Clause 167
Banking Bill
10:30 am
Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform; Dudley South, Labour)
It is a pleasure to serve under your chairmanship for this part of the Bill, Mr. Hood. Clause 167 provides an overview of part 5, which enables the Bank of England to oversee certain systems for payments between financial institutions. It might be convenient for the Committee if I outlined what the clause does.
Payment systems are networks for the electronic transfer of money or credit between participating members, linking key financial firms to each other. A typical payment system comprises a scheme company or an incorporated association, members that are mainly, but not exclusively, financial institutions, rules established by the scheme operator covering such matters as settling claims—payment instructions, for example—between members, a system in which members input instructions to transfer payments and, in some cases, a separate, related or unrelated, company providing infrastructure, such as supporting IT systems.
The vast majority of economic transactions involve some form of electronic payment; for example, payment systems include those for the payment of financial contracts, such as derivatives; automated payments, such as direct debits; the system for clearing cheques; and systems used by the Government for benefit payments. In some cases, payment systems are embedded in clearing and settlement systems for transferring securities and other financial products. Payment systems are, therefore, vital to the functioning of financial services, markets and the wider economy.
The interlinkages between payment systems, banks and other financial intermediaries mean that any problems with payment systems have the potential to spread quickly through the financial system, ultimately affecting business and consumers. For example, problems in large wholesale systems have the potential to lead to liquidity difficulties for banks and to contagion in the markets. Problems in retail systems may result in much inconvenience and hardship for considerable numbers of people—for example, if benefit or salary payments cannot be credited to people’s accounts. As such, robust and effective systems for payments are essential to the proper functioning of the financial markets and the economy.
Currently, the Bank of England undertakes oversight of payment systems on a non-statutory basis, focusing on promoting the robustness and resilience of key UK payment systems. The Financial Services Authority has a statutory responsibility under the Financial Services and Markets Act 2000 for the regulation of recognised clearing houses that contain embedded payment systems. The Bank of England’s responsibilities and its operational role as a central bank naturally mean that it is involved in the design, management and operation of high-value inter-bank payment systems, which helps to ensure that those systems are operated in a prudent and effective manner. However, the lack of formal powers, including mechanisms for enforcement, limits the Bank of England’s ability to ensure that payment systems are robust and resilient. For example, the Bank of England’s ability to regulate the operation of systems is largely dependent on what can be achieved through dialogue with the management of payment systems and its assessment of systems’ compliance with international standards, published in the Bank of England’s annual payment systems oversight report.
The Government are therefore legislating to formalise the Bank of England’s role in the oversight of payment systems, to ensure that the Bank has the tools necessary to ensure that payment systems are operated in a manner that minimises risks to financial stability and disruptions to business and consumer interests. The provisions will provide, in addition to an important tool for the maintenance of financial stability, 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 of the Bill.