory note hints at the
possibility of circumstances in which the Government would step in,
such would be the systemic risk at that time. I am not saying that that
would necessarily be the wrong thing to do, but elaboration from the
Minister would be helpful to the
Committee. If
my hon. Friend does not wish to intervene, I shall go back to the point
about the real-time gross settlement system, and to what extent that
can be seen as separate from the overall CHAPS. For example, is there a
contributory element? If so, it would be regulated by the Bank of
England, and we would have circumstances in which an element of CHAPS
is both operated and regulated by the Bank of England. That is my
understanding, and I do not think that subsection (3) changes that. I
should be grateful for the Minister’s
confirmation. Subject
to that, I have more points to raise with regard to the scope of the
recognition system, but it would be appropriate to address that under
clause
171. 11.30
am
Mr.
Newmark: I shall be brief. I am still not clear,
notwithstanding the excellent points raised by my hon. Friend the
Member for South-West
Hertfordshire. The
explanatory notes say in paragraph 381 that in some circumstances the
Bank of England could step in and provide payment system services. Is
that a nationalisation of the payment system, as my hon. Friend is
saying, or is it the Bank of England acting as a facilitator for a
short time? What period of time are the Government thinking about? Is
it two days, a week or a month, or is it a nationalisation that will be
there for a year or five years? I can see what the circumstances are
but it is the timeline that concerns me because that makes a difference
between the Bank of England being a facilitator for a short-term
systemic breakdown and a full-blown nationalisation of the payments
system.
Ian
Pearson: The clause gives the Treasury power to designate
by a recognition order an inter-bank payment system as a recognised
system, which is subject to the Bank of England’s powers of
formal oversight conferred under part 5 of the Bill.
Before
addressing the points raised by the hon. Members for South-West
Hertfordshire and for Braintree, particularly with regard to
subsections (2) and (3), I should like to return to the original point
about why the Treasury is being given the power to designate in these
circumstances. In essence, the Government believe that the Treasury is
best placed to make this assessment. As the UK’s finance and
economic ministry, it has wider powers than the Bank of England. The
Government have responsibility for delivering conditions for business
success in the UK by supporting fair, stable and efficient financial
markets. The Treasury and the Chancellor of the Exchequer also remain
responsible for ensuring compliance with the UK’s international
obligations. The Government have these wider responsibilities but we
think it right to work closely with the Bank of England which will take
clear responsibility in terms of its involvement in financial
stability, with the other party to the tripartite arrangement,
the FSA. We remain convinced that the Treasury should have overall
responsibility in the area of recognition orders. The hon.
Member for South-West Hertfordshire raised a number of points about
subsection (2) which says that the recognition order must contain
sufficient description of the arrangements that constitute the
inter-bank system so that it is clear to operators, customers, members,
third parties and the Bank of England what has led to the
system’s recognition and, importantly, in order to identify the
arrangements over which the obligations conferred under part 5 of the
Bill apply. We have no indications of any problems with this but it is
clearly something required to ensure that part 5 of the Bill can
operate effectively.
Hon. Members
also raised the issue in subsection
(3): “The
Treasury may not specify an inter-bank system operated solely by the
Bank of
England.” This
provision ensures that the Bill does not unintentionally capture
internal systems used by the Bank of England to conduct operations in
its role as a monetary authority. The Bank of England provides
facilities that allow transactions in inter-bank systems to be settled
across its balance sheet. It is not an operator of payment systems
within the meaning of the Bill. I hope that makes the situation clear.
If the Bank were to become the operator of an inter-bank payment system
in the future—a speculation raised by the hon. Member for
Braintree but which we think would be wholly exceptional—its
operations in that field would be bound by its overall statutory
responsibilities in respect of maintaining financial stability. It
would apply the same criteria to its own operations as it would expect
of others. The risk that the operator takes insufficient account of
overall financial stability considerations, which could arise in
privately operated inter-bank payment systems, would not arise in this
case if a payment system was operated by the Bank of England. That
makes the situation clear. I hope that I have been able to answer the
questions raised by hon. Members in this
area. Question
put and agreed
to. Clause
170 ordered to stand part of the
Bill.
Clause
171Recognition
criteria
Mr.
Gauke: I beg to move amendment No. 46, in
clause 171, page 88, line 18, at
end add— ‘(3) The Treasury
may make a recognition order in respect of an inter-bank payment system
only if the system is eligible for designation under the Financial
Markets and Insolvency (Settlement Finality) Regulations
1999.’.
The
Chairman: With this it will be convenient to discuss
amendment No.
47, in
clause 171, page 88, line 18, at
end add— ‘(3) The Treasury
may make a recognition order in respect of an inter-bank payment system
only if the system has been designated under the Financial Markets and
Insolvency (Settlement Finality) Regulations
1999.’.
Mr.
Gauke: These are probing amendments. They are intended to
flush out some of the issues that relate to the relationship between
the regime in these provisions
and the regime that already exists for some payment systems, under the
Financial Markets and Insolvency (Settlement Finality) Regulations
1999—the settlement finality regulations, as they are known to
their friends. They provide a comprehensive legislative framework for
the purpose of protecting systemically important payment
systems.
The purpose
of the settlement finality directive and regulations—these
regulations are based on an EU directive—is to reduce risks
associated with participation in payment settlement systems by
minimising the disruption caused by insolvency proceedings brought
against a participant in such a system. The main provisions of the
directive ensure that bilateral and multilateral netting are protected
from potentially disruptive provisions of insolvency law and that
payment orders are protected from insolvency law provisions from the
moment they are entered into a designated system. There is a
prohibition of insolvency laws having retroactive
effect. As
far as I can see—I suspect the Minister will correct me if I am
wrong—under the settlement finality regulations the following
payment systems have been designated: CHAPS sterling and CHAPS euro,
CLS, CREST and LCH.Clearnet. They are regulated by the FSA because they
are recognised investment exchanges or clearing houses. The purpose of
the regulations is to grant some certainty to these payment systems and
their participants that insolvency law will not intervene and unravel a
whole set of transactions.
In
distinction to what we have here, the designated systems system is an
opt-in system. Systems can choose to be designated and benefit from
this protection. Here the Bill is structured so that the Treasury
determines whether a system should be recognised. Such recognition does
not provide particularly great benefits, other than providing external
confidence. It imposes a number of obligations on the systems. The
point that I am seeking to examine with these amendments is whether it
is right to distinguish between the systemically important designated
system and a new recognised system, whether that will overcomplicate
the matter and whether there is anything we can do to roll the two
together.
Dr.
John Pugh (Southport) (LD): The hon. Gentleman has just
mentioned distinction. Liberal Democrat Members are having difficulty
in distinguishing between amendments Nos. 46 and 47 as written in the
amendment paper. Are they written correctly? They appear to be word for
word identical, and it is a bit hard to understand why two amendments
are needed to do the job of one.
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