Banking Bill

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Ian Pearson: I am sure that the whole Committee is relieved that we are not going to have an extensive debate on “may”, “shall” or “must” in the legislation. I confirm that the intention is for the Bank of England to publish principles to which operators of recognised inter-bank payment systems must have regard in operating those systems. As set out, the principles must be approved by the Treasury before publication.
Without wishing to pre-empt the contents of the Bank of England’s principles with regard to the clause, I can inform the Committee that the types of principles covered in the CPSS’s “Core Principles for Systemically Important Payment Systems” include a well-founded legal basis, understanding and management of financial risks and various elements covering matters such as operational resilience, efficiency and effective governance. The core principles are internationally accepted as important for sound, stable and well functioning financial systems. The Bank will work closely with industry in developing the principles, but we do not see the Bank intending to change substantially the positions that it has taken in the past in such matters. The Bank will also, of course, want to take into account other relevant, internationally agreed recommendations and best practice when setting its principles.
The hon. Member for South-West Hertfordshire raised the issue of why failure to comply with the principles was not deemed a compliance failure. Later on in his speech he answered his own question, when talking about not everyone having to comply with each principle. All recognised inter-bank payment systems must have regard to the principles, but it is intended that the Bank of England—as now—will adopt a proportionate approach as to the level of that regard, based on the risk posed to the system and its relative systemic or system-wide importance. It is right, for example, that the Cheque and Credit Clearing Company should not have the same requirements made of it as CHAPS when there is no other alternative. Therefore, it would not be appropriate if failure to comply with principles triggered a compliance failure. Instead, the Bank may use additional information-gathering powers in the form of requiring an independent report under clause 181, for instance. Or, if a recognised inter-bank payment system is not operating with sufficient regard to its principles, based on the Bank’s analysis, the Bank may then choose to use its powers to issue directions or to require rule changes. Such matters will come up.
I hope that that answers the question of the hon. Member for South-West Hertfordshire, although I think that he answered it himself.
Question put and agreed to.
Clause 174 ordered to stand part of the Bill.

Clause 175

Codes of practice
Question proposed, That the clause stand part of the Bill.
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Are the codes of practice intended to elaborate on the principles, or will they address new areas? To the layman, the principles look comprehensive but perhaps the Minister will clarify that point. Finally, the Bank for International Settlements produces material that could be described as a code of practice that elaborates on the principles. I looked at it last night—there are about 100 pages of material along those lines. The Minister said that the principles are likely to be similar to existing core principles; will the codes of practice mentioned in clause 175 be similar to that of the Bank for International Settlements?
Mr. Bone: I do want to be pedantic about the issue of “may” or “must.” I assume that the Minister will confirm that the Bank of England will publish codes of practice. If the Minister will say that, so should the Bill. The Bill governs the law of the country—it is not about what the Minister says, it is what is on the statute book. If the Government have determined that this will happen, it should be in the Bill and a Government amendment should correct that later in the proceedings. This is an important issue—we must not have sloppy drafting in Bills.
Mr. Newmark: My point follows the questions by my two hon. Friends. The question is not only, “What will the codes of practice be?” That is important and, as my hon. Friend the Member for Wellingborough said, the devil is always in the detail, but equally importantly, how will day-to-day compliance be monitored? I am curious to know how the Minister envisages that taking place.
Ian Pearson: It might help the Committee if I briefly explain how the principles, the codes of practice, system rules and directions fit together. We see them as a complementary suite of available powers. Clause 175 differs from clause 174—which is on principles—in that the codes of practice are intended to set out binding requirements in relation to specific areas, such as messaging standards, or levels of resilience, whereas the principles are intended to provide high-level, overarching guidance. The principles will set out the general conduct expected of recognised payment systems and they will be interpreted by the Bank in a manner proportionate to the risks posed by individual systems; whereas the codes of practice will focus on a more specific level of detail. For example, a code of practice may require certain types of system to observe specific minimum standards in relation to business continuity. I can confirm that it is the Bank of England’s intention to issue a code of practice, and it will consult with interested parties before doing so.
Stewart Hosie: The Minister said that he expects the code of practice to be binding. Will there be a sanction should parts of the code fail to be met? If the code is expected to be binding—effectively legislation—why is there not at least a statement of general intent to that effect in the Bill?
Ian Pearson: The principles and code of practice are two powers found in clauses 174 and 175. They are complemented by the system rules in clause 176, which we will come on to, and the directions in clause 177.
If I can, I shall say something briefly without straying on to those stand part debates—if they are thought to be necessary, Mr. Hood—because it explains the overall architecture. In clause 176 the Bank of England may want to ensure that the operator of a recognised inter-bank payment system makes rules relating to specific aspects of the payment system in question. For example, the Bank may wish to ensure that the system has rules in place to manage the default of a participant effectively. In clause 177, the Bank of England may wish to use its formal power to impose certain directions or instructions pertaining to how a specific recognised inter-bank payment system may operate. This may include requiring or prohibiting certain actions in relation to the system or setting standards to be met in the operation of the system. For example, the Bank might direct a system to set up a programme of tests of its crisis management arrangements, which were referred to earlier. This suite of powers will enable the Bank of England to carry out its function of oversight of payments effectively and efficiently. I think that starts to address the point raised by the hon. Member for Dundee, East but I suspect we shall come on to it at a later date.
Mr. Gauke: I think the question raised by the hon. Member for Dundee, East is, why is it not in the Bill that clause 175 is binding and subject to sanctions? Clause 182 defines a breach of clause 175 as a compliance failure. The following clauses make it clear that sanctions are there. Far be it from me to always want to be helpful but, in this period of bipartisan co-operation, I think the Bill does make it clear that sanctions are available.
Ian Pearson: I was explaining, without going into detail, that there were clauses under which we would have the opportunity to debate those issues later. I think I have covered the points raised by hon. Members.
Question put and agreed to.
Clause 175 ordered to stand part of the Bill.

Clause 176

Systems Rules
Question proposed, That the clause stand part of the Bill.
Mr. Gauke: The Minister has already outlined what clause 176 is about, which is the ability of the Bank of England to require an operator of a recognised inter-bank payment system to establish rules or to change the rules. I am simplifying a little. I again ask about time frame and consultation and the opportunity that an operator of a payment system will have to make representations to the Bank of England. I imagine there will be circumstances where the Bank of England will want to move very quickly with regard to system rules, although there may be times when these matters can be done in a co-operative way. I should be grateful for guidance from the Minister as to whether he envisages clause 176 being used in exceptional circumstances, where the Bank of England felt it necessary to impose rules on a payment system—if you like, forcing it on the operator, as opposed to reaching some agreement by dialogue. I know there have been instances under the non-statutory regime where the Bank of England has been able to reach an agreement by raising an eyebrow—in the manner of Sir Desmond Glazebrook of “Yes Minister” fame, as referred to earlier by my hon. Friend the Member for Wellingborough—and that that will be the way in which the Bank of England will seek to work, through dialogue and co-operation, rather than necessarily using the rules in clause 176 as a routine way of forcing payment systems to change their rules.
Stewart Hosie: Subsection (1)(d) states that an operator may be required
“not to change the rules without the approval of the Bank.”
I do not know the internal workings of any inter-bank payment systems, but I have written financial computer systems. I would be astonished if an entire system and the rules under which it operated did not include the creation of financial and transaction reports, which may subsequently be used in company accounts or bank accounts to calculate things such as tax liability.
Should the tax regime change, will the provisions mean that rules cannot be altered to change the reporting from the systems without the approval of the Bank? I suspect that that is not the intention, but it might be an unintended consequence. Perhaps the Minister will think about whether minor changes in the rules of systems should require approval by the Bank if they are made simply to facilitate additional or changed reporting that falls outside the inter-bank payment system.
Ian Pearson: May I remark on the importance of system rules before addressing those points? System rules are a fundamental part of how payment systems operate. Among other things, they cover a payment system’s legal structure, how risks are shared or managed and how default arrangements work. For example, the Bank of England may wish to ensure that a system has rules in place to manage the default of a participant effectively. The Bank’s powers on rules in the clause will be an important element of its oversight role for payment systems.
Rules fundamentally underpin the operation of any payment system. They are a crucial determinant of its efficiency and stability. Ensuring that an operator of a recognised inter-bank payment system has the appropriate rules in place on specific aspects of the payment system will ensure that it is not operated in a way that threatens the stability of financial markets or other business interests across the UK. It is important that our inter-banking system has effective rules in place and that the Bank of England has powers regarding those rules.
In response to the questions, we usually expect the Bank to operate in a co-operative way and discuss the system rules for an operator. It might be that in exceptional circumstances the Bank has to act quickly. The legislation therefore ensures that there is flexibility to take account of that. The hon. Member for Dundee, East asked whether the Bank’s approval will be required in all cases of rule change. Again, the word “may” is involved. Let me make myself clear: the Bank of England may require the operator of a payment system to seek approval before changing its rules, but that will not necessarily happen in all circumstances. System rules are important and it is right that the Bank has a strong oversight responsibility in that area. That is why we are giving these powers a statutory basis.
Stewart Hosie: Will it be permissible for a bank that is required to change the reporting in its system because of a tax change to do so without reference to the Bank of England?
Ian Pearson: I am sure that that will be the case.
Mr. Gauke: The wording of the clause is
“not to change the rules without the approval of the Bank.”
Will it be possible in any circumstances for such approval to be retrospective? In other words, there may be times when a payment system needs to change the rules quickly for tax or operational reasons. In such circumstances, the operator might have to go to the Bank and say, “We have done this; is it okay?” Is that permissible under the clause?
12.45 pm
Ian Pearson: I certainly see a distinction between routine changes to rules to comply with legislative requirements and future tax changes, and more wide-ranging changes to the rules that result from the decisions taken by an operator. Were an operator to consider making some fairly fundamental changes to its rules, I expect that it would want to have a conversation with the Bank as regulator in the first instance, and I think that that would happen in the normal course of events.
Question put and agreed to.
Clause 176 ordered to stand part of the Bill.

Clause 177

Question proposed, That the clause stand part of the Bill.
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