Clause 188 — Directions

Part of Employment Opportunities – in the House of Commons at 8:30 pm on 10th February 2009.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury 8:30 pm, 10th February 2009

As Members will know, the Government have amended two elements of parts 5 and 6 of the Bill in response to concerns raised in the other place. The first concern was raised in response to comments received by the Payments Council, a key body representing payment system operators, about exemptions from liability for such operators acting under direction from the Bank of England. Its principal concern centred on a scenario in which an operator could be instructed by the Bank—under its power to give directions—to continue to allow a failing bank to participate in a payment system even when that bank no longer met the criteria for participation. The question raised was whether the operator would be given an exemption by the Bank in respect of any liability arising from acting in accordance with the direction.

The power to give directions is intended to provide a tool for the Bank to use in furtherance of the objectives of this part of the Bill: that is, to ensure that recognised inter-bank payment systems are operated in a manner that minimises deficiencies and disruptions that could threaten the stability of, or confidence in, the UK financial system, or have serious consequences for businesses or other interests throughout the UK. We therefore do not envisage circumstances in which the power would be exercised in the manner suggested. Nevertheless, given the concerns raised, the Government considered it appropriate to address them, which is why Lords amendment 72 gives the Treasury power to grant, by order, an operator exemption from liability in damages in respect of acts or omissions carried out in accordance with a direction if that is appropriate in the circumstances.

The amendment provides that the Bank should notify the Treasury before making a direction, so that the Treasury has an opportunity to consider whether it would be appropriate to make an exemption order. As the Bank may need to give a direction urgently in the interests of financial stability, we believe that the order should be subject to the negative procedure. For obvious reasons, it will be important that any exemption is in place at the time the direction is given. Government amendment 96 is consequential, updating the statutory instrument table in part 8.

The second set of amendments concern the penalty clauses of parts 5 and 6. The Delegated Powers and Regulatory Reform Committee was particularly concerned about their application under part 6. Having considered both the Committee's report and the concerns voiced in Committee both here and in another place, the Government made amendments to assuage any fears about how the financial penalty power could be exercised.

Amendment 73, which was agreed in the other place, provides that the Bank of England must prepare and publish a statement of the principles it will apply in determining both whether to impose a penalty and the amount of the penalty in respect of a compliance failure under part 5 of the Bill. It is intended that these principles will preserve the Bank's discretion in assessing whether to impose a penalty and the quantum of that penalty, but will also enhance the transparency of the enforcement regime.

These principles will, no doubt, reflect the range of factors that will need to be taken into account in the decision process; for example, the scale of the compliance failure and the seriousness of the consequences arising, the resources of the payment system, and the frequency of the offence. However, in the interests of preserving the Bank's discretion in preparing and issuing the statement, the Government do not consider it appropriate to specify in the Bill the factors that the Bank must take into account. The statement of policy must be published on the Bank's website and a copy must be sent to the Treasury. We consider this publication requirement to be adequate to ensure the policy is brought to the attention of operators of recognised inter-bank payment systems and the general public. The Bank must review and revise the policy from time to time, as appropriate.

In the interests of fairness, any penalty imposed by the Bank must, of course, be in accordance with the published policy at the time the compliance failure was committed. This offers guidance to operators of recognised inter-bank payment systems, while maintaining the necessary flexibility for the Bank to impose penalties that are appropriate in all the circumstances in each case. I trust that the hon. Members for South-West Hertfordshire (Mr. Gauke), for Dundee, East (Stewart Hosie), for Southport (Dr. Pugh) and for Gosport (Sir Peter Viggers), who spoke to this clause in Committee, will find that this amendment puts beyond doubt the assurances I offered at the time as to the circumstances in which a financial penalty may be imposed and also the scale of that penalty.

Lords amendment 74 provides that the Treasury must specify in the banknote regulations a method for determining the maximum amount of penalty that may be imposed by the Bank for a breach of regulations or rules. This amendment was designed to address concerns that the Bank could conceivably have been enabled to set unlimited penalties under the banknote rules. As I have said, the Delegated Powers and Regulatory Reform Committee of the House of Lords expressed concerns that penalties were a matter left in banknote rules rather than in regulations. Under the amendment, which addresses that concern, it is intended that the banknote regulations will set out a formula for calculating the maximum penalty to be imposed for under-backing and will make provision in relation to a statement of policy on penalties to which the Bank must have regard in determining the level of the penalty imposed. I would like to reassure hon. Members that provision has already been drafted at paragraph 4 to schedule 1 to the indicative draft banknote regulations, providing that the amount of any penalty must be determined in accordance with a published statement of policy.

All of these amendments address concerns expressed during parliamentary scrutiny of the Bill, and serve to set out in the Bill certain reassurances as to the scope of the powers conferred therein. I therefore commend the amendments to the House.

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