Clause
172Procedure Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke: I have one or two questions about the procedure for
making a recognition order. The clause gives us another opportunity to
raise questions about the relationships between the Treasury, the Bank
of England and the FSA. Subsection (3) states:
“In
considering whether to make a recognition order in respect of a payment
system the Treasury may rely on information provided by the Bank of
England or the
FSA.” Does
the Minister envisage circumstances in which the Bank of England or the
FSA will initiate the process? Will there be times when the Bank of
England goes to the Treasury and says, “We think that this
payment system needs to be recognised.”? Is that how the process
will work in practice? There is an obligation on the Treasury to
consult the Bank of England, but can he imagine circumstances in which
the Bank of England may take a different view and say that a payment
system should not be recognised? Are there any circumstances when the
Treasury will overrule the Bank of
England? Although
it is unlikely, will it be possible for the operator of a payment
system to make an application to be recognised, in the same way that
they can make an application to be designated? Under subsection (1),
the Treasury will “consider any representations made”,
presumably by the Bank of England or the operator of the system. An
operator of a system may not want it to be recognised. What will be the
time frame in which the operators of systems that could be recognised
can make representations? How long will the Treasury take to consider
such
representations? Subsection
(2) raises the issue of recognised investment exchanges and clearing
houses and the FSA’s role. Where a recognised clearing house or
investment exchange will be a recognised payment system, which entity
will take the lead in regulation—the FSA or the Bank of England?
The Minister will be aware of the concerns about entities slipping
between the gaps, which I suspect is one of the driving forces behind
the Bill. Can he answer that
question?
Mr.
Bone: I think that clause 172(1) is the “going out
to lunch” part of the Bill. In the past, the Bank of England,
the Treasury and the operator would get together and talk things over,
and this subsection tries to re-create that consultation. If at the end
of the consultation the Bank of England and the operator took the same
view but the Treasury took a different one, it is not clear whether the
Treasury’s view would necessarily go ahead, even if the other
two parties were against
it.
Ian
Pearson: The clause sets out the process by which
recognition orders are to be made. Again, I have to tell the hon.
Gentleman that this is not the “going out to lunch”
clause. It is a clause that makes clear how the procedure should
operate. I
shall try to add flesh to the bones of the clause, in response to the
largely theoretical questions posed by the hon. Member for South-West
Hertfordshire. In practice, there will be a large, if not complete,
measure of agreement between the authorities in the tripartite system
and in the banking and building societies system, as to which
inter-bank systems should be recognised. Important systems may,
however, emerge in the future and the hon. Gentleman is right to want
to probe the basis on which future systems might wish to be recognised.
We have already indicated the sorts of system that will be recognised
initially, and once the legislation has been passed we expect that a
range of systems will be completely agreed between all parties. In the
future, the Bank of England and/or the FSA could bring information to
the
Treasury along with a recommendation to recognise a system. In addition,
an operator could apply to be recognised. The Treasury can consider any
representations, and the decision to recognise is at its discretion.
However, we would want to consult the FSA and, importantly, the Bank of
England. There needs to be a clear designating authority, and the
legislation makes it clear that that is the
Treasury. Stewart
Hosie: The Minister has just said that recognition would
be at the Treasury’s discretion, but he has also said that a new
inter-bank system could emerge that might, if it failed, be a systemic
failure. Surely, the decision to recognise ought not to be at
anyone’s discretion. If an inter-bank payment system has become
so big that it is critical and that if it failed it would be a systemic
failure, recognition should be automatic and not at the discretion of
the
Treasury.
Ian
Pearson: Perhaps I was being loose with my terminology,
but let me make it clear that the Treasury, which is able to exercise
that power, will do so at its discretion. It will want to use the power
if it believes that clause 171(1)(a) or (b) are engaged. As I said, in
the normal course of events I expect there will be a large measure of
agreement on the types of inter-bank payment system we are discussing.
With regard to the potential for the future, the Treasury will be open
to representations from the Bank of England, the FSA and individual
organisations on whether there are new systems that are of such
systemic or system-wide importance that they should be
recognised. The
hon. Member for South-West Hertfordshire raised an issue about the time
frame. As he will appreciate, that will depend on the nature of the
representations. The Treasury might seek further information from the
Bank of England, the FSA or the operator of a system, so it is not
possible to give a precise time scale. I return to the overall point
that there has to be a recognition procedure, and we believe that it is
right that the Treasury leads on that. The Treasury will consult widely
on that point with the Bank of England, the FSA and operators. I hope
that those reassurances will be supported by the
Committee. Question
put and agreed
to. Clause
172 ordered to stand part of the
Bill.
Clause
173De-recognition
Ian
Pearson: I beg to move amendment No. 19, in
clause 173, page 89, line 11,
after ‘recognised’, insert
‘inter-bank’. The
amendment is a technical correction intended to provide consistency
across part 5 of the Bill. Clause 170 provides for the Treasury to make
a recognition order in respect of an inter-bank payment system, thereby
bringing it within the Bank of England’s remit as formal
overseer. Clause 173 provides for the revocation of a recognition order
made under clause 170. The amendment makes it clear that the Treasury
must consider requests by the operator of a recognised inter-bank
payment system only in relation to the recognition order made under
clause 170(1) and not one made, for example, under the Financial
Services and Markets Act 2000.
By way of
example, clearing houses or investment exchanges may be recognised by
the FSA under part 18 of the 2000 Act. Such recognised clearing houses
and investment exchanges are then subject to the FSA’s
regulatory regime, and those recognised clearing houses or investment
exchanges might contain embedded payment systems that do not meet the
recognition criteria in clause 171 and would not, therefore, be
recognised by the Treasury under clause 170(1). In such circumstances,
it would be inappropriate for the Treasury to consider requests for
revoking a recognition made by the FSA. That is why we believe this
technical amendment to be
necessary. Amendment
agreed
to. Question
proposed, That the clause, as amended, stand part of the
Bill. 12.15
pm
Mr.
Gauke: I have a brief question for the Minister on the
subsection that he has amended, and we are grateful for his explanation
for that amendment. My question relates to the circumstances in which
the Treasury must consider any request by the operator of a recognised
payment system for revocation of its recognition order. We have not
tabled an amendment to the clause, but perhaps the Minister might help
the Committee on this point. When the Treasury rejects any such
request, does he consider it appropriate that it should give reasons
for that rejection? Furthermore, is there anything more that he can say
on whether an application for revocation would be successful, other
than referring to the recognition criteria in clause 171? If a payment
system saw its market share fall substantially, whether because of this
regulatory regime or commercial factors, would that be the sort of
matter that the Treasury would take into account, on which grounds it
would be willing to grant revocation?
Would it ever
be possible for a payment system to put in an application with a view
to its coming into effect some months down the line? A payment system
might be seeking to wind up its business. Rather than simply doing so
and still finding itself a recognised system for these purposes and
with various obligations on it, I wonder whether it could work with the
Treasury and say, “We are going to cease performing at some
time. We would like the revocation of the recognition order to coincide
with the time we cease trading so there is not a huge overlap.”
Would the Treasury be willing to work in a constructive manner with
payment systems were those circumstances to arise? I do not know how
likely that would be, but certainly in other sectors when a business
winds up it wants to be able to work with the regulator to do that in
as smooth and orderly a fashion as
possible.
Ian
Pearson: I can assure the Committee that the Treasury
always wants to act in a supportive and helpful manner in these areas.
The hon. Gentleman raises some practical points about what might happen
if an inter-bank payment system was in decline and no longer had any
systemic importance. The Bank of England will monitor the situation
closely. It will undoubtedly be in contact with the operator. The
tripartite authorities work very
closely together. In those circumstances, there would be no alarms and
no surprises. On the question whether reasons would be given if the
Treasury refused a request of an operator to de-recognise a payment
system, in the spirit of openness and transparency, the Treasury would
naturally want to give its reasons. I am happy to place that comment on
the record for those who look at these
things. Question
put and agreed
to. Clause
173, as amended, ordered to stand part of the
Bill.
Clause
174Principles Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke: We have already touched upon these principles and
the contents of the clause in earlier discussions. I note that the
clause states that the Bank “may” publish principles. We
have not tabled an amendment to say that it “must” do so,
but I should be grateful if the Minister would confirm that it is
intended that principles will be published and that they will apply to
the operators of recognised inter-bank payment
systems. A
set of principles is already in place for such payment systems. These
have been established by the Bank for International Settlements,
specifically the Committee on Payment and Settlement Systems. They are
described as the core principles for systemically important payment
systems. They have historically been adopted by the Bank of England and
other central banks. Mr. Hood, you will be relieved to learn
that I have no intention of reading out the principles in full. In
broad terms they relate to: legal basis; the participants having a
clear understanding of the system’s impact; the management of
financial risk; prompt final settlement; settlement in multilateral
netting systems; settlement assets; security and operational
reliability; efficiency; access criteria and governance. Can the
Minister say whether the principles under the clause will essentially
be those, and confirm that there is no intention of changing them? The
clause
states: “Before
publishing principles the Bank must obtain the approval of the
Treasury”, but
will consultation on the principles take place more widely with
operators? Will they have an opportunity to put their
views? The
explanatory notes state that the clause will reflect the core
principles. We need to know whether those principles will be those to
which I have referred, and that there will be no real change—the
point raised by my hon. Friend the Member for Wellingborough when he
drew attention to the regulatory impact assessment. I notice that a
breach of principles will not constitute a compliance failure for the
purposes of clause 182. Without getting into a debate on that clause,
can the Minister explain the status of the principles and say why they
will not constitute a compliance failure? It is the case for firms
generally regulated by the Financial Services Authority under the
Financial Services and Markets Act 2000 that there is a set of
principles and a set of rules, but that breach of the principles can
constitute a regulatory
offence. Indeed, most disciplinary action taken by the FSA refers to a
large extent to principles. Perhaps the hon. Gentleman can also explain
that. I
return to the point that the Bank of England, in its oversight of
payment systems until now, does not necessarily require each payment
system to comply with every core principle. Given what the Minister
said about which systems will constitute recognised systems, I should
be grateful for clarification. He might believe that he has provided
it, but it would help the Committee if the point were made absolutely
clear and it would help us to know whether, for those institutions,
although not systemically important, full observance of the core
principles is necessary.
Mr.
Bone: I draw attention to subsection (1) and the wonderful
word “may” in the
phrase: “The
Bank of England may publish
principles”. Those
principles have been working in practice for a great number of years,
but I understand that there is no necessity to publish them because
they are being used anyway and the regulatory impact assessment says
that there will not be any change. Is it the Government’s
intention that the clause is only in the Bill in case they think that
the principles need to be published, or do they definitely intend to
publish them? If so, why does the Bill not state that the Bank of
England “must publish”? I am not clear whether that is
something that the Government are holding in reserve or whether they
will take such action. If that is their intention, perhaps the Bill
should be amended at a later
stage.
Dr.
Pugh: My view is similar to that of the hon. Member for
South-West Hertfordshire, but possibly more basic and a little more
naive. I could have said the same about the principle, the rules or the
codes of conduct. I have not seen examples of each, but when we have
discussed them hitherto in Committee, we have talked primarily about
the robustness, the security and the resilience of payment
arrangements—the technical issues. There are wider issues of
banking practices and ethics. At its simplest level, we consumers have
all noticed how debits are recognised almost immediately and credits
after appreciable delay, which causes concern and seems unreasonable in
the high-speed world of IT. There is a distinction between what is
regarded as a legitimate matter of commercial choice for payment
systems, and what is a matter for public regulation. In commenting on
this, the British Banking Association said that it was worried about
the effect of regulation on competition. I seek further clarification
from the Minister, if only to help me, on the scope of the principles,
codes and system
rules.
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