Mr.
Bone: It is a pleasure to serve under your chairmanship,
Mr. Hood.
I start with
a slightly different view of clause 167 even from that of Members of my
Front
Bench.
Mr.
Mark Hoban (Fareham) (Con): Not
again.
Mr.
Bone: I am unhappy to see regulations brought in, unless
it can be proved that they should be brought in. The Government
probably take the other view: regulations should be brought in, unless
there is an overwhelming case that they should not be introduced. That
is a difference between us from the start. I refer to “Yes
Minister”, because it is the best example of how the Government
work. If there was a failing in the banking system, the Governor of the
Bank of England would ask his chairman and chief executive out to
lunch and the problem would be sorted out. From the Minister’s
introduction to the clause, it seems that the system has been working
rather well and that there has never been any sign of a problem in the
oversight of the payment system. It worries me that we may be
regulating because of the present circumstances—because we think
that we should be doing something—but actually it will make no
difference whatever to the process or the security of the system. I
hope that the Government will persuade me otherwise as we go through
the clauses in detail, but that is my concern in
principle. My
concern has some backing to it. Her Majesty’s Treasury produced
a helpful impact assessment in October 2008, which
states: “The
Authorities do not envisage that this provision will amount to a
substantial change in
practice.” If
there is no change in practice, why are we bothering to introduce
regulations to make something happen? If it is already happening, there
seems little point in bringing it in. It concerns me that the
regulations do not have effect across the board, but are restricted to
systematic or system-wide consequences. How is it determined in advance
whether a bank or clearing house falls within those concerns? At this
stage, I am not sure that I am totally in favour of the
clause. 11
am
Ian
Pearson: I hope that I can persuade hon. Gentlemen of the
importance of the clause. The debate has usefully set out the general
principles that will be discussed under later
clauses. I
will explain the background to this proposal. Since early last year,
the authorities have been developing a clearer and more robust
framework for the oversight of payment systems. That was part of the
Government’s wider work to strengthen the framework for
financial stability. I emphasise that these measures are not the result
of problems in the payment system. However, we must take it into
account that the characteristics and importance of payment systems
could change, or that wholly new payment systems could develop and take
on systemic importance. Given the importance of payment systems to the
financial system, and therefore to wider financial stability and
consumer protection, it is sensible to pass these measures as part of a
package of proposals in the
Bill. I
welcome the hon. Member for South-West Hertfordshire to his debut in
the Committee. He asked about the scope of the measure and which
systems would be covered. The consultation document identified CHAPS,
Europea, LCH.Clearnet, BACS, Cheque and Credit Clearing, the faster
payments service and the LINK scheme as areas that would be regarded as
key wholesale inter-bank systems under the authority’s
preliminary assessment. It is important to recognise that such systems
process about £1.5 billion daily. That emphasises their systemic
importance to our financial system and the UK
economy. I
will make a few points on the remarks of the hon. Member for Dundee,
East and others who talked about the architecture of the system. He was
not making a debating point, but was genuinely interested in knowing
how the architecture fits together. I will explain the general
principles and we will cover the detail when discussing subsequent
clauses, as the hon. Member for South-West Hertfordshire
said.
The general
principle is that in the first instance it is the responsibility of the
Treasury, following consultation with the Bank of England and the FSA,
to designate a payment system and make a recognition order under clause
170. It is the responsibility of the Bank of England to exercise
oversight of the payment systems. That is clear in the Bill. As I
explained earlier, that will put the Bank of England’s current
responsibilities on a statutory footing, which we believe is the right
and prudent thing to do. We want the Bank of England to consult as
appropriate with the FSA, particularly where payment systems are
embedded in recognised clearing houses or investment exchanges, which
are also subjected to the FSA’s regulatory regime. That is why
there will be a memorandum of understanding between the Bank and the
FSA to ensure that there is no duplication and there is efficient
regulation.
It is also
important to stress that in all these instances the tripartite
authorities will work closely together. There are clearly distinct
roles for the Treasury, the Bank and the FSA in this, but we would
expect close co-operation on a regular basis between the three
organisations that make up the tripartite
system.
Mr.
Bone: Will the Minister give
way?
Mr.
Hoban: Will the Minister give
way?
Ian
Pearson: Before I give way to the hon. Member for
Wellingborough I should tell him that the days are gone when the Bank
of England gets a bank in and has a cosy chat. It is important that the
tripartite authorities work closely together and have good
relationships with the banks. There is a wider recognition that putting
these arrangements on a statutory basis is the right way
forward.
Mr.
Bone: That is most helpful. We used the example of people
getting around a lunch table and discussing matters. We are now trying
to formalise this in some sort of memorandum of who does what and when.
Is this Committee likely to be able to see a draft of that
memorandum?
Ian
Pearson: The Committee can see what is in the Bill. It
sets out clear and distinct roles. The issue of a memorandum where the
FSA regulates and the Bank of England regulates at the moment is pretty
much a technical issue, which we would not expect to see in the Bill. I
give way to the hon. Member for Fareham, who obviously cannot stay away
from the
Committee.
Mr.
Hoban: I am drawn to it by the magnetism of the subject we
have been discussing. The Minister talked about arrangements for the
FSA to look at regulated investment exchanges and clearing houses, but
a volume of transactions does not go through them, such as derivatives
that are not traded through exchanges. How will he ensure that the
payment systems that relate to them are covered by the Bill because
they are an important volume of transactions in the wholesale market
which, if we are looking at maintaining financial stability, ought to
be covered in some way by these rules?
Ian
Pearson: There are powers in the Bill that allow the
Treasury, in consultation and having received advice from the Bank of
England and the FSA, to recognise key wholesale inter-bank payment
systems. I have given an indication of which payment systems of
preliminary assessment would suggest that we would want them to be
recognised. But we need to ensure that we have adequate coverage so
that the Bank can discharge its responsibilities for financial
stability
appropriately.
Stewart
Hosie: I presume that the Minister is talking about clause
170 where the Treasury makes the recognition order. I thank him for his
previous explanation: the Treasury makes the recognition of the systems
and the Bank then does the other bits. That is perfectly reasonable.
The question posed by the hon. Member for Fareham is very important,
given that London is one of the three key wholesale financial markets
in the world. The Minister has just said that there is provision for
the Treasury, through regulation or by order, to specify other systems
that might come into this. Will he provide a little more detail? Does
he have anything in mind? How would he go about putting a recognition
order in place for one of those large wholesale systems that is not at
the moment an official, recognised inter-bank system? How would that
happen and what criteria would be used to do
that?
Ian
Pearson: We are talking about the general principles in
this clause. We shall get on to those questions when we debate the
relevant clauses. The hon. Gentleman also asked about who was consulted
and what issues were raised. Consultees included the Bank of England,
payment system operators, users of payment systems and the payments
council, which is the representative body for payment systems.
Everybody wanted to see clarity and responsibility in the system and we
believe that the Bill achieves that. Overall, there was widespread
support for the legislative proposals and we can proceed with
confidence. The financial community broadly welcomes the thrust of what
we are trying to do in part 5 of the Bill. No doubt, we will want to
tease out some of the detail during this and other sittings.
Question
put and agreed
to. Clause
167 ordered to stand part of the Bill.
Clause
168Interpretation:
“inter-bank payment
system”
Mr.
Gauke: I have two questions for the Minister. This
is an interpretation clause and should not detain us for long. The
clause relates to an inter-bank system. Subsection (1) refers
to
“arrangements
designed to facilitate or control the transfer of money between
financial institutions who participate in the
arrangements.” I
should be grateful if the Minister said a little more about money. We
know that money includes credit, but the Bank of England publication,
“Oversight of Payment Systems” from November 2000, states
that “‘money’
is regarded as cash (ie notes and coins issued by the central bank or
government) and claims against credit institutions in the form of
deposits.”
It
continues: “In
the end, however, what is acceptable as ‘money’ is a
matter of behaviour and the boundary could move.”
Does the Minister agree
that money is a more flexible concept than it might first
appear?
My second
point is about subsection
(5): “A
system is an inter-bank payment system for the purposes of this Part
whether or not it operates wholly or partly in relation to persons or
places outside the United
Kingdom.” That
comes back to the territorial point that has been mentioned already. In
order to fall within the regime, is it necessary for the operation of
the payment system to be in the UK? Does it matter where the
participants are? Is that the test? If so, this is a broad territorial
test, and it could appear to cover any payment system anywhere in the
world. I assume that the key point is the operation—where is
that performed? If it is performed from the UK, will it be caught by
the system so that it does not matter where participants are
based?
Mr.
Bone: On my hon. Friend’s last point, if I send
money to America and there is a transfer between a British bank and its
subsidiary in the US, is that part of the system? If the payment
originates in the US and money is sent to me, will the regulations
cover the bank over there? That is an important
point.
Mr.
Newmark: I, too, shall be brief. I am sorry to see that
the hon. Member for Wolverhampton, South-West (Rob Marris) is not on
the Committee. I know how assiduous he is with explanatory notes.
Having learned my lessons from him, I will ask a couple of questions
relating to points made in the explanatory notes. The first is about
subsection (2), which states that if non-financial institutions
participate, that will not prevent the process from being considered an
inter-bank payment system. I am curious about what institutions the
Minister has in mind when he talks about non-financial institutions.
Why has that been raised, what red flags have given him concern about
non-financial institutions and why are they being brought under the
umbrella? I suspect I know why, but I am curious to hear his take on
the matter.
My second
question relates to subsection (5), but it approaches from a different
angle to that taken by my hon. Friend the Member for South-West
Hertfordshire. It relates to the issue of systems operating wholly or
mainly outside the UK that are to be included and how we will deal with
different regulatory environments. A provision might be interpreted as
being right in the UK because it has an impact on what goes on in the
UK, but how do we try to enforce policies with institutions under
different regulatory regimes in other
countries? 11.15
am
Ian
Pearson: I am happy to try to provide clarification for
the hon. Gentleman. As the hon. Member for South-West Hertfordshire
said, the clause defines the use of the term “inter-bank payment
system” throughout part 5. He referred specifically to
subsection (1), which defines the term “inter-bank payment
system” for the purposes of the Bill and refers to the
arrangements that enable the transfer of money. Subsection (4) confirms
that that includes credit between participating financial institutions,
which are defined in subsection (3) as banks and building
societies. Let me be clear that the Bill will give us the flexibility to
recognise new systems in the future, and we think it appropriate that
we should be able to do so. Let me also be clear that that does not
include internal bank systems or correspondent banking
arrangements.
The hon.
Gentleman also raised the issue of subsection (5), which will ensure
that systems operating wholly or mainly in relation to persons or
places outside the UK can be classed as inter-bank payment systems for
the purposes of part 5. I shall give a little more detail on that
because a few hon. Members questioned how the legislation would work.
Recognised inter-bank payment systems that are wholly or partly based
outside the UK might be systemically important for the UK financial
system. Where that is the case, part 5 provides for the Treasury to
recognise them and for the Bank of England to oversee them to the
extent that that is possible. In most circumstances, that oversight
would be delivered through the Bank of England’s participation
in international co-operative agreements with other central banks,
because that is the nature of things.
Clearly, we
cannot regulate for the American banking system, as the hon. Member for
Wellingborough hinted, but we can ensure that the Bank of England can
participate in those international co-operative agreements and make the
points that it needs to in order to discharge its
responsibilities.
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