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Clause 174

Banking Bill – in a Public Bill Committee at 12:15 pm on 28th October 2008.

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Principles

Question proposed, That the clause stand part of the Bill.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

We have already touched upon these principles and the contents of the clause in earlier discussions. I note that the clause states that the Bank “may” publish principles. We have not tabled an amendment to say that it “must” do so, but I should be grateful if the Minister would confirm that it is intended that principles will be published and that they will apply to the operators of recognised inter-bank payment systems.

A set of principles is already in place for such payment systems. These have been established by the Bank for International Settlements, specifically the Committee on Payment and Settlement Systems. They are described as the core principles for systemically important payment systems. They have historically been adopted by the Bank of England and other central banks. Mr. Hood, you will be relieved to learn that I have no intention of reading out the principles in full. In broad terms they relate to: legal basis; the participants having a clear understanding of the system’s impact; the management of financial risk; prompt final settlement; settlement in multilateral netting systems; settlement assets; security and operational reliability; efficiency; access criteria and governance. Can the Minister say whether the principles under the clause will essentially be those, and confirm that there is no intention of changing them? The clause states:

“Before publishing principles the Bank must obtain the approval of the Treasury”, but will consultation on the principles take place more widely with operators? Will they have an opportunity to put their views?

The explanatory notes state that the clause will reflect the core principles. We need to know whether those principles will be those to which I have referred, and that there will be no real change—the point raised by my hon. Friend the Member for Wellingborough when he drew attention to the regulatory impact assessment. I notice that a breach of principles will not constitute a compliance failure for the purposes of clause 182. Without getting into a debate on that clause, can the Minister explain the status of the principles and say why they will not constitute a compliance failure? It is the case for firms generally regulated by the Financial Services Authority under the Financial Services and Markets Act 2000 that there is a set of principles and a set of rules, but that breach of the principles can constitute a regulatory  offence. Indeed, most disciplinary action taken by the FSA refers to a large extent to principles. Perhaps the hon. Gentleman can also explain that.

I return to the point that the Bank of England, in its oversight of payment systems until now, does not necessarily require each payment system to comply with every core principle. Given what the Minister said about which systems will constitute recognised systems, I should be grateful for clarification. He might believe that he has provided it, but it would help the Committee if the point were made absolutely clear and it would help us to know whether, for those institutions, although not systemically important, full observance of the core principles is necessary.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

I draw attention to subsection (1) and the wonderful word “may” in the phrase:

The Bank of England may publish principles”.

Those principles have been working in practice for a great number of years, but I understand that there is no necessity to publish them because they are being used anyway and the regulatory impact assessment says that there will not be any change. Is it the Government’s intention that the clause is only in the Bill in case they think that the principles need to be published, or do they definitely intend to publish them? If so, why does the Bill not state that the Bank of England “must publish”? I am not clear whether that is something that the Government are holding in reserve or whether they will take such action. If that is their intention, perhaps the Bill should be amended at a later stage.

Photo of John Pugh John Pugh Shadow Minister (Treasury)

My view is similar to that of the hon. Member for South-West Hertfordshire, but possibly more basic and a little more naive. I could have said the same about the principle, the rules or the codes of conduct. I have not seen examples of each, but when we have discussed them hitherto in Committee, we have talked primarily about the robustness, the security and the resilience of payment arrangements—the technical issues. There are wider issues of banking practices and ethics. At its simplest level, we consumers have all noticed how debits are recognised almost immediately and credits after appreciable delay, which causes concern and seems unreasonable in the high-speed world of IT. There is a distinction between what is regarded as a legitimate matter of commercial choice for payment systems, and what is a matter for public regulation. In commenting on this, the British Banking Association said that it was worried about the effect of regulation on competition. I seek further clarification from the Minister, if only to help me, on the scope of the principles, codes and system rules.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

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.