David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I will leave the issue of which payment systems will be recognised until we discuss clause 171. However, I have one or two questions on clause 170.

First, as the hon. Member for Dundee, East said, the recognition order is made by the Treasury. Presumably, because it is an order it must be made by the Treasury and cannot be made by the Bank of England. Will the Minister explain what the role of the Bank of England will be in determining whether a recognition order is appropriate? This issue relates to the discussions we have had on the relationship between the parties to the tripartite arrangement.

Subsection (2) states:

“A recognition order must specify in as much detail as is reasonably practicable the arrangements which constitute the inter-bank payment system.”

The terminology

“in as much detail as is reasonably practicable”

is somewhat vague. It may be the best that can be done in the circumstances. Does the Minister anticipate difficulties in specifying what is covered? I do not think that there will be, but I should be grateful for his thoughts.

Subsection (3) makes the interesting point:

“The Treasury may not specify an inter-bank system operated solely by the Bank of England.”

Following the example of my hon. Friend the Member for Braintree, I too have looked at the explanatory notes on the clause. Paragraph 381 is interesting:

“The Bank of England has a central role in relation to certain payment systems. In particular, it operates the Real Time Gross Settlement System and it acts as an infrastructure provider in relation to CHAPS.”

I am sure that subsection (3) is not preventing the Treasury from specifying a system that is partly operated by the Bank of England, because that would cover some of the main payment systems being addressed. The terminology clearly refers to inter-bank systems operated “solely” by the Bank of England, while the explanatory notes say that

“the Bank of England could step in and provide payment system services.”

In the light of recent events, we consider that less unlikely than in the past—the Government or a Government agency performing such a major role in this area.

Brooks Newmark (Whip, Whips; Braintree, Conservative)

My hon. Friend is titillating me, because he is skirting around the key phrase in paragraph 381. I would underline the part about the possibility of the Bank of England “in some circumstances” stepping in. I am curious about that central question, which I ask through my hon. Friend. What does the Minister think such circumstances might be? What advice does he have? What situations is he thinking about?

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I am grateful to my hon. Friend, although I do not know whether I should apologise for titillating him or not. I was going to come to that very point.

It is noticeable that, in some jurisdictions, the performance of a payment system is performed by a central bank, essentially, rather than by private entities that are regulated. It might be helpful to the Committee if the Minister indicated whether the Government considered nationalising payment systems. For the avoidance of doubt, he could explain why he thinks that nationalisation is a bad idea. We are with the Government in viewing a regulatory system, rather than nationalisation, as appropriate, but perhaps the Minister would elaborate.

Brooks Newmark (Whip, Whips; Braintree, Conservative)

It was not the issue of nationalisation that crossed my mind. However, the explanatory notes say that

“in some circumstances, the Bank of England could step in”.

I assume that the Minister does not think that “could step in” means nationalisation; it just means to enforce some regulation, which we are trying to impose through the Bill. Or am I incorrect, and my hon. Friend correct—that it is nationalisation or nothing?

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

Again I am grateful to my hon. Friend. My reading was that, if the Government provide the payment system services, they are essentially performing  that role, which is what happens in some jurisdictions. The Government are maintaining that option, although not on the face of the Bill. They do not need to do so in the Bill, but the explanatory note hints at the possibility of circumstances in which the Government would step in, such would be the systemic risk at that time. I am not saying that that would necessarily be the wrong thing to do, but elaboration from the Minister would be helpful to the Committee.

If my hon. Friend does not wish to intervene, I shall go back to the point about the real-time gross settlement system, and to what extent that can be seen as separate from the overall CHAPS. For example, is there a contributory element? If so, it would be regulated by the Bank of England, and we would have circumstances in which an element of CHAPS is both operated and regulated by the Bank of England. That is my understanding, and I do not think that subsection (3) changes that. I should be grateful for the Minister’s confirmation.

Subject to that, I have more points to raise with regard to the scope of the recognition system, but it would be appropriate to address that under clause 171.

Brooks Newmark (Whip, Whips; Braintree, Conservative)

I shall be brief. I am still not clear, notwithstanding the excellent points raised by my hon. Friend the Member for South-West Hertfordshire.

The explanatory notes say in paragraph 381 that in some circumstances the Bank of England could step in and provide payment system services. Is that a nationalisation of the payment system, as my hon. Friend is saying, or is it the Bank of England acting as a facilitator for a short time? What period of time are the Government thinking about? Is it two days, a week or a month, or is it a nationalisation that will be there for a year or five years? I can see what the circumstances are but it is the timeline that concerns me because that makes a difference between the Bank of England being a facilitator for a short-term systemic breakdown and a full-blown nationalisation of the payments system.

Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform; Dudley South, Labour)

The clause gives the Treasury power to designate by a recognition order an inter-bank payment system as a recognised system, which is subject to the Bank of England’s powers of formal oversight conferred under part 5 of the Bill.

Before addressing the points raised by the hon. Members for South-West Hertfordshire and for Braintree, particularly with regard to subsections (2) and (3), I should like to return to the original point about why the Treasury is being given the power to designate in these circumstances. In essence, the Government believe that the Treasury is best placed to make this assessment. As the UK’s finance and economic ministry, it has wider powers than the Bank of England. The Government have responsibility for delivering conditions for business success in the UK by supporting fair, stable and efficient financial markets. The Treasury and the Chancellor of the Exchequer also remain responsible for ensuring compliance with the UK’s international obligations. The Government have these wider responsibilities but we think it right to work closely with the Bank of England which will take clear responsibility in terms of its involvement in financial stability, with the other party to the tripartite arrangement,  the FSA. We remain convinced that the Treasury should have overall responsibility in the area of recognition orders.

The hon. Member for South-West Hertfordshire raised a number of points about subsection (2) which says that the recognition order must contain sufficient description of the arrangements that constitute the inter-bank system so that it is clear to operators, customers, members, third parties and the Bank of England what has led to the system’s recognition and, importantly, in order to identify the arrangements over which the obligations conferred under part 5 of the Bill apply. We have no indications of any problems with this but it is clearly something required to ensure that part 5 of the Bill can operate effectively.

Hon. Members also raised the issue in subsection (3):

“The Treasury may not specify an inter-bank system operated solely by the Bank of England.”

This provision ensures 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 Bank of England provides facilities that allow transactions in inter-bank systems to be settled across its balance sheet. It is not an operator of payment systems within the meaning of the Bill. I hope that makes the situation clear. If the Bank were to become the operator of an inter-bank payment system in the future—a speculation raised by the hon. Member for Braintree but which we think would be wholly exceptional—its operations in that field would be bound by its overall statutory responsibilities in respect of maintaining financial stability. It would apply the same criteria to its own operations as it would expect of others. The risk that the operator takes insufficient account of overall financial stability considerations, which could arise in privately operated inter-bank payment systems, would not arise in this case if a payment system was operated by the Bank of England. That makes the situation clear. I hope that I have been able to answer the questions raised by hon. Members in this area.