Mr.
Gauke: I am grateful to the hon. Gentleman. I had seen an
earlier version of the amendment paper. Two separate amendments had
been tabled and both appear to be in the final printed version. The
hon. Gentleman is absolutely right, which is a great pity. At least let
me discuss what I was intending to do.
Mr.
Todd: Which one are you going to speak
to?
Mr.
Gauke: It is difficult to argue for amendment
No. 46 over No. 47—they both have their
merits.
Ian
Pearson: And the same flaws.
Mr.
Gauke: As the Minister says—they both have their
flaws. I shall move on to the purpose of the amendments tabled, albeit
not put on the amendment paper correctly. Amendment No. 46 essentially
says that one may only make an order if the system is eligible under
the settlement finality
regulations. Actually,
there is a subtle difference between the amendments. The amendment
paper is correct and I apologise for suggesting that it was not. If the
hon. Member for Southport looks carefully, he will see that the
distinction is that amendment No. 47 states that a system may only be
recognised if it “has been designated” as opposed to
“is eligible for designation”. I apologise for being slow
and for suggesting that an error had been
made. To
be fair, technically, amendment No. 46 has its weaknesses. The schedule
to the settlement finality regulations sets out requirements that must
be satisfied for a system to be designated. It might be better if
amendment No. 46 referred to that schedule rather than simply saying
“is eligible”. We are seeking to explore whether the
designated regime in the settlement finality regulations is likely to
cover the types of entity that could be at systemic risk and whether
those entities will benefit from the insolvency protection law. We
could give systems greater control over whether they fell under the
recognition regime. There is no particular voluntary system, but those
entities that are going to be systemically important are likely to fall
within the settlement finality regulations already.
I can move
on, if you would like, Mr. Hood, to raise other points on
clause 171, but I am happy to leave it there, having raised the issues
of whether the two systems could be run together and of whether it
would cause unnecessary uncertainty, contradiction or complication to
have both recognised and designated systems. Whether through these
subtly different amendments or other methods, the Government should
find a way of simplifying what may be an unnecessarily complex
system.
11.45
am
Mr.
Bone: The amendment draws out an important issue and
touches on what I said at the beginning about a general
principle—how do we define a system that will have systemic
failures? How do we know which systems are brought in? We are talking
about a system that already has some designations. Looking at the
clause, I wonder whether it would have been better if the Government
had stopped at clause 171(1), which gives them the insight to be able
to make the decision on their own. To have subsection (2)(a), (b), (c),
(d) and (e) is window-dressing, in a way, because it is the first part
that counts. I understand that the Government are trying to be helpful,
but in reality, if they thought that there was a problem, they would
not worry about the rest of it; they would just go ahead and do it. I
am therefore not sure that we need subsection
(2).
Mr.
Newmark: I want to follow on from the point that my hon.
Friend has raised. My point also concerns subsection (1), but I take a
different view on it. Clause 171 states that the Treasury
may make a recognition order only if disruption to operation of the
system, or deficiencies in its design, would
“threaten the
stability of, or confidence in, the UK financial
system”.
I am sure that the
Minister will not wait until there is a disruption and that he will be
looking for certain red flags in the system which will trigger
disruption out there. I am therefore curious as to how he and his
advisers will go about trying to recognise a systemic breakdown before
it happens. What red flags, which may cause systemic breakdown further
down the road, has he been advised may be out
there?
Ian
Pearson: It would be our intention first to identify
systemically important inter-bank systems and for those to be
designated. That is not because we think that there is imminent risk of
catastrophic failure of those systems, because we do not. However, we
think that it is right to identify systems that have critical
importance, and the recognition criteria in clause 171(1) and (2) are
both important in this
respect. I
refer specifically to the amendments. I appreciate that the hon. Member
for South-West Hertfordshire says that they are probing amendments. He
also says that they may have been inspired by some of the responses to
the consultation, where two of the responses suggested that there could
be a potential in the recognition criteria to duplicate criteria by
which a system can be designated under the Financial Markets and
Insolvency (Settlement Finality) Regulations 1999—the
SFRs.
The
amendments seek to ensure that only inter-bank payment systems eligible
for designation, or those that have been designated under those SFR
regulations, may be recognised by the Treasury. That limits the scope
of the Treasury’s power under clause 171, which sets out
recognition criteria. I shall explain why I think that is a bad
idea.
First,
amendment No. 47, as proposed, would mean that a payment system not
designated under the SFRs could not be recognised by the Treasury by
order made under this clause, notwithstanding its systemic or
system-wide importance. That is particularly significant as there is no
obligation for payment systems to apply for designation under the SFRs.
The amendment would simply undermine the robustness of the framework
that the Government are putting in place, by providing a loophole by
which an inter-bank payment system may escape
recognition. Officials
advise me that Amendment No. 46 is a moderate improvement on amendment
No. 47. Amendment No. 46 offers the alternative words: “eligible
for designation”. It is still, however, fundamentally flawed for
several reasons, of which I shall give the Committee one or two.
Paragraph 1 of the schedule to the SFRs requires the law of England and
Wales, or Scotland to be the governing law of the system, whereas
clause 168(5) of the Bill provides that an inter-bank payment system,
to which this part applies, may include systems that operate wholly or
partly in relation to persons or places outside the UK, and may,
therefore, be governed by foreign law. Therefore, payment systems not
eligible for designation under the SFRs—because they are
governed by foreign law, for example—would be precluded from
recognition regardless of their systemic or system-wide importance in
the UK.
There is also
scope for a system to avoid even being eligible for designation. For
example, SFRs require systems to define a point after which a transfer
cannot be revoked or cancelled by the sender. If a system
makes that part of the rules unclear, that system would no longer be
eligible for designation. Both amendments would unnecessarily restrict
the scope of the clause and limit the inter-bank payment systems that
could be recognised by the Treasury. We do not think that they are a
good idea. Amendments
Nos. 46 and 47 constrain flexibility and we do not think that they are
required. I emphasise that when we consulted on the criteria in July
with the document, “Financial stability and depositor
protection: further consultation”, we specifically asked whether
the criteria set out were right, and whether they would provide
sufficient flexibility as payment systems evolved over time. The
majority of responses agreed that the criteria were appropriate and
that they offered the right degree of flexibility to allow for the
evolution of payment systems. Respondents considered the latter point
particularly important in terms of future-proofing the legislation.
That is why, should the hon. Member for South-West Hertfordshire choose
to press amendments Nos. 46 and 47 to a vote, I invite hon. Members to
oppose it.
Mr.
Gauke: I am grateful to the Minister for addressing the
points raised by amendments Nos. 46 and 47. I appreciate his arguments.
He did not specifically address the issue of whether a more elegant
solution could ultimately be reached in relation to both the designated
system and the recognised system, but I see that trying to impose one
system on the other would create difficulties. I have one point that is
more broadly related to the clause. We have started to touch on the
issue of systemic risk, and I should be grateful if we could address
that issue in the stand part debate. I beg to ask leave to withdraw the
amendment.
Amendment,
by leave, withdrawn.
Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke: My point, which has been touched upon by my hon.
Friend the Member for Wellingborough, is on the issue of systemic risk
and risk of serious consequences for business or other interests
throughout the UK. Earlier, the Minister set out the payment systems
that will be recognised under the provisions. He also agreed that we
should first look at what systems will involve a systemic risk. It is
worth quoting again from the Bank of England document,
“Oversight of Payment Systems” from November
2000: “Systemic
risk is likely to be significant only in relation to payment systems
transferring amounts which are large in relation to the balance sheets
and capital resources of at least some of the members; in practice,
this usually means systems used to settle wholesale financial market
transactions in money, foreign exchange and
securities.”
Does the
Minister agree that in clause 171(1)(a), those payment systems where
disruption of the operation
may “threaten
the stability of, or confidence in, the UK financial
system,” relates
to payments that are involved in the wholesale markets? Will the other
payment systems to which he referred, such as credit and debit card
payment systems, fall under paragraph (b), which
is “to
have serious consequences for business or other interests throughout
the United Kingdom”?
The point I am trying to
draw out is that it is not necessary for a payment system to have
systemic risk for it to be recognised under the provisions. I should be
grateful if the Minister would confirm that.
I said
earlier that the Bank of England has traditionally taken a differential
approach to the principles that apply, depending on the nature of what
they do and largely on the factors set out under clause 171(2), to
which my hon. Friend the Member for Wellingborough referred. We shall
probably debate that when we come to clause 171, but the Minister might
want to deal with it
now.
Ian
Pearson: We are discussing clause
171.
Mr.
Gauke: I am sorry; I meant when we come to clause 174 on
principles and clause 175 on codes of
practice. Even
though recognition may apply under paragraphs (a) or (b), the
application of the rules and principles is likely to be tougher for
those entities where there is a systemic risk under paragraph (a) than
those under paragraph (b).
Mr.
Bone: Subsection (1) contains the phrase,
“only if
satisfied that any deficiencies in the design of the system, or any
disruption of its
operation”. Let
us consider the airline industry. It might have a design code of
practice. The design might be right. There would be no disruption to
the operation, but the administration of the airline might be failing
to meet the design, with the consequence that something disastrous
happens at the end. That is like the banking system: the design might
be right, but its administration might be wrong. Why is that
specifically excluded from clause
171(1)(a)? The
test falls on two issues, but not a third. The interpayment system
might be designed right. It may be operated correctly at the time, but
as time goes on there might be a failure in the operation, of which the
Treasury would be aware. The Minister may be able to clarify why it is
not the case, but there seems to be an
omission.
Ian
Pearson: Clause 171 states that the Treasury may make a
recognition order only if
satisfied “that
any deficiencies in the design of the system, or any disruption of its
operation, would be
likely” to
have consequences of a systemic nature under subsection
(1)(a), as the hon. Member for South-West Hertfordshire said, or to
have
“serious
consequences for business or other interests throughout the United
Kingdom” under
subsection
(1)(b). It
is not as simple as to say that paragraph (a) means wholesale, while
paragraph (b) means retail. “Systemic” could be retail or
wholesale. For example, the BACS system has links to retail and is
potentially systemic. When it comes to defining which systems are
covered by paragraphs (a) and (b), there is no real disagreement within
the financial services community.
Mr.
Gauke: I am grateful for the Minister’s
clarification. He will be aware that I was quoting what the Bank of
England said in the year 2000. If the position has evolved since then,
so be it. When making a recognition order, does the Treasury intend to
make it clear whether paragraphs (a) or (b) apply or whether they will
both
apply?
Ian
Pearson: We would certainly want to operate in an open and
transparent manner and, as I have explained, we shall seek advice from
the Bank of England and the Financial Services Authority before making
such recognitions. I do not think that there will be a lot of
contention in that
area. 12
noon I
believe that subsection (2) is important, despite the suggestion of the
hon. Member for Wellingborough that we focus just on subsection (1).
When deciding whether something is systemic or will have serious
consequences, it is right to consider the number and value of the
transactions processed by the system, the nature of the transactions,
whether they could be handled by other systems and the relationship
between the system and other
systems. I
will explain why those criteria are appropriate. Whether transactions
could be handled by other systems is relevant to the consideration of
systemic or system-wide importance because the extent and effect of the
disruption caused by system failure are likely to be greater if there
are no alternatives. For example, CHAPS carries high-value same-day
payments for the settlement of sterling obligations in financial
markets. No other system provides that
facility. It
is important to consider relationships with other systems because such
interdependencies could generate system-wide or systemic risks that are
not apparent when the system is viewed by itself. Interdependencies
might exist operationally or because of the use of a shared liquidity
pool, such as the ability to transfer liquidity between CREST and
CHAPS. There could also be an overlap in memberships of the two
systems. The criteria in the clause will inform the assessment by the
Treasury of the systemic or system-wide importance of the inter-banking
system and thereby identify whether formal oversight by the Bank of
England is appropriate to minimise the risk to the financial stability
of the
UK. The
hon. Member for Wellingborough also remarked that the issue is not just
with the system, but with the administration of the system. I refer him
to later clauses, which I believe deal adequately with the points he
has
made. Question
put and agreed
to. Clause
171 ordered to stand part of the
Bill.
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