Banking Bill

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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 169

Interpretation: other expressions
Question proposed, That the clause stand part of the Bill.
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 170

Recognition 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?
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 171

Recognition 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.’.
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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