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. The
clause, in essence, formalises an aspect of the existing structure of
oversight under which the Bank of England expects payment systems to
take account of the Committee on Payment and Settlement Systems and its
core principles for systemically important payment
systems, which were referred to by the hon. Member for South-West
Hertfordshire. “Core Principles for Systemically Important
Payment Systems” was published in January 2001. The principles
emphasise the importance of those systemically important payment
systems within which disruption could trigger or transmit further
disruptions among participants, or cause systemic disruptions in the
financial markets more
widely. 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
175Codes
of
practice Question
proposed, That the clause stand part of the
Bill. 12.30
pm
Mr.
Gauke: The clause relates to codes of practice. I know
that the Minister is not keen to have a lengthy debate about
“may” and “must”, but I shall raise the
issue briefly. Does the Bank of England intend to publish codes of
practice? My second point is about consultation. The clause does not
mention consultation with operators, or state whether the Treasury or
the Bank of England intend to hold consultation about codes of practice
and any changes to them.
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
176Systems
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
177Directions Question
proposed, That the clause stand part of the
Bill.
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