Banking Bill

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Clause 172

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 173

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 174

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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