| Previous Section | Back to Table of Contents | Lords Hansard Home Page |
Part 5 seeks to ensure that the Bank of England has the necessary tools to ensure that payment systems are operated in a manner that minimises risks to financial stability and disruptions to business and consumer interests. In addition to providing an important tool for the maintenance of financial stability, these measures will also provide an important new statutory lever for the Bank of England to use in fulfilling its new statutory objective for financial stability, as provided for in Part 7.
Amendment 163 concerns the Treasury’s power, under Clause 181, to make a recognition order in respect of an interbank payment system for the purposes of this part of the Bill. The aim of subsection (3) is to ensure 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 amendment seeks to remove this provision, which states that such an order cannot apply to a system operated solely by the Bank of England.
I do not believe that the amendment is necessary. Although the Bank of England may provide facilities that allow transactions in interbank payment systems to be settled across its balance sheet, it is not currently an operator of payment systems within the meaning of the Bill. If the Bank were to become the operator of an interbank payment system in the future, it would conduct its operations in that field in accordance with its overall statutory responsibilities, including its new
26 Jan 2009 : Column 38
The risk of an operator taking insufficient account of overall financial stability considerations, which arises in privately operated interbank payment systems, would therefore not arise in connection with a payment system operated by the Bank of England. The removal of this subsection is thus unnecessary and I ask the noble Baroness to withdraw the amendment.
Baroness Noakes: I thank the Minister for that. I think he is saying that, if the Bank ever does operate a system, no one needs to oversee the Bank because it is perfect in all ways and will always do things that can never be criticised. Is that what the Minister is saying?
Lord Myners: It is not what the Minister is saying. I suspect that the noble Baroness is very aware of that and I am grateful to her for providing me with the opportunity to clarify it, should there be any doubt. In the hypothetical example that she provided, the Bank’s executive would be accountable to the Court of Directors of the Bank of England for its operation of any payment system, and the Bank, in turn, is accountable to Parliament.
5 pm
Lord Stewartby: I was taken rather by surprise by subsection (3) as it is not immediately apparent for whose benefit it is included. Is it to protect the Treasury or the Bank of England? What lies behind it? If the Minister says that the amendment is not needed, presumably that will be because the thinking behind subsection (3) copes with questions of whose interest is at stake, but it does not leap off the page. Will the noble Lord explain for whose benefit or protection the subsection should remain in the Bill?
Lord Myners: I shall respond to the noble Lord, Lord Stewartby, by suggesting that the subsection is designed to provide clarity and remove any doubt.
Baroness Noakes: The Minister has given some interesting answers which we will study carefully. I beg leave to withdraw the amendment.
164: Clause 185, page 97, line 16, at end insert—
“( ) Before publishing principles, the Bank must consult the operators of recognised inter-bank payment systems and any other persons which, in the opinion of the Bank, might be affected by the principles.”
26 Jan 2009 : Column 39
Baroness Noakes: Amendment 164 would add a new subsection to Clause 185. I shall also speak to Amendments 165 and 167, which would amend Clauses 186 and 193 respectively.
Under Clause 185, the Bank of England may issue principles, which I understand it already does in its informal oversight arrangements. The operators have to have regard to them when operating their systems. There is a requirement to consult the Treasury but no requirement to consult the interbank settlement players or indeed anyone else. My Amendment 164 would add that.
Amendment 165 is in similar form in relation to the code of practice which may be issued under Clause 186. I hope that the Government agree that it is appropriate and necessary for the Bank to consult those who will be objects of those principles and codes.
Amendment 167 would add a new category of compliance failure to Clause 193—the failure to have regard to the principles. This is a probing amendment to find out the status of the principles and the consequences of not following, or not having regard to, the principles. I am not convinced that a failure to have regard to principles should be sufficient to trigger things such as penalties, which are then provided for, but having said that, it is important to establish what happens if an interbank payment system does not have regard to the principles. What is the role of the principles in this legislation? I hope that the Minister can explain. I beg to move.
Lord Higgins: I understand that it is proposed that the Bank will publish a set of principles with regard to the interbank payments, and so on, and before doing so will consult operators in the market. I am not clear why this is necessary to prevent destabilisation of the system. I am right at the very beginning of the argument. These are apparently elaborate arrangements for ensuring that the Bank supervises and regulates the interbank payment system. What is the danger if there are unregulated operators working a system of interbank payments?
Lord Davies of Oldham: I am grateful to noble Lords who spoke on this amendment. With respect to the principles behind Clause 185, we do not think that the Bank of England needs to be put under a specific requirement to consult. The Bank intends to adopt the internationally recognised principles developed by the Bank for International Settlements. These principles are set out in the Committee on Payment and Settlement Systems’ Core Principles for Systemically Important Payment Systems. The Bank will follow those international requirements.
As the Committee would anticipate, these core principles are already used by the Bank in its current oversight regime. They are internationally accepted as important for sound, stable and well functioning financial systems, and form part of the Financial Stability Forum's Compendium of Standards. The Bank of England will also take account of other relevant internationally agreed recommendations and best practice in setting its principles, and it will work closely with operators of recognised payment systems in the undertaking of its functions under this part.
26 Jan 2009 : Column 40
The Bank must also obtain the Treasury’s approval before it publishes any principles, which ensures a degree of parliamentary accountability. It is also worth noting that compliance with the principles is not prescriptive. Recognised systems must have regard to the principles in operating, but not doing so does not constitute a compliance failure. I hope that I have covered the issue with regard to Clause 185.
Amendment 165 makes a change with regard to the codes of practice provided for in Clause 186. This was discussed in the other place and, like my honourable friend the Economic Secretary during Committee stage in the other place, I can confirm that the Bank will seek to consult with the operators of payment systems in developing codes of practice. However, the codes of practice are intended to function as a flexible mechanism to set binding standards that can be applied, as appropriate, to one or more recognised interbank payment systems as needed. They will focus on a more specific level of detail than the principles. For example, a code of practice may require certain types of system to observe specific minimum standards in relation to business continuity. However, we do not believe that it is necessary to insist on consultation in primary legislation, given that the Bank will develop relevant codes of practice by working with the payment systems concerned as appropriate, which I think was the noble Baroness’s anxiety. I hope that gives her some reassurance.
Amendment 167 extends the definition of compliance failure in Clause 193 to include a failure by an operator of a recognised payment system to “have regard to” the principles. We do not think this amendment is necessary. The principles published by the Bank of England will be high-level and over-arching. All recognised interbank payment systems must have regard to those principles. However, they do not set out detailed provisions about the operation of payment systems, but instead provide guidance about good practice in operating the systems. It would not be appropriate for failure to comply with the principles to trigger a compliance failure.
In practice, if the Bank thought that a system’s observance of a principle was inadequate, it would engage in dialogue with the system and monitor progress, for example via regular meetings. The Committee would recognise the seriousness of that position, and the necessity for the Bank to engage in discussions. If that proved insufficient, the Bank might use additional information-gathering powers by commissioning an independent report, which we provide for in Clause 192, to assess whether the operator is taking sufficient account of the principles. Based on this analysis, the Bank could then use its powers to issue a code of practice or directions, or to require the payment system operator to make rule changes. Failure to adhere to such measures would constitute a compliance failure, and the Bank could impose a sanction. We specify this in Clauses 194, 195 and 196. I hope that I have illustrated how the principles and code of practice are intended to work. Therefore, I reassure the noble Baroness that she can withdraw her amendments with confidence.
26 Jan 2009 : Column 41
The noble Lord, Lord Higgins, asked what danger we are addressing with these clauses. The arrangements in the Bill replicate and formalise the existing role of the Bank, to which I referred earlier, in overseeing payment systems. The noble Lord does not need me to emphasise that payment systems are fundamental to the efficient operation of financial markets, and the Bank needs powers over them. That is what these clauses identify. I hope that I have given sufficient reassurance for the amendment to be withdrawn.
Baroness Noakes: I am grateful to the Minister for setting that out. I thought earlier that he was saying that principles were high-level things that somehow needed Treasury approval, but that the worst that would happen if you were not complying with them would be that you would have a meeting, whereas breaking the code of practice, which did not require Treasury approval, could result in penalties. That seemed strange, but the Minister squared the circle when he explained the link with an independent report under Clause 192 that could take account of principles. I am therefore satisfied with the Minister’s answer. I beg leave to withdraw.
Clause 186 : Codes of practice
165A: Clause 188, page 97, line 37, at end insert—
“( ) An inter-bank payment system, its officers or servants and members of its governing body shall not be liable in damages for anything done or omitted to be done when such act or omission occurs in accordance with a direction given by the Bank of England under this section.”
Baroness Noakes: Amendment 165A adds a new subsection to Clause 188, so that if an interbank payment system does or does not do something in accordance with a direction given by the Bank of England under Clause 188, it will not be liable for damages. The amendment has been suggested by the Payments Council, an independent industry-led body that brings banks and users together to discuss strategic issues in relation to payment systems.
The council accepts the need for the Bank to be given powers, in Clause 188, to instruct an interbank payment system to act, even if the rules of that system preclude this, as might be the case with a bank that is being dealt with under the special resolution regime. It is normal for a bank in financial difficulties to be excluded from a payment system, and the Bank may want to overrule that. The concern that has been expressed relates to possible actions by creditors of
26 Jan 2009 : Column 42
5.15 pm
Lord Davies of Oldham: I am grateful to the noble Baroness for the way in which she introduced her amendment, and for the fact that she accepts that the power given to the Bank of England is important. The Bank will make a direction to the operator of an inter-bank payment system only where it is necessary in the interests of protecting the stability of or confidence in the UK financial system, or to protect business or other interests in the UK. I would have been shocked if the concept of the power had been challenged in a direct way and I am relieved that all sides of the Committee endorse that position.
In undertaking its formal oversight role in accordance with this part of the Bill, the Bank will work collaboratively with the operators of payment systems. It will communicate regularly in order to ensure that recognised payment systems are being operated in a way that minimises deficiencies and the likelihood of disruptions to inter-bank payment systems that could give rise to financial instability or other concerns. The Bank will give directions only in the event that other informal and formal regulatory tools are ineffective or where action is urgent because it is necessary to avert a particular risk.
As in the case of the intervention powers of other authorities—for example, the FSA’s powers to give directions to the managers of authorised unit trust schemes—it is inappropriate to exempt the operators from liability in damages as a result of those directions. The payment system in question will have been recognised as having systemic or system-wide importance, including for business or other interests across the UK. Therefore, any directions with which the Bank may ask a system to comply will ultimately be preventive in order to seek to ensure that the system is not running unnecessary risks that could threaten financial stability. I hope that I have established the significant purpose of this clause and indicated how the Bank will operate its power under this clause in consultation and fully in accord with the seriousness of the potential difficulty that might arise—namely the Bank’s enhanced role in protecting the stability of or confidence in the UK financial system, or to protect our business or other interests. I hope the noble Baroness feels that I have justified the clause enough to enable her to withdraw the amendment.
Baroness Noakes: I thank the Minister for his response but he did not deal with the point that I raised. He described issuing a direction in the context of a payment system being important to financial stability, but my point concerned a failing bank which needs continued access to the payment system for continuity of banking services, or something like that. The rules of a payment
26 Jan 2009 : Column 43
I think that the Minister also said that there were no equivalent provisions in the Financial Services and Markets Act. It is my understanding—I do not have the chapter and verse as I do not have the Act with me—that there were similar situations within the Financial Services and Markets Act where indemnities were provided. I am sorry to press the Minister on these points but they have been raised with me by the Payments Council. I wonder whether he can help.
Lord Davies of Oldham: I disagree. We do not think that it is appropriate to extend the FSA’s powers to give directions to the managers of authorised unit trust schemes to exempt the operators from liability in damages as a result of those directions. After all, the power to give directions is to ensure that the system is being operated in a way that does not threaten financial stability or disrupt markets.
We do not intend to use the power in the way that the noble Baroness suggests as it would involve a more limited operation with regard to potential creditors. We are talking about a significant failure in the system, in which case talk of indemnity is misplaced. I alluded to the Financial Services Authority’s powers in this area because those do not exempt operators from liability in damages as a result of directions which the authority may give. I am sorry if I have not been entirely clear but we may have been at cross-purposes over the nature of these powers. I am seeking to explain that these powers would operate at a more substantial and significant level than in the instance given by the noble Baroness. In such circumstances, indemnity would not be appropriate.
Baroness Noakes: I hear what the Minister says, and I shall not go into the question of the Government using those powers in the context that he described. Is he saying that the Government would not use these powers to instruct a payment system to keep within that payment system a bank that would be required to leave the system under the terms of that system? I gave the example of a bank that failed to satisfy financial conditions and would therefore be deprived of ongoing membership—which I understand is a normal term of payment systems. Are the Government saying that these direction powers would not be used in such an instance? It is that kind of instance that is causing the problem.
26 Jan 2009 : Column 44
Lord Davies of Oldham: On the noble Baroness’s specific point, I am seeking to identify the importance of the powers—which would, after all, be withdrawn if she pressed her amendment and the clause were deleted.
Baroness Noakes: If the Minister looks at the amendment he will see that I am not seeking to delete the clause. I am seeking to add a subsection to offer some protection to the payment systems that act in accordance with the directions.
Lord Davies of Oldham: The noble Baroness is right; I withdraw that point. I have been dealing with so many debates on clause stand part that I misconstrued the argument.
I was seeking to emphasise the level of the powers within the clause and explain why the clause is essential. The noble Baroness has raised an important point but it is not four-square with the way in which the Bank of England would intervene at this level. I realise that that may not be a satisfactory response, so I shall write to the noble Baroness. If I do not convince her, the issue will undoubtedly be raised again.
Baroness Noakes: The Minister correctly identifies the fact that he has failed to deal with the amendment to my satisfaction. As he will be aware, the time between now and Report is almost non-existent as we are operating way outside the normal intervals. I am not sure that writing to me will be helpful unless there is a very rapid response tomorrow, which would be helpful. I will need to consult those who raised the point with me; the Payments Council regarded it as a serious point. I will almost certainly have to return to this on Report.
Lord Davies of Oldham: The noble Baroness has not yet withdrawn her amendment, so I am not tardy. I shall ensure that I reply to her immediately.
Baroness Noakes: I am grateful to the noble Lord. I beg leave to withdraw the amendment.
Baroness Noakes: Amendment 166 amends Clause 189(1). Clause 189 is headed “Role of FSA”, but the first two subsections describe what the Bank should do in relation to the FSA and not what the FSA should do. I have proposed the deletion of subsection (1) for a different reason. It says:
“In exercising powers under this Part the Bank ... shall have regard to any action that the FSA has taken or could take”.
| Next Section | Back to Table of Contents | Lords Hansard Home Page |