Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

Letter from the Right Hon John Spellar MP, Minister for Transport (Bus 01A)

  Thank you for your letter of 23 May, requesting certain further information from this Department following my appearance at the Transport Sub-Committee's inquiry into the Bus Industry on 21 May.


  The Bus Service Operators Grant (England) Regulations 2002 define those services which are eligible for the grant as from 1 May this year. These regulations re-enact previous provisions which made eligible those local bus services following a route and timetable registered with the Traffic Commissioner and on which a member of the general public is able to make a journey between any two stopping places (those stopping places being at locations where they are likely to be used with reasonable frequency by the general public).

  The regulations also for the first time extend eligibility to a wide range of services operated by non-profit making bodies (``community transport") under a permit under section 19 of the Transport Act 1985. These services do not follow a fixed route or timetable and are for use by particular categories of passengers, rather than the general public. The services eligible under this provision are those used wholly or mainly by those:

    —  aged 60 or over or are disabled;

    —  in receipt of income support or jobseeker's allowance;

    —  who are socially excluded because of poverty or other economic factors, homelessness, geographical remoteness, ill health, religious or cultural mores or who believe that it would be unsafe to use other forms of public transport.

  We will be considering as part of forthcoming consultation on changes to the local bus service registration rules whether there should also be changes to grant rules to enable flexibly routed registered services to receive bus service operators' grant.


  We are not aware of any local authority that is actively proposing to make a statutory (as opposed to voluntary) quality partnership scheme. We can confirm that the Traffic Commissioners have to date received no applications from operators to register that they will meet the quality standards laid down by the local authority in a Quality Partnership scheme when they are using the Quality Partnership scheme facilities, nor have they been consulted by local authorities about any proposed scheme. Local authorities are not required to apply to the Department for Statutory Quality Partnerships, though they are required to give prior notification and to consult bus operators, the relevant traffic commissioner and bus user interests.

  By contrast, there are voluntary quality partnerships in around 130 areas in England. Many of them have been very successful. A statutory Quality Partnership scheme under the Transport Act seeks to take this a stage further. It envisages a more formal arrangement—in effect representing a commitment on the part of the authority to provide certain facilities to improve local bus services, and an obligation on the part of participating bus operators to meet the quality standards prescribed in the scheme.

  It is difficult to say why no authorities have so far chosen to use the new powers available to them. It seems, however, that those authorities which have successful voluntary schemes see no advantage in putting them on a formal footing. It is more puzzling that authorities without a scheme have not been more willing to take the statutory route. Some authorities have, however, claimed that the provision in section 114(6)(b) of the Transport Act 2000 specifically preventing them from specifying frequency or timing of services in a statutory partnership acts as a disincentive.


  Local authorities have always been able to use their bus subsidy powers under the Transport Act 1985 to provide higher frequency of service on a route where they considered that the frequency already being provided commercially was not sufficient to meet public transport needs.

  However, some authorities argued that they were reluctant to use their powers in this way because in particular of the requirement in section 92 of the 1985 Act that they do not use the powers in a way which might inhibit competition between those providing or seeking to provide bus services commercially.

  Changes brought in by Section 152 of the Transport Act 2000 sought to deal with this concern. Section 152 replaced the do not inhibit competition provision with a broader formulation requiring that authorities have regard to the interests of the public and of those providing bus services in the area. The section also introduced a broader best value test for authorities in deciding whether to subsidise a service.

  It is of course up to authorities to decide in particular cases whether to subsidise increased frequencies, taking account of local circumstances and priorities.

  We expect that the decision recently announced by Ministers to more than double the tendering "de minimis'' limits will be helpful to authorities in this regard. It will give them a great deal more flexibility if they consider it appropriate to issue a contract for increased frequency—perhaps to an incumbent operator—without having to use competitive tender procedures.


  The new legislation that you refer to seeks to protect the consumer by regulating issuers of e-money. An annex is attached, explaining the scope and purpose of the legislation and its possible impact on transport schemes in detail.


  We are not persuaded of the case for the creation of a new statutory body at national level to represent bus users. Buses are essentially local services, and effective representation at the local level is what really matters. Indeed, the strength of the National Federation of Bus Users (NFBU) is in its network of local groups. The NFBU is well respected by the bus industry, and is in regular contact with this Department. The bus industry has also set up an independent Bus Appeals Body to handle representations not satisfactorily resolved at the local level.

20 June 2002

Annex A



  The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002 is the UK's enactment of an EU Directive (2000/46/EC) which requires Member States to implement measures on the taking up, pursuit and prudential supervision of the business of electronic money institutions. The Directive was originally championed by the European banking community who felt that their control over the financial services market was being undermined by non-bank organisations (eg High Street retail chains) issuing smart cards carrying monetary value.

  The banks wanted legislation that obliged issuers of "e-purses" and other monetary value instruments to be subject to the regulatory regime currently applied to full financial services. However in drafting the Directive the declared intent of the European Commission is different—the legislation is intended to offer opportunities:

    —  to open up the financial marketplace to third party competition—particularly to non-financial institutions who were supplying other smart card services and who could therefore offer alternative payment mechanisms as part of the service from a single service provider;

    —  to facilitate technological innovation;

    —  to establish a regulatory level playing field by imposing a supervisory regime on electronic money institutions that is much lighter than that for banks but which severely restricts the activities that electronic money institutions may undertake; and

    —  to give consumers confidence in the security of "e-money" in the same way that they trust cash and the current protections for standard financial transactions.


  The Directive seeks to regulate only issuers of e-money. As with cash now, retailers, banks, bureaux de change and consumers would be free to hold, sell and exchange e-money in the normal course of business. The Directive allows any type of organisation to issue and manage e-money provided that it meets specified criteria for financial management and prudent control mechanisms. The new UK regulatory regime requires the FSA to ensure inter alia that:

    —  the company has sufficient capital;

    —  the "float" is invested in low risk and highly liquid financial assets;

    —  the management has the necessary expertise and standing;

    —  the systems, controls, fraud detection and risk management procedures are robust;

    —  the issuer may not undertake any business activity other than the issue of e-money and the provision of financial and non-financial services closely related to e-money issuance; and

    —  the bearers of electronic monetary value may require redemption at par in notes or coin or by transfer to a bank account.

  The Order defines electronic money as "monetary value as represented by a claim on the issuer which is:

    (a)  stored on an electronic device;

    (b)  issued on receipt of funds; and

    (c)  accepted as means of payment by undertakings other than the issuer".

  The UK implementation of the Directives gives the FSA considerable discretion in ruling on specific applications and it is too early to say precisely how this definition of e-money will be applied. However, item (a) above appears to exclude from regulation all paper tickets, and paper based points or voucher schemes. Item (b) should exclude schemes where points or value is not bought but is given, won, or for example, earned as a bonus for frequent travel, unless the electronic value issued is prepaid by a third party. Item (c) should exclude for example schemes in which customers pre-pay for some form of "right to travel" points or value which can only be used to purchase travel and other related services from the issuing travel operator. [However, the fact that the definition of electronic money refers to monetary value means that an electronic season ticket that was valid on the services of more than one operator would not constitute electronic money since it is not actually "spent" as it is used.] Together these three points should exclude from regulation many of the schemes operating or being planned in travel.

  Any electronic ticketing scheme which permitted stored value on a travelcard to be used for purchases of other goods from third parties (eg station retailers) would prima facie constitute electronic money unless it qualified for a waiver on size or relationship grounds.


  Many transport card schemes have been designed on the assumption that the scheme promoter—a PTE, transport operator, LA—would issue the smart cards and the associated e-money. The introduction of the e-money legislation is already prompting a re-evaluation of existing schemes, although without detailed knowledge of individual proposals it is not possible to estimate the size of the impact and its likely consequences.

  Operators of transport ticketing schemes which aim to allow customers to purchase stored value from one travel operator which then can be used to purchase tickets or travel or other goods from a different operator are likely to have a number of choices. These include:

    —  taking steps to conform to the legislation;

    —  converting the scheme to use "stored travel tokens"; and

    —  seeking a waiver if the scheme is relatively small in scope.

  Current schemes have a period of six months from 27 April 2002 to make such changes or become authorised electronic money issuers. Loyalty point schemes may also have to be restricted in terms of what the points can be converted into. Many Local Authorities are considering "citizen card" schemes which typically involve value on a card which could be used for both transport and for local applications eg travel on buses and a swim at the local sports centre. Unless the scheme applies to a very small geographic area, when it might be eligible for a waiver, these would also be subject to the new legislation.

  However, for the larger schemes, and for schemes that wish to see value accepted by third parties, there is likely to be no alternative to either becoming a regulated e-money issuer, or of sub-contracting the issuing of value to someone who already has or intends to obtain regulatory approval. Typically this would be a bank or the operator of an existing regulated scheme. It is possible that the costs, complexities and likely delays required to organise either option could damage the commercial viability of some of the currently planned schemes. On the other hand the substantial safeguards provide by the new legislation give consumers very much enhanced protection against fraud or financial mismanagement.

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