Banking Bill

Public Bill Committee, 28 October 2008.

Clause 167

Ian Pearson (Labour, Dudley South)

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.

Peter Bone (Conservative, Wellingborough)

The Minister did not explain whether there has at any time been a problem with the systems. Has current regulation ever failed? Has there ever been a problem with the system?

Ian Pearson (Labour, Dudley South)

We consulted on whether there should be a statutory power for the Bank of England in those areas. The overall response from the consultation exercise was that it was a good idea, which is why we are proceeding with it in the Bill.

The clauses we are to debate follow a logical structure. I hope that hon. Members appreciate the recognition systems and the principles of regulation, and how they will be enforced, if necessary. Clause 167 provides an overview of what we are trying to achieve with bank payment systems by giving the Bank of England a statutory role. I commend the clause to the Committee.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship, Mr. Hood. As this is my first contribution in the main part of the Committee stage, I declare an interest as a non-executive director of a deposit-taking institution—although for clarity’s sake I point out that it is not a payment system or a member of a payment system.

I am grateful to the Minister for setting out a brief introductory overview of the part of the Bill relating to inter-bank payment systems. He is right to highlight their importance. Figures produced by the Bank of England for 2003—there may be more up-to-date figures—state that the value passing through UK payment systems that year was £130 trillion, which is about 20 times the UK annual gross domestic product. That is the equivalent of almost 50 per cent. of GDP flowing through UK payment systems every business day. It is clearly an important system, consisting of high-value transfers between financial institutions but also more numerous, smaller transfers between individuals and/or companies. The Minister set out some of the circumstances, such as the payment and receipt of wages and salaries, Government benefits, direct debits and cheques and debit and credit card payments.

We recognise the potential for systemic risk. The Bank of England and the Government, too, have long recognised the potential for systemic risk from failure within the payment systems. If there is a problem with one there is likely to be a direct and rapid effect on other members. Even if there is no systemic risk, a failure in a payment system may cause considerable disruption to individuals. No politician would want to be responsible for the failure to pay wages and salaries on time.

We are broadly supportive of the provisions but it might be helpful for the Committee if I outlined some of the themes that we want to address during this part of the Bill. As the Minister says, the Bill is presented clearly and logically, which will be helpful to the Committee. We will raise specific questions as we go through each clause, but at this stage it might be helpful to highlight some of the key issues.

The first issue touches on the intervention made by my hon. Friend the Member for Wellingborough. What assessment have the Government made of the existing arrangements? As the Minister explained, the Bank of England has performed an oversight role on a non-statutory basis for some time. As the helpful Library note made clear:

“It should be stressed that, to date, there has been no evidence that existing systems have failed or are threats to future stability.”

Of course, that is not to say that we should not look to make improvements. I note the points about enforcement and so on. This may be one of those cases where the roof is being fixed while the sun is shining, to coin a phrase.

Mark Todd (Labour, South Derbyshire)

A tired one.

David Gauke (Conservative, South West Hertfordshire)

Well, the sun is shining over this particular roof, even if not over most of the roofs nearby.

It would be helpful if we had a sense of how effective non-statutory regulation has been—for example, in the dialogue between some payment systems and the Bank of England. The Bank has given examples of situations in which, through dialogue, it persuaded some payment systems to make particular changes. The settlement finality regulations are part of the existing regulatory regime, even though it is on a non-statutory basis, and we will discuss them with regard to our proposed amendments to clause 171. The regulations provide payment systems with some protection from insolvency law, which could disrupt them, but we will discuss those issues later this morning.

The second broad theme is the objective of the oversight. The Bank of England’s payment systems oversight report for 2004 states:

“The main objective of the Bank’s payment systems oversight is to assess and, if necessary, seek to ensure mitigation of risks to the wider economy—‘systemic risk’.”

I suspect that the Minister will say that one difference is that the Bank states that it will “seek to ensure mitigation”—although of course it could take a stronger line as a consequence of the provisions. However, is the focus on addressing systemic risk? What is the purpose of the regulations?

The Bank of England’s 2004 report further states that

“efficiency considerations also need to be weighed”,

which leads me to a further theme—there can be conflict between safety and efficiency. The Bank put it very well:

“The Bank also recognises that designing and operating a payment system to minimise systemic risk would be counterproductive if the system thereby became so expensive or impractical to use that payment traffic migrated to less safe alternatives.”

The Minister will be aware of that danger. We will be seeking reassurance in the debate that the operation of the measures will not result in a less safe system because banks go elsewhere.

It is notable that the Bank of England has previously expressed, perhaps rather modestly, the limits of its oversight, noting that

“the Bank as overseer, cannot guarantee that there will never be operational failures of payment systems”.

Does the Minister accept that the point applies equally to the new arrangements—it is not about a guarantee, but about doing everything that we can to eliminate risk—or would he go further and say that payment systems will now be 100 per cent. safe?

On the balance between safety and efficiency, concerns have been raised that some of the enforcement provisions, which we will come to later this morning, may be so draconian as to dissuade businesses or individuals from being involved in payment systems. Are the costs for payment systems likely to increase substantially? I want to stress that by raising these questions we are not arguing against the provisions, but we think that these are legitimate questions to put to the Government.

The next theme is the scope of the recognition regime. It focuses on payment systems, but I hope that this morning it will become clearer whether the clause will apply to all payment systems or only to the largest. Will there be a differential application of the principles and codes of practice, depending on the nature of the system? Until now the Bank of England has adopted different approaches depending on the type, number and value of payments made, the design of the system, and the potential substitute means of making payments. It is notable that it has particularly focused on CHAPS and CREST, then at the next level BACS, CLS and LCH.Clearnet Ltd, followed by the Cheque and Credit Clearing Company and LINK and finally debit and credit card systems. Will there still be that differential approach and that flexibility? We will probably debate those matters when we look at the principles and code of practice.

What the provision does not do is focus on payment system members, so it is worth highlighting the role played by some major banks, which settle payments for a large number of other banks. Not all banks are members of payment systems and relatively few of them are settlement banks. As the Bank of England has said, in some respects the largest of the settlement member banks have the characteristics of payment systems.

In some other jurisdictions there is close supervision of payment members; for example, system participants are obliged to provide information to central banks. In the UK, the payment system is required to do that, but in jurisdictions such as the US, Australia, Austria, Hong Kong and Singapore the obligation to provide information applies to participants. Central banks can also set membership conditions in Australia, France, Hong Kong, Norway and Singapore. Will the Minister say a little about that?

Another area of potential risk relates to the infrastructure providers. It is interesting that the Bank of England has highlighted the dependence of all the network participants on a single supplier as the second potential source of risk—the first being the systemic risk of a problem in one payment system migrating to another. In particular, SWIFT, which provides messaging services in support of CHAPS, is used heavily in those circumstances. How will the provisions help us to address that potential risk? I think the Minister will be able to answer that question.

The next theme—familiar to our debates on the Bill—is how the tripartite arrangements will work in this area. Banks, principally regulated by the FSA, are payment system members and play an important role in those systems. The likes of CREST and LCH.Clearnet—recognised clearing houses and investment exchanges—are principally regulated by the FSA rather than the Bank of England. How will the Bank work and co-operate with the FSA? The Treasury will make the recognition orders—we will come to that issue—but how will the relationship between those three entities work? The question that we keep coming back to is, “Who is in charge?” The greater the clarity about that, the better.

The next related theme is the general role of the Bank of England. The Bank has a role as an operator of real-time gross settlement systems—at the heart of the CHAPS system—yet it is also the regulatory body that will presumably supervise CHAPS. How do we avoid a conflict of interest? We support the Bank of England’s performing that role. There are good historical reasons why it should, and the role is central to financial stability. Perhaps in dealing with those points, the Minister will explain why the Government continued to allow the Bank of England to play such a major role in the oversight of payment systems, at a time when, generally, everything was handed over to the FSA.

The final theme touches on the international perspective. It is all very well looking at payments within the UK, but we all know that there will be a huge number of cross-border payments. In those circumstances, how would the provisions that we are debating this morning play a role, and how are the Government working with other central banks and financial institutions to ensure that there is no systemic risk from a breakdown in cross-border payment systems? We must not forget that aspect.

I hope I have been helpful to the Committee in outlining some broad concerns before we turn to each of the provisions in detail. I do not necessarily expect the Minister to respond to each and every one of those concerns now, but I hope they provide a useful summary of some of the points that we hope to raise over the course of the morning. I reiterate that we are supportive of the provisions but, as always, it is appropriate that they have proper scrutiny, and that those who are studying the debate have a better understanding of the intention and practicality of some of the measures that we are debating.

Brooks Newmark (Conservative, Braintree)

Like my hon. Friend the Member for South-West Hertfordshire, I shall put down a few markers on some issues that have come to light—not simply from listening to the Minister, but from reading the explanatory notes and listening to my hon. Friend.

Clause 167 imposes a statutory regime on inter-bank bank systems when currently the Bank of England, as I understand it, oversees payment systems on a non-statutory basis. The Government’s position seems to be formalising the Bank of England’s role in creating stability, which has to be a good thing. We have seen the huge systemic risk out there, following the current crisis. The build-up we have before us addresses many of the issues which have been raised, and highlighted, by the current crisis, but it has also sought to address issues that have been raised over a long time. It is therefore a good thing, as is the ability of the Bank of England and the Government to make a quick response to problems in the banking systems.

The Bill will enable the Bank of England to retain power of informal oversight when it considers it appropriate. It is that sort of language that I am trying better to understand: what is “informal oversight” and what does “appropriate” mean? I appreciate that is not the language used in the explanatory notes or the Bill, but it is the language I have heard people use when addressing the clause.

Our party’s position is clearly that formal regulation is a positive thing, particularly when payment systems have a systemic risk. Recent years have seen an explosion in the values and volume passing through them, particularly in derivatives, which many people do not understand. I draw the attention of Members to my register of interest; I have had 20 years’ significant experience in the banking system. One of the problems is lack of understanding, particularly of derivatives, which have caused some of the major problems relating to systemic risk and, as we have seen, the fall-out from that.

The Minister made a couple of points, using the words “robust” and “resilience”, about the system that we are creating. Has he thought about how to stress-test the system to see how robust and resilient it is? He referred to oversight and tools, but I am curious to know which tools he is talking about and what he meant by that term. How will the tools cause “minimum disruptions”—another phrase he used? Which groups did the Minister consult when coming up with the proposal and what feedback did he receive? It is important that we understand which issues were raised and how the clause will deal with them.

My hon. Friend the Member for South-West Hertfordshire talked about the tripartite relationship between the FSA, the Treasury and the Bank of England. That tripartite system broke down over Northern Rock. It seemed as though everyone was pointing the finger at everyone else, with no one taking responsibility. How will the provision fix that situation?

Finally, my hon. Friend referred to the important issue of cross-border relationships. Given that the financial system is global, how do we hope to enforce our legislation on foreign entities over which we do not have as much control as we would like? We can try to fix things in the UK, but how will that deal with systemic breakdowns in other countries?

Stewart Hosie (Scottish National Party, Dundee East)

It is a pleasure to serve under your chairmanship, Mr. Hood.

I want to pick up on the relationship with the tripartite system to which the hon. Member for South-West Hertfordshire referred. The clause describes how part 5 of the Bill enables the Bank of England to oversee certain systems. Later clauses cover interpretation and regulation, but I shall touch on them now because it is important to understand where confusion might arise.

Clause 170 allows the Treasury to impose recognition orders. Clause 172 requires it to consult the Bank of England and the FSA and the orders can, of course, be revoked. Clause 174 covers the regulation principles. The Bank of England publishes them, but it is required to consult the Treasury. Clause 175 allows the Bank of England to deal with the code of practice, which many people might consider more important than the principles because it is the mechanics of the process—the nuts and bolts—but nothing in the Bill says that the Bank needs to consult the Treasury at that point. Under clause 176, the Bank of England—not the Treasury—may require an operator to establish rules and, under clause 177, the Bank of England can give direction. Clause 178 says that the Bank of England must have regard to the action taken by the FSA.

The interpretation and the regulations of the Bill set out a mix or a balance between the action that the Treasury takes and that taken by the Bank of England, sometimes in consultation with the Treasury and/or the FSA, and sometimes not. I am trying to get to the bottom of the Government’s thinking behind why various bits of responsibility have been allocated to the Treasury or the Bank and why consultation is required on certain elements, but not others. I accept that those points touch on subsequent clauses, but I should be grateful if the Minister would explain why the breakdown in responsibility and the particular roles have been allocated in such a way.

Peter Bone (Conservative, Wellingborough)

It is a pleasure to serve under your chairmanship, Mr. Hood.

I start with a slightly different view of clause 167 even from that of Members of my Front Bench.

David Gauke (Conservative, South West Hertfordshire)

Surely not.

Mark Hoban (Conservative, Fareham)

Not again.

Peter Bone (Conservative, Wellingborough)

I am unhappy to see regulations brought in, unless it can be proved that they should be brought in. The Government probably take the other view: regulations should be brought in, unless there is an overwhelming case that they should not be introduced. That is a difference between us from the start. I refer to “Yes Minister”, because it is the best example of how the Government work. If there was a failing in the banking system, the Governor of the Bank of England would ask his chairman and chief executive out to lunch and the problem would be sorted out. From the Minister’s introduction to the clause, it seems that the system has been working rather well and that there has never been any sign of a problem in the oversight of the payment system. It worries me that we may be regulating because of the present circumstances—because we think that we should be doing something—but actually it will make no difference whatever to the process or the security of the system. I hope that the Government will persuade me otherwise as we go through the clauses in detail, but that is my concern in principle.

My concern has some backing to it. Her Majesty’s Treasury produced a helpful impact assessment in October 2008, which states:

“The Authorities do not envisage that this provision will amount to a substantial change in practice.”

If there is no change in practice, why are we bothering to introduce regulations to make something happen? If it is already happening, there seems little point in bringing it in. It concerns me that the regulations do not have effect across the board, but are restricted to systematic or system-wide consequences. How is it determined in advance whether a bank or clearing house falls within those concerns? At this stage, I am not sure that I am totally in favour of the clause.

Ian Pearson (Labour, Dudley South)

I hope that I can persuade hon. Gentlemen of the importance of the clause. The debate has usefully set out the general principles that will be discussed under later clauses.

I will explain the background to this proposal. Since early last year, the authorities have been developing a clearer and more robust framework for the oversight of payment systems. That was part of the Government’s wider work to strengthen the framework for financial stability. I emphasise that these measures are not the result of problems in the payment system. However, we must take it into account that the characteristics and importance of payment systems could change, or that wholly new payment systems could develop and take on systemic importance. Given the importance of payment systems to the financial system, and therefore to wider financial stability and consumer protection, it is sensible to pass these measures as part of a package of proposals in the Bill.

I welcome the hon. Member for South-West Hertfordshire to his debut in the Committee. He asked about the scope of the measure and which systems would be covered. The consultation document identified CHAPS, Europea, LCH.Clearnet, BACS, Cheque and Credit Clearing, the faster payments service and the LINK scheme as areas that would be regarded as key wholesale inter-bank systems under the authority’s preliminary assessment. It is important to recognise that such systems process about £1.5 billion daily. That emphasises their systemic importance to our financial system and the UK economy.

I will make a few points on the remarks of the hon. Member for Dundee, East and others who talked about the architecture of the system. He was not making a debating point, but was genuinely interested in knowing how the architecture fits together. I will explain the general principles and we will cover the detail when discussing subsequent clauses, as the hon. Member for South-West Hertfordshire said.

The general principle is that in the first instance it is the responsibility of the Treasury, following consultation with the Bank of England and the FSA, to designate a payment system and make a recognition order under clause 170. It is the responsibility of the Bank of England to exercise oversight of the payment systems. That is clear in the Bill. As I explained earlier, that will put the Bank of England’s current responsibilities on a statutory footing, which we believe is the right and prudent thing to do. We want the Bank of England to consult as appropriate with the FSA, particularly where payment systems are embedded in recognised clearing houses or investment exchanges, which are also subjected to the FSA’s regulatory regime. That is why there will be a memorandum of understanding between the Bank and the FSA to ensure that there is no duplication and there is efficient regulation.

It is also important to stress that in all these instances the tripartite authorities will work closely together. There are clearly distinct roles for the Treasury, the Bank and the FSA in this, but we would expect close co-operation on a regular basis between the three organisations that make up the tripartite system.

Peter Bone (Conservative, Wellingborough)

Will the Minister give way?

Mark Hoban (Conservative, Fareham)

Will the Minister give way?

Ian Pearson (Labour, Dudley South)

Before I give way to the hon. Member for Wellingborough I should tell him that the days are gone when the Bank of England gets a bank in and has a cosy chat. It is important that the tripartite authorities work closely together and have good relationships with the banks. There is a wider recognition that putting these arrangements on a statutory basis is the right way forward.

Peter Bone (Conservative, Wellingborough)

That is most helpful. We used the example of people getting around a lunch table and discussing matters. We are now trying to formalise this in some sort of memorandum of who does what and when. Is this Committee likely to be able to see a draft of that memorandum?

Ian Pearson (Labour, Dudley South)

The Committee can see what is in the Bill. It sets out clear and distinct roles. The issue of a memorandum where the FSA regulates and the Bank of England regulates at the moment is pretty much a technical issue, which we would not expect to see in the Bill. I give way to the hon. Member for Fareham, who obviously cannot stay away from the Committee.

Mark Hoban (Conservative, Fareham)

I am drawn to it by the magnetism of the subject we have been discussing. The Minister talked about arrangements for the FSA to look at regulated investment exchanges and clearing houses, but a volume of transactions does not go through them, such as derivatives that are not traded through exchanges. How will he ensure that the payment systems that relate to them are covered by the Bill because they are an important volume of transactions in the wholesale market which, if we are looking at maintaining financial stability, ought to be covered in some way by these rules?

Ian Pearson (Labour, Dudley South)

There are powers in the Bill that allow the Treasury, in consultation and having received advice from the Bank of England and the FSA, to recognise key wholesale inter-bank payment systems. I have given an indication of which payment systems of preliminary assessment would suggest that we would want them to be recognised. But we need to ensure that we have adequate coverage so that the Bank can discharge its responsibilities for financial stability appropriately.

Stewart Hosie (Scottish National Party, Dundee East)

I presume that the Minister is talking about clause 170 where the Treasury makes the recognition order. I thank him for his previous explanation: the Treasury makes the recognition of the systems and the Bank then does the other bits. That is perfectly reasonable. The question posed by the hon. Member for Fareham is very important, given that London is one of the three key wholesale financial markets in the world. The Minister has just said that there is provision for the Treasury, through regulation or by order, to specify other systems that might come into this. Will he provide a little more detail? Does he have anything in mind? How would he go about putting a recognition order in place for one of those large wholesale systems that is not at the moment an official, recognised inter-bank system? How would that happen and what criteria would be used to do that?

Ian Pearson (Labour, Dudley South)

We are talking about the general principles in this clause. We shall get on to those questions when we debate the relevant clauses. The hon. Gentleman also asked about who was consulted and what issues were raised. Consultees included the Bank of England, payment system operators, users of payment systems and the payments council, which is the representative body for payment systems. Everybody wanted to see clarity and responsibility in the system and we believe that the Bill achieves that. Overall, there was widespread support for the legislative proposals and we can proceed with confidence. The financial community broadly welcomes the thrust of what we are trying to do in part 5 of the Bill. No doubt, we will want to tease out some of the detail during this and other sittings.

Clause 168

David Gauke (Conservative, South West Hertfordshire)

I have two questions for the Minister. This is an interpretation clause and should not detain us for long. The clause relates to an inter-bank system. Subsection (1) refers to

“arrangements designed to facilitate or control the transfer of money between financial institutions who participate in the arrangements.”

I should be grateful if the Minister said a little more about money. We know that money includes credit, but the Bank of England publication, “Oversight of Payment Systems” from November 2000, states that

“‘money’ is regarded as cash (ie notes and coins issued by the central bank or government) and claims against credit institutions in the form of deposits.”

It continues:

“In the end, however, what is acceptable as ‘money’ is a matter of behaviour and the boundary could move.”

Does the Minister agree that money is a more flexible concept than it might first appear?

My second point is about subsection (5):

“A system is an inter-bank payment system for the purposes of this Part whether or not it operates wholly or partly in relation to persons or places outside the United Kingdom.”

That comes back to the territorial point that has been mentioned already. In order to fall within the regime, is it necessary for the operation of the payment system to be in the UK? Does it matter where the participants are? Is that the test? If so, this is a broad territorial test, and it could appear to cover any payment system anywhere in the world. I assume that the key point is the operation—where is that performed? If it is performed from the UK, will it be caught by the system so that it does not matter where participants are based?

Peter Bone (Conservative, Wellingborough)

On my hon. Friend’s last point, if I send money to America and there is a transfer between a British bank and its subsidiary in the US, is that part of the system? If the payment originates in the US and money is sent to me, will the regulations cover the bank over there? That is an important point.

Brooks Newmark (Conservative, Braintree)

I, too, shall be brief. I am sorry to see that the hon. Member for Wolverhampton, South-West (Rob Marris) is not on the Committee. I know how assiduous he is with explanatory notes. Having learned my lessons from him, I will ask a couple of questions relating to points made in the explanatory notes. The first is about subsection (2), which states that if non-financial institutions participate, that will not prevent the process from being considered an inter-bank payment system. I am curious about what institutions the Minister has in mind when he talks about non-financial institutions. Why has that been raised, what red flags have given him concern about non-financial institutions and why are they being brought under the umbrella? I suspect I know why, but I am curious to hear his take on the matter.

My second question relates to subsection (5), but it approaches from a different angle to that taken by my hon. Friend the Member for South-West Hertfordshire. It relates to the issue of systems operating wholly or mainly outside the UK that are to be included and how we will deal with different regulatory environments. A provision might be interpreted as being right in the UK because it has an impact on what goes on in the UK, but how do we try to enforce policies with institutions under different regulatory regimes in other countries?

Ian Pearson (Labour, Dudley South)

I am happy to try to provide clarification for the hon. Gentleman. As the hon. Member for South-West Hertfordshire said, the clause defines the use of the term “inter-bank payment system” throughout part 5. He referred specifically to subsection (1), which defines the term “inter-bank payment system” for the purposes of the Bill and refers to the arrangements that enable the transfer of money. Subsection (4) confirms that that includes credit between participating financial institutions, which are defined in subsection (3) as banks and building societies. Let me be clear that the Bill will give us the flexibility to recognise new systems in the future, and we think it appropriate that we should be able to do so. Let me also be clear that that does not include internal bank systems or correspondent banking arrangements.

The hon. Gentleman also raised the issue of subsection (5), which will ensure that systems operating wholly or mainly in relation to persons or places outside the UK can be classed as inter-bank payment systems for the purposes of part 5. I shall give a little more detail on that because a few hon. Members questioned how the legislation would work. Recognised inter-bank payment systems that are wholly or partly based outside the UK might be systemically important for the UK financial system. Where that is the case, part 5 provides for the Treasury to recognise them and for the Bank of England to oversee them to the extent that that is possible. In most circumstances, that oversight would be delivered through the Bank of England’s participation in international co-operative agreements with other central banks, because that is the nature of things.

Clearly, we cannot regulate for the American banking system, as the hon. Member for Wellingborough hinted, but we can ensure that the Bank of England can participate in those international co-operative agreements and make the points that it needs to in order to discharge its responsibilities.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister, because what he has just said is helpful. For further clarity, is he saying that the Treasury will not seek a recognition order in respect of a payment system that is regulated by another central bank? Is he saying that it will not go that far, but that the Bank of England will undertake a role in oversight? I am not quite clear about that. I note his point about not wanting to regulate things that are regulated by another central bank, but is he saying that there will not be a recognition order for such a payment system?

Ian Pearson (Labour, Dudley South)

I am clearly saying the latter. We think that in most circumstances it will be appropriate that oversight is delivered through the Bank of England’s participation in international co-operative arrangements. It is not right to say that that will be the case in each and every circumstance, because I cannot anticipate what future circumstances might be. However, the normal way of things is that we would discuss such matters with other central banks as part of the normal arrangements. I hope that answer provides clarity to the Committee.

Clause 169

David Gauke (Conservative, South West Hertfordshire)

My intervention on this clause will be even more brief and concerns the terminology used of the operator and manager of a system. Before I entered this place, I was a solicitor specialising in regulatory matters. Unfortunately, I did not specialise in this area but in collective investment schemes. Over the years I worked in that field, I was never entirely comfortable that I understood the difference between operating and managing a collective investment scheme. The clause uses the terminology of operating and managing a payment system. Perhaps the Minister will enlighten the Committee on the difference between the two. As far as I can see, both are swept up under the definition of “operator” for these purposes.

Ian Pearson (Labour, Dudley South)

The clause defines various terms used throughout part 5, as the hon. Gentleman indicated. In particular, subsection (a) defines the term “operator” of an inter-bank payment system to which the provisions of this part apply if the inter-bank system is recognised by the Treasury under clause 170. It is a sensible and straightforward provision. Subsection (b) allows that

“a reference to the operation of a system includes a reference to its management”.

Subsection (c) defines references to the UK financial system in the same terms as section 3(2) of FSMA, which states:

“‘The financial system’ means the financial system operating in the United Kingdom and includes—

(a) financial markets and exchanges;

(b) regulated activities; and

(c) other activities connected with financial markets and exchanges.”

I do not think that I need go into detail on subsections (d) or (e).

The clause makes it clear how we interpret the terms used. It is pretty straightforward and is understood by the financial community that considers these things closely.

Clause 170

David Gauke (Conservative, South West Hertfordshire)

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 (Conservative, Braintree)

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 (Conservative, South West Hertfordshire)

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 (Conservative, Braintree)

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 (Conservative, South West Hertfordshire)

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 (Conservative, Braintree)

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 (Labour, Dudley South)

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.

Clause 171

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 46, in clause 171, page 88, line 18, at end add—

‘(3) The Treasury may make a recognition order in respect of an inter-bank payment system only if the system is eligible for designation under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999.’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss amendment

No. 47, in clause 171, page 88, line 18, at end add—

‘(3) The Treasury may make a recognition order in respect of an inter-bank payment system only if the system has been designated under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999.’.

David Gauke (Conservative, South West Hertfordshire)

These are probing amendments. They are intended to flush out some of the issues that relate to the relationship between the regime in these provisions and the regime that already exists for some payment systems, under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999—the settlement finality regulations, as they are known to their friends. They provide a comprehensive legislative framework for the purpose of protecting systemically important payment systems.

The purpose of the settlement finality directive and regulations—these regulations are based on an EU directive—is to reduce risks associated with participation in payment settlement systems by minimising the disruption caused by insolvency proceedings brought against a participant in such a system. The main provisions of the directive ensure that bilateral and multilateral netting are protected from potentially disruptive provisions of insolvency law and that payment orders are protected from insolvency law provisions from the moment they are entered into a designated system. There is a prohibition of insolvency laws having retroactive effect.

As far as I can see—I suspect the Minister will correct me if I am wrong—under the settlement finality regulations the following payment systems have been designated: CHAPS sterling and CHAPS euro, CLS, CREST and LCH.Clearnet. They are regulated by the FSA because they are recognised investment exchanges or clearing houses. The purpose of the regulations is to grant some certainty to these payment systems and their participants that insolvency law will not intervene and unravel a whole set of transactions.

In distinction to what we have here, the designated systems system is an opt-in system. Systems can choose to be designated and benefit from this protection. Here the Bill is structured so that the Treasury determines whether a system should be recognised. Such recognition does not provide particularly great benefits, other than providing external confidence. It imposes a number of obligations on the systems. The point that I am seeking to examine with these amendments is whether it is right to distinguish between the systemically important designated system and a new recognised system, whether that will overcomplicate the matter and whether there is anything we can do to roll the two together.

John Pugh (Liberal Democrat, Southport)

The hon. Gentleman has just mentioned distinction. Liberal Democrat Members are having difficulty in distinguishing between amendments Nos. 46 and 47 as written in the amendment paper. Are they written correctly? They appear to be word for word identical, and it is a bit hard to understand why two amendments are needed to do the job of one.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the hon. Gentleman. I had seen an earlier version of the amendment paper. Two separate amendments had been tabled and both appear to be in the final printed version. The hon. Gentleman is absolutely right, which is a great pity. At least let me discuss what I was intending to do.

Mark Todd (Labour, South Derbyshire)

Which one are you going to speak to?

David Gauke (Conservative, South West Hertfordshire)

It is difficult to argue for amendment No. 46 over No. 47—they both have their merits.

Ian Pearson (Labour, Dudley South)

And the same flaws.

David Gauke (Conservative, South West Hertfordshire)

As the Minister says—they both have their flaws. I shall move on to the purpose of the amendments tabled, albeit not put on the amendment paper correctly. Amendment No. 46 essentially says that one may only make an order if the system is eligible under the settlement finality regulations.

Actually, there is a subtle difference between the amendments. The amendment paper is correct and I apologise for suggesting that it was not. If the hon. Member for Southport looks carefully, he will see that the distinction is that amendment No. 47 states that a system may only be recognised if it “has been designated” as opposed to “is eligible for designation”. I apologise for being slow and for suggesting that an error had been made.

To be fair, technically, amendment No. 46 has its weaknesses. The schedule to the settlement finality regulations sets out requirements that must be satisfied for a system to be designated. It might be better if amendment No. 46 referred to that schedule rather than simply saying “is eligible”. We are seeking to explore whether the designated regime in the settlement finality regulations is likely to cover the types of entity that could be at systemic risk and whether those entities will benefit from the insolvency protection law. We could give systems greater control over whether they fell under the recognition regime. There is no particular voluntary system, but those entities that are going to be systemically important are likely to fall within the settlement finality regulations already.

I can move on, if you would like, Mr. Hood, to raise other points on clause 171, but I am happy to leave it there, having raised the issues of whether the two systems could be run together and of whether it would cause unnecessary uncertainty, contradiction or complication to have both recognised and designated systems. Whether through these subtly different amendments or other methods, the Government should find a way of simplifying what may be an unnecessarily complex system.

Peter Bone (Conservative, Wellingborough)

The amendment draws out an important issue and touches on what I said at the beginning about a general principle—how do we define a system that will have systemic failures? How do we know which systems are brought in? We are talking about a system that already has some designations. Looking at the clause, I wonder whether it would have been better if the Government had stopped at clause 171(1), which gives them the insight to be able to make the decision on their own. To have subsection (2)(a), (b), (c), (d) and (e) is window-dressing, in a way, because it is the first part that counts. I understand that the Government are trying to be helpful, but in reality, if they thought that there was a problem, they would not worry about the rest of it; they would just go ahead and do it. I am therefore not sure that we need subsection (2).

Brooks Newmark (Conservative, Braintree)

I want to follow on from the point that my hon. Friend has raised. My point also concerns subsection (1), but I take a different view on it. Clause 171 states that the Treasury may make a recognition order only if disruption to operation of the system, or deficiencies in its design, would

“threaten the stability of, or confidence in, the UK financial system”.

I am sure that the Minister will not wait until there is a disruption and that he will be looking for certain red flags in the system which will trigger disruption out there. I am therefore curious as to how he and his advisers will go about trying to recognise a systemic breakdown before it happens. What red flags, which may cause systemic breakdown further down the road, has he been advised may be out there?

Ian Pearson (Labour, Dudley South)

It would be our intention first to identify systemically important inter-bank systems and for those to be designated. That is not because we think that there is imminent risk of catastrophic failure of those systems, because we do not. However, we think that it is right to identify systems that have critical importance, and the recognition criteria in clause 171(1) and (2) are both important in this respect.

I refer specifically to the amendments. I appreciate that the hon. Member for South-West Hertfordshire says that they are probing amendments. He also says that they may have been inspired by some of the responses to the consultation, where two of the responses suggested that there could be a potential in the recognition criteria to duplicate criteria by which a system can be designated under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999—the SFRs.

The amendments seek to ensure that only inter-bank payment systems eligible for designation, or those that have been designated under those SFR regulations, may be recognised by the Treasury. That limits the scope of the Treasury’s power under clause 171, which sets out recognition criteria. I shall explain why I think that is a bad idea.

First, amendment No. 47, as proposed, would mean that a payment system not designated under the SFRs could not be recognised by the Treasury by order made under this clause, notwithstanding its systemic or system-wide importance. That is particularly significant as there is no obligation for payment systems to apply for designation under the SFRs. The amendment would simply undermine the robustness of the framework that the Government are putting in place, by providing a loophole by which an inter-bank payment system may escape recognition.

Officials advise me that Amendment No. 46 is a moderate improvement on amendment No. 47. Amendment No. 46 offers the alternative words: “eligible for designation”. It is still, however, fundamentally flawed for several reasons, of which I shall give the Committee one or two. Paragraph 1 of the schedule to the SFRs requires the law of England and Wales, or Scotland to be the governing law of the system, whereas clause 168(5) of the Bill provides that an inter-bank payment system, to which this part applies, may include systems that operate wholly or partly in relation to persons or places outside the UK, and may, therefore, be governed by foreign law. Therefore, payment systems not eligible for designation under the SFRs—because they are governed by foreign law, for example—would be precluded from recognition regardless of their systemic or system-wide importance in the UK.

There is also scope for a system to avoid even being eligible for designation. For example, SFRs require systems to define a point after which a transfer cannot be revoked or cancelled by the sender. If a system makes that part of the rules unclear, that system would no longer be eligible for designation. Both amendments would unnecessarily restrict the scope of the clause and limit the inter-bank payment systems that could be recognised by the Treasury. We do not think that they are a good idea.

Amendments Nos. 46 and 47 constrain flexibility and we do not think that they are required. I emphasise that when we consulted on the criteria in July with the document, “Financial stability and depositor protection: further consultation”, we specifically asked whether the criteria set out were right, and whether they would provide sufficient flexibility as payment systems evolved over time. The majority of responses agreed that the criteria were appropriate and that they offered the right degree of flexibility to allow for the evolution of payment systems. Respondents considered the latter point particularly important in terms of future-proofing the legislation. That is why, should the hon. Member for South-West Hertfordshire choose to press amendments Nos. 46 and 47 to a vote, I invite hon. Members to oppose it.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister for addressing the points raised by amendments Nos. 46 and 47. I appreciate his arguments. He did not specifically address the issue of whether a more elegant solution could ultimately be reached in relation to both the designated system and the recognised system, but I see that trying to impose one system on the other would create difficulties. I have one point that is more broadly related to the clause. We have started to touch on the issue of systemic risk, and I should be grateful if we could address that issue in the stand part debate. I beg to ask leave to withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

My point, which has been touched upon by my hon. Friend the Member for Wellingborough, is on the issue of systemic risk and risk of serious consequences for business or other interests throughout the UK. Earlier, the Minister set out the payment systems that will be recognised under the provisions. He also agreed that we should first look at what systems will involve a systemic risk. It is worth quoting again from the Bank of England document, “Oversight of Payment Systems” from November 2000:

“Systemic risk is likely to be significant only in relation to payment systems transferring amounts which are large in relation to the balance sheets and capital resources of at least some of the members; in practice, this usually means systems used to settle wholesale financial market transactions in money, foreign exchange and securities.”

Does the Minister agree that in clause 171(1)(a), those payment systems where disruption of the operation may

“threaten the stability of, or confidence in, the UK financial system,”

relates to payments that are involved in the wholesale markets? Will the other payment systems to which he referred, such as credit and debit card payment systems, fall under paragraph (b), which is

“to have serious consequences for business or other interests throughout the United Kingdom”?

The point I am trying to draw out is that it is not necessary for a payment system to have systemic risk for it to be recognised under the provisions. I should be grateful if the Minister would confirm that.

I said earlier that the Bank of England has traditionally taken a differential approach to the principles that apply, depending on the nature of what they do and largely on the factors set out under clause 171(2), to which my hon. Friend the Member for Wellingborough referred. We shall probably debate that when we come to clause 171, but the Minister might want to deal with it now.

Ian Pearson (Labour, Dudley South)

We are discussing clause 171.

David Gauke (Conservative, South West Hertfordshire)

I am sorry; I meant when we come to clause 174 on principles and clause 175 on codes of practice.

Even though recognition may apply under paragraphs (a) or (b), the application of the rules and principles is likely to be tougher for those entities where there is a systemic risk under paragraph (a) than those under paragraph (b).

Peter Bone (Conservative, Wellingborough)

Subsection (1) contains the phrase,

“only if satisfied that any deficiencies in the design of the system, or any disruption of its operation”.

Let us consider the airline industry. It might have a design code of practice. The design might be right. There would be no disruption to the operation, but the administration of the airline might be failing to meet the design, with the consequence that something disastrous happens at the end. That is like the banking system: the design might be right, but its administration might be wrong. Why is that specifically excluded from clause 171(1)(a)?

The test falls on two issues, but not a third. The interpayment system might be designed right. It may be operated correctly at the time, but as time goes on there might be a failure in the operation, of which the Treasury would be aware. The Minister may be able to clarify why it is not the case, but there seems to be an omission.

Ian Pearson (Labour, Dudley South)

Clause 171 states that the Treasury may make a recognition order only if satisfied

“that any deficiencies in the design of the system, or any disruption of its operation, would be likely”

to have consequences of a systemic nature under subsection (1)(a), as the hon. Member for South-West Hertfordshire said, or to have

“serious consequences for business or other interests throughout the United Kingdom”

under subsection (1)(b).

It is not as simple as to say that paragraph (a) means wholesale, while paragraph (b) means retail. “Systemic” could be retail or wholesale. For example, the BACS system has links to retail and is potentially systemic. When it comes to defining which systems are covered by paragraphs (a) and (b), there is no real disagreement within the financial services community.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the Minister’s clarification. He will be aware that I was quoting what the Bank of England said in the year 2000. If the position has evolved since then, so be it. When making a recognition order, does the Treasury intend to make it clear whether paragraphs (a) or (b) apply or whether they will both apply?

Ian Pearson (Labour, Dudley South)

We would certainly want to operate in an open and transparent manner and, as I have explained, we shall seek advice from the Bank of England and the Financial Services Authority before making such recognitions. I do not think that there will be a lot of contention in that area.

I believe that subsection (2) is important, despite the suggestion of the hon. Member for Wellingborough that we focus just on subsection (1). When deciding whether something is systemic or will have serious consequences, it is right to consider the number and value of the transactions processed by the system, the nature of the transactions, whether they could be handled by other systems and the relationship between the system and other systems.

I will explain why those criteria are appropriate. Whether transactions could be handled by other systems is relevant to the consideration of systemic or system-wide importance because the extent and effect of the disruption caused by system failure are likely to be greater if there are no alternatives. For example, CHAPS carries high-value same-day payments for the settlement of sterling obligations in financial markets. No other system provides that facility.

It is important to consider relationships with other systems because such interdependencies could generate system-wide or systemic risks that are not apparent when the system is viewed by itself. Interdependencies might exist operationally or because of the use of a shared liquidity pool, such as the ability to transfer liquidity between CREST and CHAPS. There could also be an overlap in memberships of the two systems. The criteria in the clause will inform the assessment by the Treasury of the systemic or system-wide importance of the inter-banking system and thereby identify whether formal oversight by the Bank of England is appropriate to minimise the risk to the financial stability of the UK.

The hon. Member for Wellingborough also remarked that the issue is not just with the system, but with the administration of the system. I refer him to later clauses, which I believe deal adequately with the points he has made.

Clause 172

David Gauke (Conservative, South West Hertfordshire)

I have one or two questions about the procedure for making a recognition order. The clause gives us another opportunity to raise questions about the relationships between the Treasury, the Bank of England and the FSA. Subsection (3) states:

“In considering whether to make a recognition order in respect of a payment system the Treasury may rely on information provided by the Bank of England or the FSA.”

Does the Minister envisage circumstances in which the Bank of England or the FSA will initiate the process? Will there be times when the Bank of England goes to the Treasury and says, “We think that this payment system needs to be recognised.”? Is that how the process will work in practice? There is an obligation on the Treasury to consult the Bank of England, but can he imagine circumstances in which the Bank of England may take a different view and say that a payment system should not be recognised? Are there any circumstances when the Treasury will overrule the Bank of England?

Although it is unlikely, will it be possible for the operator of a payment system to make an application to be recognised, in the same way that they can make an application to be designated? Under subsection (1), the Treasury will “consider any representations made”, presumably by the Bank of England or the operator of the system. An operator of a system may not want it to be recognised. What will be the time frame in which the operators of systems that could be recognised can make representations? How long will the Treasury take to consider such representations?

Subsection (2) raises the issue of recognised investment exchanges and clearing houses and the FSA’s role. Where a recognised clearing house or investment exchange will be a recognised payment system, which entity will take the lead in regulation—the FSA or the Bank of England? The Minister will be aware of the concerns about entities slipping between the gaps, which I suspect is one of the driving forces behind the Bill. Can he answer that question?

Peter Bone (Conservative, Wellingborough)

I think that clause 172(1) is the “going out to lunch” part of the Bill. In the past, the Bank of England, the Treasury and the operator would get together and talk things over, and this subsection tries to re-create that consultation. If at the end of the consultation the Bank of England and the operator took the same view but the Treasury took a different one, it is not clear whether the Treasury’s view would necessarily go ahead, even if the other two parties were against it.

Ian Pearson (Labour, Dudley South)

The clause sets out the process by which recognition orders are to be made. Again, I have to tell the hon. Gentleman that this is not the “going out to lunch” clause. It is a clause that makes clear how the procedure should operate.

I shall try to add flesh to the bones of the clause, in response to the largely theoretical questions posed by the hon. Member for South-West Hertfordshire. In practice, there will be a large, if not complete, measure of agreement between the authorities in the tripartite system and in the banking and building societies system, as to which inter-bank systems should be recognised. Important systems may, however, emerge in the future and the hon. Gentleman is right to want to probe the basis on which future systems might wish to be recognised. We have already indicated the sorts of system that will be recognised initially, and once the legislation has been passed we expect that a range of systems will be completely agreed between all parties. In the future, the Bank of England and/or the FSA could bring information to the Treasury along with a recommendation to recognise a system. In addition, an operator could apply to be recognised. The Treasury can consider any representations, and the decision to recognise is at its discretion. However, we would want to consult the FSA and, importantly, the Bank of England. There needs to be a clear designating authority, and the legislation makes it clear that that is the Treasury.

Stewart Hosie (Scottish National Party, Dundee East)

The Minister has just said that recognition would be at the Treasury’s discretion, but he has also said that a new inter-bank system could emerge that might, if it failed, be a systemic failure. Surely, the decision to recognise ought not to be at anyone’s discretion. If an inter-bank payment system has become so big that it is critical and that if it failed it would be a systemic failure, recognition should be automatic and not at the discretion of the Treasury.

Ian Pearson (Labour, Dudley South)

Perhaps I was being loose with my terminology, but let me make it clear that the Treasury, which is able to exercise that power, will do so at its discretion. It will want to use the power if it believes that clause 171(1)(a) or (b) are engaged. As I said, in the normal course of events I expect there will be a large measure of agreement on the types of inter-bank payment system we are discussing. With regard to the potential for the future, the Treasury will be open to representations from the Bank of England, the FSA and individual organisations on whether there are new systems that are of such systemic or system-wide importance that they should be recognised.

The hon. Member for South-West Hertfordshire raised an issue about the time frame. As he will appreciate, that will depend on the nature of the representations. The Treasury might seek further information from the Bank of England, the FSA or the operator of a system, so it is not possible to give a precise time scale. I return to the overall point that there has to be a recognition procedure, and we believe that it is right that the Treasury leads on that. The Treasury will consult widely on that point with the Bank of England, the FSA and operators. I hope that those reassurances will be supported by the Committee.

Clause 173

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 19, in clause 173, page 89, line 11, after ‘recognised’, insert ‘inter-bank’.

The amendment is a technical correction intended to provide consistency across part 5 of the Bill. Clause 170 provides for the Treasury to make a recognition order in respect of an inter-bank payment system, thereby bringing it within the Bank of England’s remit as formal overseer. Clause 173 provides for the revocation of a recognition order made under clause 170. The amendment makes it clear that the Treasury must consider requests by the operator of a recognised inter-bank payment system only in relation to the recognition order made under clause 170(1) and not one made, for example, under the Financial Services and Markets Act 2000.

By way of example, clearing houses or investment exchanges may be recognised by the FSA under part 18 of the 2000 Act. Such recognised clearing houses and investment exchanges are then subject to the FSA’s regulatory regime, and those recognised clearing houses or investment exchanges might contain embedded payment systems that do not meet the recognition criteria in clause 171 and would not, therefore, be recognised by the Treasury under clause 170(1). In such circumstances, it would be inappropriate for the Treasury to consider requests for revoking a recognition made by the FSA. That is why we believe this technical amendment to be necessary.

David Gauke (Conservative, South West Hertfordshire)

I have a brief question for the Minister on the subsection that he has amended, and we are grateful for his explanation for that amendment. My question relates to the circumstances in which the Treasury must consider any request by the operator of a recognised payment system for revocation of its recognition order. We have not tabled an amendment to the clause, but perhaps the Minister might help the Committee on this point. When the Treasury rejects any such request, does he consider it appropriate that it should give reasons for that rejection? Furthermore, is there anything more that he can say on whether an application for revocation would be successful, other than referring to the recognition criteria in clause 171? If a payment system saw its market share fall substantially, whether because of this regulatory regime or commercial factors, would that be the sort of matter that the Treasury would take into account, on which grounds it would be willing to grant revocation?

Would it ever be possible for a payment system to put in an application with a view to its coming into effect some months down the line? A payment system might be seeking to wind up its business. Rather than simply doing so and still finding itself a recognised system for these purposes and with various obligations on it, I wonder whether it could work with the Treasury and say, “We are going to cease performing at some time. We would like the revocation of the recognition order to coincide with the time we cease trading so there is not a huge overlap.” Would the Treasury be willing to work in a constructive manner with payment systems were those circumstances to arise? I do not know how likely that would be, but certainly in other sectors when a business winds up it wants to be able to work with the regulator to do that in as smooth and orderly a fashion as possible.

Ian Pearson (Labour, Dudley South)

I can assure the Committee that the Treasury always wants to act in a supportive and helpful manner in these areas. The hon. Gentleman raises some practical points about what might happen if an inter-bank payment system was in decline and no longer had any systemic importance. The Bank of England will monitor the situation closely. It will undoubtedly be in contact with the operator. The tripartite authorities work very closely together. In those circumstances, there would be no alarms and no surprises. On the question whether reasons would be given if the Treasury refused a request of an operator to de-recognise a payment system, in the spirit of openness and transparency, the Treasury would naturally want to give its reasons. I am happy to place that comment on the record for those who look at these things.

Clause 174

David Gauke (Conservative, South West Hertfordshire)

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.

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.

John Pugh (Liberal Democrat, Southport)

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.

Ian Pearson (Labour, Dudley South)

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.

Clause 175

David Gauke (Conservative, South West Hertfordshire)

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?

Peter Bone (Conservative, Wellingborough)

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.

Brooks Newmark (Conservative, Braintree)

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 (Labour, Dudley South)

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 (Scottish National Party, Dundee East)

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 (Labour, Dudley South)

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.

David Gauke (Conservative, South West Hertfordshire)

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 (Labour, Dudley South)

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.

Clause 176

David Gauke (Conservative, South West Hertfordshire)

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 (Scottish National Party, Dundee East)

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 (Labour, Dudley South)

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 (Scottish National Party, Dundee East)

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 (Labour, Dudley South)

I am sure that that will be the case.

David Gauke (Conservative, South West Hertfordshire)

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?

Ian Pearson (Labour, Dudley South)

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.

Clause 177

David Gauke (Conservative, South West Hertfordshire)

This clause allows the Bank of England to give directions to an operator of a recognised inter-bank payment system. With regard to the consultation representations from the affected operator, those issues that apply to system rules also apply to directions. Does the Minister see a direction under the clause as being an exceptional route of action taken by the Bank of England or as routine? May I ask specifically what those directions might relate to? The clause states:

“A direction may...require or prohibit the taking of specified action in the operation of the system”.

Would the Minister elaborate on what “specified action” might mean so that we are sure that it does not mean rule change, for example? It could be helpful to throw out even one possibility of what a “specified action” might be. It might be a question, for example, of whether employing an individual would, or would not, be appropriate, or whether that enables the Bank of England to assess if particular individuals are fit and proper to perform a role within a payment system in the way that the FSA, as a matter of course, assesses people performing approved functions under the Financial Services and Markets Act 2000. Is that part of what clause 177 is designed to address?

Ian Pearson (Labour, Dudley South)

The clause gives the Bank of England power to give directions to the operator of an organised inter-bank payment system. Directions may require, or conversely prohibit, certain actions in the course of the operation of a recognised inter-bank payment system. Directions may also set standards to be met in the operation of the system.

As I understand it, the purpose of the legislation is not that directions should be used routinely. To give a specific example, the Bank might direct the recognised inter-bank payment system to set up a programme of tests on its crisis management arrangements. One would hope that the operator of the inter-bank payment system would wish to do that in any event and that agreement would normally be reached. If the Bank thought that the operator was unwilling to do so and that it was necessary, it is right that it should have the power by direction to require a programme of tests. That is an important part of the Bank’s oversight role for payment systems, as it enables it to ensure that specific steps, such as the one I have just indicated, are taken in relation to a payment system as and when the need arises.

Directions, unlike system rules, will make specific instructions regarding the general conduct of the payment system, rather than its rules of operation. Directions could also be made as emergency measures to take immediate action, or conversely, to stop doing something with immediate effect. Those powers are therefore necessary because they are an important part of the suite of regulatory tools, which I mentioned earlier, that enable the Bank of England to ensure that the payment system is both designed and operated in a manner that does not threaten the stability of the UK’s financial system.

The hon. Member for South-West Hertfordshire asked what would happen in an instance when the Bank might not have confidence in an individual’s ability to operate the system. We will cover that when we come to clause 186, if he thinks it is acceptable to debate the issue then.

Clause 178

David Gauke (Conservative, South West Hertfordshire)

Briefly, the clause states that in exercising powers under this part of the Bill, the Bank of England shall have regard to

“any action that the FSA has taken or could take”.

This comes back to a theme that has run through the morning of the relationship between the various regulatory bodies. I can see that the purpose of the clause is to avoid any duplication. Are there any similar obligations on the FSA to have regard to any action taken by the Bank in respect of payment systems? I am also slightly curious about the phrase,

“any action that the FSA has taken or could take”,

as it is somewhat broad. I can see what the clause is trying to get at, but one could argue that it is vague.

Can the Minister reassure us that there will be good communication between the FSA and the Bank in this area? Could he identify structurally how that will be done? This is particularly an issue for recognised clearing houses and investment exchanges where the FSA has a major role. Who is in charge with regard to those institutions? I think it is essentially the FSA, but will the Minister confirm that that is the case? For those payment systems that are not either a recognised clearing house or a recognised investment exchange, does he expect that the Bank be in charge and what role will the FSA have in those circumstances?

Peter Bone (Conservative, Wellingborough)

The clause touches on the tripartite arrangements, which are not unique. There are other areas where there is more than one agency responsible for a set of affairs, but usually there is a clear memorandum of working between the organisations, setting out which organisation is paramount in an area where things overlap. I am still not clear whether one organisation will come out on top when there is duplication. The clause deals with the relationship between the Bank and the FSA. We have been unable to see these memorandums of working, so will the Minister tell us whether there will be duplication? If there is, will the Bank, the Treasury or the FSA come out on top?

Ian Pearson (Labour, Dudley South)

As I explained earlier, the Bank of England clearly has the lead responsibility when it comes to the regulation of inter-bank payment systems. In the case of payment systems within recognised clearing houses and investment exchanges, which are regulated by the FSA, the Bank will again have responsibility for the regulation of the inter-bank payment systems. Certainly in all the consultations in this area, there was overwhelming recognition that there should be a single regulator when it comes to inter-bank payment systems. To avoid duplication between the responsibilities of the FSA in the regulation of recognised clearing houses and recognised investment exchanges and the role of the Bank in overseeing inter-bank payment systems, there will be a memorandum of understanding between the Bank and the FSA. It will ensure that there is effective co-ordination and minimum duplication of regulations.

Mark Hoban (Conservative, Fareham)

I dealt with the Investment Exchanges and Clearing Houses Act 2006 when it went through Parliament. In that Act, the FSA clearly has the responsibility for approving rule changes put forward by the clearing houses and investment exchanges. Would it not be better for that legislation to be modified through this Bill, rather than relying on a memorandum of understanding?

Ian Pearson (Labour, Dudley South)

The Bill is clear—the Bank of England is responsible for the oversight of inter-bank payment systems. If it becomes necessary to take enforcement action, the Bank of England and the FSA will want to agree on which one of them is best placed to do so. It is important to recognise that we are setting out in different parts of the Bill the clear responsibilities of the tripartite authorities. It is right that the Treasury leads on, and has responsibility for, recognition, and that the Bank of England has lead responsibility on inter-bank payment systems.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for being explicit about inter-bank payment systems. We support the Bank of England taking the lead. Why is there a statutory obligation on the Bank of England to have regard to the FSA, but, as far as we can see, no comparable obligation on the FSA to have regard to the Bank?

Ian Pearson (Labour, Dudley South)

It is my understanding that the clause was designed to ensure that the role of the FSA was explicitly recognised, given its responsibilities on recognised clearing houses and investment exchanges. I am not sure that a reciprocal power is necessary, because there are other measures within architecture of the Bill to ensure that the tripartite authorities talk to one another. However, I will reflect on that point further and, if necessary, return to it at a later stage.

Clause 179

David Gauke (Conservative, South West Hertfordshire)

We enter into the enforcement area of part 5. I have more comments to make on clause 180, some of which relate to this clause. Does the Minister consider the inspection powers in clause 179 to be exceptional? I assume that the Bank of England will be able to work co-operatively with operators of payment systems without recourse to the relevant clauses.

Subsection (2) says that an operator must

“grant an inspector access, on request and at any reasonable time, to premises on or from which any part of the system is operated”.

What will the notice period for an inspector to access premises be? Her Majesty’s Revenue and Customs, for example, has various rules and guidance about how much notice it should give an entity before it gains access to premises. What does the Minister see the position as being in those circumstances? It is particularly significant, given the issues regarding clause 180, but I hope to address those this afternoon.

Stewart Hosie (Scottish National Party, Dundee East)

The clause is fairly similar to a clause that we discussed earlier with regard to the provision for HMRC officers to have access to ascertain documents. We had a debate in another Committee Room about what “a document” meant.

Stewart Hosie (Scottish National Party, Dundee East)

As I was saying before lunch, the clause is similar in form to a clause we considered on another Bill. That clause gave Her Majesty’s Revenue and Customs officials the right to access and seize documents. I argued that if a document was an electronic document hosted on an overseas computer, it would be wholly unreasonable to expect that the person being asked to provide it could necessarily do so. Such legislation, because it could be seen as extraterritorial, might be unenforceable. The same argument applies in this case.

The clause states that the Bank of England may appoint someone to inspect an inter-bank payment system and that the operator of that system must

“grant an inspector access, on request and at any reasonable time, to premises on or from which any part of the system is operated”.

Clearly, if the data centre is overseas, that might be impossible and legally unenforceable. However, although the extraterritorial argument is a real one that needs to be addressed, the issue of the operator is more important in terms of the Bill. The operator may be a fairly junior member of staff in a bank, certainly not a senior figure, who may not have access or be able to arrange it.

If an overseas data centre forms part of the system that is to be inspected, it would make more sense for the legislation to suggest that failure would be only if all reasonable efforts to gain access or to allow the inspector access were not made, rather than the pretty blunt description in the clause that the operator of a recognised inter-bank payment system must grant an inspector access even when the centre may be overseas or he or she simply cannot organise that access. I should like to hear what the Minister has to say about that. I would not like to see a piece of legislation that could land someone in court, or subject them to an inspection warrant, for something that they physically cannot do, or do not have the status to do. Would not the phrase “make all reasonable efforts” be better than the wording in the clause? I will listen to what the Minister has to say before we look at other amendments to this part of the Bill.

Ian Pearson (Labour, Dudley South)

Clause 179, as Members have outlined, gives the Bank of England the power to appoint inspectors whose role is to inspect the operation of a recognised inter-bank system. It is relatively straightforward and is the first of a number of clauses in the enforcement section of part 5. It places the operator of the system under a statutory obligation to grant the inspector access to the premises from which all or part of the system is operated or managed and to co-operate with the inspector.

The power allows the Bank of England to appoint an inspector to check that codes of practice, principles, system rules or directions are being complied with and that the recognised inter-bank payment system is otherwise operating in a satisfactory manner. The power is an important tool of oversight that strengthens the Bank’s ability to ensure that payment systems identified as of systemic or system-wide importance are being operated in a manner that does not pose a threat to business or other interests, or to financial stability in the United Kingdom as a whole.

The hon. Member for South-West Hertfordshire asked whether the power would be routinely used. I am happy to confirm that we do not anticipate that it will be routinely used. We expect that if the Bank of England had any concerns about the operation of an inter-bank system it would discuss them in the first instance with the operator concerned. In most, if not all cases, I imagine that things would be sorted out. However, given the importance of oversight of those critical systems, I think it right that there are powers for inspection, so the later powers that we shall discuss are in reserve.

Colin Breed (Liberal Democrat, South East Cornwall)

Would that be similar to the non-routine use of the Anti-terrorism, Crime and Security Act 2001 for the inspection of Landsbanki, for instance?

Ian Pearson (Labour, Dudley South)

I will not be tempted to speculate or to respond to that comment; I discussed the issue at some length yesterday in the statutory instrument Committee dealing with Landsbanki.

The hon. Member for Dundee, East made a number of interesting points relating to the fact that some bank systems are outsourced. I recognise that, and it will have to be taken into account by the Bank of England as part of its supervisory role. The Bank will want to ensure that it has confidence that the systemic and system-wide recognised inter-banking systems are being operated in an appropriate manner. I cannot prejudge all the circumstances in which an inter-bank system might operate and I do not think that it would be right to put them in the Bill; that is not the purpose of primary legislation. However, the hon. Gentleman makes a valid point that will have to be considered as part of how the Bank views its oversight arrangements.

Peter Viggers (Conservative, Gosport)

I last came across the exercise of powers such as this last week in parallel circumstances, when I found myself answering questions on behalf of the Speaker’s Committee on the Electoral Commission about the powers of the Electoral Commission to investigate premises and to call for papers. I am thus looking with some interest at clause 179 and wondering whether the Minister can tell me what the previous powers were in this field. No doubt there were powers for the Bank of England to carry out investigations, and the provision may be a repetition or a strengthening of powers that previously existed. I would be interested to know whether there were such powers.

Secondly, I wonder if the operator of a recognised inter-bank payment system knows that he is an operator of a recognised inter-bank payment system. What process is there for ensuring that when the inspector authorised by the Bank of England arrives to inspect the premises, the operator realises that he must give the inspector access?

My third point is about the phrase

“otherwise co-operate with an inspector,”

which seems very broad and seems to mean that the operator must do everything that the inspector requires him to do. However, one would like rather more clarification of exactly what it is that the inspector can require the operator to do. To say that they must “otherwise co-operate” with the inspector is really very broad and might leave the operator, who might not be briefed in banking law, at a loss as to what exactly they are required to do. I would be grateful for some clarification of what appears, on the face of it, to be a very general clause.

Ian Pearson (Labour, Dudley South)

The hon. Gentleman raises three points. The first is the question of whether the operator understands that he is operating a recognised system. As we explained when considering some of the earlier clauses, there is a process whereby the Treasury will establish that a system is a recognised system because it is of either systemic or system-wide importance. In the consultation exercise, we gave examples of those systems and it would be readily apparent to those who work in such areas that they are operating a systemic or system-wide inter-bank system.

The second issue that the hon. Gentleman raised related to the fact that the Bank of England already has a number of investigatory powers. The Bank has not previously had statutory responsibilities for the oversight of inter-bank systems. Under the clause, we are talking specifically about inter-bank systems and giving the power of inspection, if it is required, to the Bank.

The third point that the hon. Gentleman made was about the words

“otherwise co-operate with an inspector”.

I understand that the power is relatively broad. It will be used in a reasonable way by the Bank of England, just as we expect all our public institutions to operate in a reasonable manner. I do not think it unreasonable to put the power in the Bill.

Clause 180

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 39, in clause 180, page 90, line 34, at end insert ‘acting reasonably’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following amendments: No. 40, in clause 181, page 91, line 4, after ‘it’, insert ‘reasonably’.

No. 41, in clause 180, page 91, line 9, after ‘assist’, insert ‘substantially’.

No. 42, in clause 185, page 91, line 33, after ‘England’, insert ‘reasonably’.

No. 43, in clause 185, page 91, line 33, leave out ‘think’ and insert ‘thinks’.

No. 44, in clause 190, page 93, line 31, after ‘Bank’, insert ‘reasonably’.

No. 45, in clause 190, page 93, line 33, after ‘otherwise’, insert ‘reasonably’.

David Gauke (Conservative, South West Hertfordshire)

The clause deals with the circumstances in which Bank of England inspectors may apply for a warrant entitling them to enter the premises of an operator of a payment system and in which justices of the peace may issue one. A number of conditions are set out and if any one of them is fulfilled, an inspector will be permitted to seek to obtain a warrant for entry. The amendment relates to condition 4, which states that

“a person occupying or managing the premises has failed to co-operate with an inspector.”

To understand the thinking behind the amendment, it is worth looking at the other conditions. It must be remembered that it is necessary to satisfy only one of them. Conditions 1 and 2 relate to the information-gathering process set out in clause 190. Condition 3 relates to refusing to give an inspector access to premises, despite reasonable notice having been given. If an operator has not failed to provide information or access, a warrant can none the less be issued on the basis that the person occupying or managing the premises failed to co-operate with an inspector.

The point of the amendment is that only an inspector who is acting reasonably should be able to obtain a warrant. The other conditions are set at the appropriate level, but condition 4 simply allows an inspector to make requests of the occupier of premises that are part of a payment system. If he refuses to co-operate in any way, he makes himself vulnerable to a warrant from a justice of the peace. I would be grateful for the Minister’s views on that point.

If I may talk generally on the clause, it would preclude the need, from my point of view, for a stand part debate. I shall raise the usual points and I am sure that the Minister will be obliging in responding to them. Will he give an assurance that the procedure in the clause will be used only in exceptional circumstances? Does he anticipate the Bank of England looking to obtain warrants to enter premises as a routine matter? Given his comments on clause 179, I am sure that he will have no problem in giving that assurance.

Amendments Nos. 40 and 41 relate to clause 181, which sets out that the Bank of England may require the operator of an inter-bank payment system to appoint an expert to report on the operation of the system. Amendment No. 40 would insert the word “reasonably” so that the Bank may impose a requirement only if it reasonably thinks that the operator is not taking sufficient account of the published principles or the code of practice. Amendment No. 41 would insert the word “substantially” in subsection (2)(c) so that the Bank may impose a requirement only if it reasonably thinks that the report is likely for any other reason substantially to assist the Bank in the performance of its functions under this part. Both amendments attempt to be slightly more specific, because a report might be of only marginal benefit to the Bank yet cause substantial inconvenience and costs for the payment system, so it should not be issued lightly.

Amendment No. 42 relates to clause 185, which sets out the Bank of England’s powers to close a payment system, which is clearly a draconian sanction. The amendment proposes that those powers may be applied only if the Bank reasonably thinks that the compliance failure threatens the stability of the UK financial system. It is a probing amendment, so I would be grateful for the Minister’s thoughts on it.

Amendment No. 43 also relates to clause 185 but is less of a probing amendment. Although it would not be fair to claim that it goes to the heart of the Bill, I feel quite bullish about it. The current drafting states:

“This section applies if the Bank of England think that a compliance failure threatens the stability of the UK financial system.”

The amendment would instead state that the Bank of England “thinks” that the compliance failure threatens the stability of the UK financial system. Elsewhere, the Bill states that the Bank “thinks”, so I hope that the Minister will accept the amendment.

Amendments Nos. 44 and 45 relate to clause 190, which provides that the Bank of England may request information from an operator of a payment system. Again, I propose that that should occur when the Bank “reasonably” thinks that it will help the Treasury in determining whether to make a recognition order and when it “reasonably” requires the information in connection with its functions under Part 5. I am sure that the Minister will say that the Bank of England will act reasonably in all circumstances, but I suggest that we should include the provision in the Bill.

Peter Viggers (Conservative, Gosport)

I am of course aware that the explanatory notes do not form part of the Bill and have not been endorsed by Parliament, but one nevertheless looks to them for an explanation. In relation to clause 180 they state:

“The application is to a justice of the peace, who can issue the warrant only if certain conditions are fulfilled.”

The fact that “conditions” is plural could lead one to think that all the conditions need to be fulfilled, but my reading of clause 180(1)(b) is that the warrant can be issued if

“any of the following conditions is satisfied.”

I take it from my reading of the Bill that any of the conditions laid out is sufficient to enable a warrant to be issued. The Minister is indicating assent.

With regard to the amendment moved by my hon. Friend the Member for South-West Hertfordshire, I do not think that anyone disagrees that inspectors act reasonably. That rather flows back to my point that the words

“otherwise co-operate with an inspector”

in clause 179 are really quite broad. One would like to think that the mandate imposed on the inspector is that he should act reasonably, so for what it is worth, I lend my support to my hon. Friend’s amendment.

Ian Pearson (Labour, Dudley South)

I congratulate the eagle-eyed hon. Member for South-West Hertfordshire on amendment No. 43, which changes “think” to “thinks.” It was a typographical error and he spotted it. Either it will be corrected, or I will happily accept the amendment. However, apart from that example, the Government’s view is that the amendments are unnecessary and inappropriate.

Amendment No. 39 would amend clause 180. When determining whether to

“issue a warrant entitling an inspector or a constable to enter premises,”

a justice of the peace must look at a range of issues to see whether any of the conditions are met in order to issue such a warrant. I am happy to confirm to the hon. Member for Gosport that his interpretation is right; it is any one or more of the “following conditions”. The justice of the peace will look at whether the requirements on the operator of the payment system, including the requirement to co-operate with an inspector, have been met. If they have not been met, the JP will ask why, but even if the JP considers an inspector to have acted unreasonably, or that it was reasonable in the circumstances for the operator of the payment system not to comply, a warrant will not be issued unless one of the other conditions has been met. There is, therefore, no need to amend the subsection in the manner suggested.

Amendments Nos. 40, 42 and 44 relate to different clauses in the Bill and in essence have the same purpose. As hon. Members are aware, the Bank of England is adept at balancing public and private interests. As a public body, it is expected that it will act reasonably when undertaking its functions under this part of the Bill. It would be inconsistent with existing legislation to include the word “reasonably” in relation to the conduct of a public authority. For those reasons, the proposed amendments are inappropriate.

The Bank of England’s actions might be subject to judicial review, which could provide a remedy if the Bank’s conduct was found to be unreasonable, unfair or disproportionate. That is the normal way in which legislation is passed in this House and the other House. The word “reasonably” is not used in relation to public authorities, because it is expected that public authorities will act reasonably.

Amendment No. 41 would mean that the Bank of England can require a report only if it “substantially” assists the Bank in carrying out its functions. However, it might require a report in order to acquire further information, should it feel that an operator of a recognised inter-bank payment system is failing to meet its requirements. It may, therefore, be impossible to say at the outset that such a report would “substantially” assist the Bank of England. The report might be of only partial assistance, and would need to be combined with other information to provide a full and accurate picture of the system’s operation. We feel that the amendment would unnecessarily restrict the Bank of England’s ability to require the production of such a report. I therefore ask the hon. Gentleman to withdraw the amendment, although if he wishes to press amendment No. 43—a typographical error—I shall be happy to accept it.

David Gauke (Conservative, South West Hertfordshire)

I express my gratitude to the Minister with regard to amendment No. 43. He has demonstrated that Ministers can be reasonable, and it would be unreasonable to object to that. When we reach clause 185, I shall press the amendment.

As for the other amendments in the group, I am pleased to learn that it is assumed that public authorities act reasonably, although we can probably all think of circumstances in which that does not apply. However, given that the Minister has assured the Committee that the provisions reflect the manner in which statutes tend to be drafted, I am prepared not to press the point today. I am slightly alarmed by his comments about “substantially”, as he may be leaving open the opportunity for the Bank of England to go on what can only be described as fishing expeditions for further information. I am not sure that the drafting of clause 181 really provides protection for operators of banking systems in such circumstances, given that an independent report could be quite expensive and other factors need to be borne in mind, such as the management time that it could impose.

If the Minister can provide an assurance that independent reports will be used only in exceptional circumstances and that he does not regard them as a matter of routine, it could prevent the need for a stand part debate on clause 181. I would be happier if the Bank of England does not use independent reports under clause 181 for the purpose of fishing expeditions but, in the circumstances, I do not intend to press amendment No. 41.

Ian Pearson (Labour, Dudley South)

It may help the Committee if I say that we do not see clause 180 and clause 181 on the independent report as being routinely exercised. If they were required, it would be for exceptional and unusual matters. I repeat that we expect the Bank, as a public authority, to act reasonably in making requests in such areas.

David Gauke (Conservative, South West Hertfordshire)

I beg to ask leave to withdraw the amendment.

Jimmy Hood (Labour, Lanark and Hamilton East)

Will the Minister help the Chair? Do I take it from his response to amendment No. 43 that it was accepted as it drew attention to a typographical error?

Ian Pearson (Labour, Dudley South)

I am happy to accept amendment No. 43, which I assume that we shall vote on when we reach clause 185.

Stewart Hosie (Scottish National Party, Dundee East)

Subsection (1) states that a

“justice of the peace may on the application of an inspector issue a warrant entitling an inspector or a constable to enter premises”.

Will the Minister confirm that he really means that that would cover a justice of the peace issuing a search warrant in Scotland, which is a different jurisdiction from England, or does he mean a sheriff in such circumstances? If so, would the legislation under which that applied be the warrants procedure under the Police and Criminal Evidence Act 1984 or would it be the equivalent Scottish legislation? In any event, does that legislation allow only for a search warrant to be issued by a justice of the peace in England? Will the hon. Gentleman explain why the normal wording that ensures what legislation evidence is treated under is not included under this part of the Bill? Usually, when legislation outlines how a search warrant is issued, it specifies at the same place in the legislation under what legislation the evidence would be collected and treated, whether it is PACE in England or separate Scotland legislation. Will he confirm that the Government mean that a justice of the peace will issue a search warrant when that is necessary in Scotland, or should it be a sheriff, and will he say under what legislation the evidence or productions in Scotland will be treated, and how that system will work?

Ian Pearson (Labour, Dudley South)

The hon. Gentleman makes a fair point. I do not have the answer, and I do not believe that anyone else in the room does either. I refer him to clause 180(7), which mentions the Police and Criminal Evidence Act 1984, but, as that does not clearly answer his question, I shall write to him about the situation. An amendment may be required to clarify matters.

Clause 183

David Gauke (Conservative, South West Hertfordshire)

We were getting carried away, were we not, with the speed of progress? I wish to ask the Minister a couple of questions.

We again have the words, “may publish”. I can see an argument for some discretion for the Bank of England as to whether it publishes details of compliance failure, particularly in respect of minor circumstances, but I wish to flag up a point about major failures.

The Minister may be able to provide some reassurance to the Committee as to the steps that will be taken by the Bank of England and, indeed, the Treasury, if a major compliance failure is identified within a payment system but the information has not necessarily reached the public domain. If some type of failure is identified by the Bank of England, it may cause publication, which may cause some damage to confidence in that payments system. I would be grateful to know whether the Minister has given any thought as to how such issues will be dealt with, because we do not want regulatory authorities to be unprepared when publication of some breach of the code of practice or principles is revealed to the public and there is a sudden decrease in confidence in a particular payment system.

Peter Viggers (Conservative, Gosport)

I am concerned about a lack of specificity in clauses 181 to 183. Clause 183 states:

“The Bank of England may publish details of a compliance failure by the operator of a recognised inter-bank payment system.”

How will it get those details? I assume that it would get them under clause 181, as it

“may require the operator of a recognised inter-bank payment system to appoint an expert to report on the operation of the system.”

If I were starting from scratch, I would prefer to say in clause 181 that the Bank may appoint an expert at the cost of the operator.

Jimmy Hood (Labour, Lanark and Hamilton East)

Order. I have a suspicion that the hon. Gentleman is speaking to clause 181, which has already been decided by stand part. It is okay for him to refer to it but not to go into any great detail. He is speaking to clause 183 stand part.

Peter Viggers (Conservative, Gosport)

Indeed, Mr. Hood, but clause 183, which I have just read, gives the Bank power to publish details of a compliance failure. How is the Bank to get the information which, under clause 183, it will require to carry out those powers? I should have thought that the Bank would prefer, in preparation for the exercise of powers under clause 183, to have its own independent inspection. We have seen that under clause 181—I shall not refer to it again, Mr. Hood—the Bank does not itself have power to authorise an inspection. Instead, it has power only to

“require the operator...to appoint an expert”.

When he discusses clause 183, will the Minister explain how the Bank will pull together all the information it needs to enable it to publish details of a compliance failure? It does not have under its thumb or control the inspector who carries out the inspection into the bank under inquiry. I therefore would have thought that clause 183 would be much more powerful if preceding it there was a description of the detailed manner in which the Bank will pull together all the information it needs. How can the Bank produce details of a compliance failure if it has not had someone working specifically to produce the details for it? I hope that the Minister understands the point that I am making. It is a matter of concern that the Bank will not readily be able to exercise the powers in clause 183 without the all the background information that it needs to be clear and specific.

Peter Bone (Conservative, Wellingborough)

I assume that the word “may” in clause 183 is genuine and that it gives discretion to the Bank. That goes to the heart of one of the problems with the Bill and the banking system. A serious compliance failure by one of the major banks that is published could cause a run against that bank. Not to disclose such a failure might, in the long run, be better, but if the bank got into serious trouble, the Government would be in a great deal of trouble because the bank did not publish details of the failure earlier. Do the Government think that such things should be disclosed, or should they be kept quiet to stop the damage being done to the relevant bank?

Ian Pearson (Labour, Dudley South)

Clause 182 establishes the meaning of the term “compliance failure”, and clauses 183 to 185 set out sanctions that may be imposed if an operator of a recognised inter-bank payment system commits a compliance failure.

The first sanction is set out in clause 183, which provides that the Bank of England may publish details of a compliance failure. In effect, it is a power of public censure. The disclosure of an operator’s failure to observe or abide by requirements that seek to ensure the UK’s financial stability is intended to act as a deterrent against non-compliance. There are other sanctions, which we will move on to discuss, in case of more serious failures, but we think it right, in the exceptional circumstances that I am happy to confirm we are talking about, that the Bank has a range of measures at its disposal.

The hon. Member for Gosport asked how the Bank might have the powers of information to be able to come to its conclusions. Compliance failure is defined in clause 182 as a failure to observe a requirement under clauses 175, 176, 177 and 181—respectively, the codes of practice, system rules, directions and the independent report. Other sanctions, as I said, are set out in clauses 184 and 185. When it comes to looking at compliance with the code of practice and the system rules, the Bank will routinely gather a lot of information, given its oversight role.

In addition, clause 190(1) gives the Bank power that it

“may by notice in writing require a person to provide information”,

so there are a range of mechanisms to ensure that the Bank has the information that it requires to make the judgments that it wants to make. I should stress that the publication of a report is simply one way in which the Bank can act following a compliance failure, which is why, in response to the hon. Member for Wellingborough, the word should be “may”. It may be better, if there was a serious breach of systems, not to publish a report but to go for other remedies that we will discuss later. That would be a judgment for the bank to make when considering the circumstances of the case.

Clause 184

David Gauke (Conservative, South West Hertfordshire)

Will the Minister confirm that there is no limit on the level of fine that may be imposed as a penalty in accordance with the clause?

Stewart Hosie (Scottish National Party, Dundee East)

May we have some comfort from the Minister about whether the penalty that may be levied for a compliance failure can be variable and could be zero? Failures in respect of the code of practice and the system rules, a failure to provide a direction, or a failure to report, can mean anything between being late in issuing a report, as specified in clause 181, and a serious breach of the guidelines or rules, as in previous clauses.

In terms of the limit on the fine, clause 187 says that before a sanction is imposed, a warning is to be issued, and so on. Clause 186, which deals with management disqualification, states:

“A person guilty of an offence is liable...to a fine not exceeding the statutory maximum”.

These things apply in specific circumstances. Clause 184 uses the words, “pay a penalty”, as opposed to imposing a sanction. Can the Minister provide some clarity on the nature of the penalties and say whether they are the same as a sanction? Will he clarify whether the penalty or the sanction might be small in the case of a minor breach but larger in the case of a significant systemic failure breach?

John Pugh (Liberal Democrat, Southport)

I have a concern, brought about by the comments of other hon. Members, about the excessive use of “may” in the context of other verbs. An initial reading of clauses 183 and 184 might lead one to assume that the Bank of England will not act, will not publish and will not inflict a penalty for a minor offence that does not really require and necessitate such action. The hon. Member for Wellingborough said that there might be various reasons for that; it might not happen owing to information being highly commercially sensitive and because the payments agency and the Bank of England, and its chief executives, have had a really good lunch somewhere—we simply do not know. However, it is a quasi-judicial system. Some people whose details are published and who have penalties inflicted on them will, presumably, be commercially damaged.

I am wondering—this is a serious anxiety—how one resolves concerns about equity, if, for example, the Bank of England uses its discretion in one way, in favour of one organisation, and in another way, possibly for good reasons, against another organisation. Should the organisation that is commercially damaged or embarrassed, or whatever, feel itself to have any kind of grievance, what precisely may they do about it? I cannot see an appeal mechanism here, nor can I see a mechanism whereby the reasons that the Bank may have for acting in one case and not in another will be made explicit to such organisations. I am worried that rumour may spread to the effect that decisions are made on a partial and less than equitable basis. Obviously, if the system is to work well it has to embody equity.

Peter Viggers (Conservative, Gosport)

I concur with colleagues who feel that we need rather more detail in the clause. It mentions a penalty. Are we talking about a fine or could there be a penalty other than a financial fine? We need to know the basis of the assessment.

We Members of Parliament spend a lot of time talking about penalties in criminal and civil cases. I had to discover from a constituency case that, for example, Customs and Excise operates way outside any statutory scale and it is open to it to impose such a penalty for offences as it thinks fit. There needs to be some sort of calibration of the penalty that can be imposed.

Moving ahead to the appeal procedure under clause 188, which we are not discussing at the moment, I see that there can be an appeal against a warning notice of a requirement to pay a penalty. That wording sounds a little cumbersome to me, but at this point I simply refer to clause 184 and ask for a degree of clarity on the amount of final penalty that the Government have in mind.

Ian Pearson (Labour, Dudley South)

It is right that hon. Members ask questions about clause 184 and what we have in mind for the penalty. It might be helpful if I explain that the power to impose a financial penalty is intended to act as a further deterrent against the non-compliance of operators of recognised payment systems with their obligations under this part of Bill. It reinforces the need to comply with, for example, the provision of codes of practice or directions, which is intended to ensure that systems are not being operated in a manner that could represent a threat to financial stability, and to ensure the overall robustness of the payment systems. We have no reason to believe that operators will not want to co-operate and operate fully, but it is right that we legislate to have an enforcement regime in place.

The hon. Member for Southport suggested that there was no appeal system, but he clearly has not appreciated what we have proposed in clause 188, or the warning system set out in clause 187. Clause 184(1) gives the bank the bank the power to impose a penalty in the event of a compliance failure, and subsection (2) makes it clear that the penalty is payable to the Bank of England and is enforceable as a debt. The term “sanction” is defined in clause 187(2) and includes penalties or other sanctions contained in this part.

A number of hon. Members rightly asked how much the penalty will be. To answer the hon. Members for South-West Hertfordshire and for the Dundee, East in particular, it is intended that the Bank will impose financial penalties in proportion to the seriousness of the compliance failure and the system operator’s ability to pay. There is no statutory limit, but as the hon. Member for Dundee, East rightly pointed out, compliance failure could occur in a wide variety of circumstances, and it would not be sensible to try to envisage all those circumstances and include them in the Bill. However, I am happy to confirm in Committee that it is our intention that if the Bank was in a situation where it wanted to impose financial penalties, it would do so in a proportionate way, depending on the circumstances.

Clause 185

David Gauke (Conservative, South West Hertfordshire)

Buoyed up by that triumph, I would like to ask the Minister a question on a point of clarification. The sanction of closure of a payment system is clearly a serious one. I am sure that he will confirm that it will be used in exceptional circumstances only, but I draw the Committee’s attention to the fact that clause 185 applies where

“a compliance failure threatens the stability of the UK financial system.”

Returning to the debate we had this morning on clause 171 and the dual criteria for assessing whether a payment system should be recognised or not, those criteria are:

“(a) to threaten the stability of, or confidence in, the UK financial system, or

(b) to have serious consequences for business or other interests throughout the United Kingdom.”

I quoted the Bank of England in putting the argument to the Minister that it is essentially the wholesale payment systems that can be described as systemic. The more retail-based payment systems cannot be described as systemic, but could none the less have serious consequences for businesses. The Minister did not accept that distinction. Would he say, however, that the clause is more likely to apply to big payment systems, which deal with large amounts of money? If so, significant and disruptive failures in payment systems that are not of such a scale would not be systemic and therefore would not be liable to closure under the clause. I hope that I have made my point clear.

Peter Bone (Conservative, Wellingborough)

I understand the reason behind the Government wanting to stop the operation of a payment system. However, have they considered the reverse? Are there provisions in the Bill to keep a payment system open when the company wants to shut it down, but the Government want to keep it going so that there is no failure in the system?

Ian Pearson (Labour, Dudley South)

None of the enforcement powers proposed in the Bill should be taken lightly. I am happy to confirm that we anticipate their being used only in unusual and exceptional circumstances. The power to make a closure order is necessary as the ultimate sanction in cases of a compliance failure that is considered so serious that the Bank of England believes that the continued operation of a recognised inter-bank payment system could destabilise the UK financial system. It is entirely appropriate for the Bank to have such a power in such circumstances, because it will have to act decisively to address such threats by closing down all or part of a recognised inter-bank payment system.

I say again that that could happen to a payment system on the wholesale or retail end of spectrum, but it would have to be of systemic or system-wide importance. The combination of this power and the others that we have discussed on publication compliance failures and financial penalties provides a suite of tools that may be applied, depending on the severity of the compliance failure.

The hon. Member for Wellingborough raised an interesting point. It is not likely that the circumstance he described could or would ever arise, but I have in the back of my mind that there are already powers that could deal with it. If I find that that is not the case, I will think about whether anything needs to be done in that area. However, I am pretty confident that the matter is covered.

Peter Bone (Conservative, Wellingborough)

The Minister is being very generous. During pre-legislative scrutiny, the British Bankers Association said if a bank failed, an issue in retail banking would be to keep payments flowing. Thinking about that in relation to the present example, if the owners of a payment system fail for another reason, it may be desirable to keep the payment system running so that there is not a systemic failure.

Ian Pearson (Labour, Dudley South)

I understand the hon. Gentleman’s point. It is probably covered in the clauses concerning system rules and directorates. If a problem remains, I will reflect on whether improvements need to be made at a later stage.

Clause 186

David Gauke (Conservative, South West Hertfordshire)

I shall make just two points about the clause. First, I am sure the Minister would not want us to have a system in place that discourages good people from being involved in the operation of payment systems, so if he can provide some comfort to the Committee about how the powers under clause 186 will operate, it will be helpful. The powers are quite widely drawn and there is concern that that might discourage people from operating in that area—although I also note that similar provisions exist with regard to approved persons within FSA-regulated entities as a whole.

Secondly, I said to the Minister this morning that clause 177 is broadly defined and that the Bank of England will be able to give a direction to the operator of a recognised inter-bank payment system to take specified action and that that power could be used against particular individuals. The Minister referred me to clause 186 and was right to do so, but considering clause 177 in isolation, it seems to be broad enough to take into account various elements of clause 186. Therefore, in the context of clause 186, I ask again if the Minister can confirm that clause 177 will not be used as a mechanism for prohibiting individuals and that, as far as the treatment of individuals is concerned, that will be dealt with under clause 186. If he cannot confirm that, perhaps he will elaborate on why that is the case.

Colin Breed (Liberal Democrat, South East Cornwall)

In the past, we have talked about the operator being an entity and said that therefore the entity can or cannot carry on. This clause specifically refers to a person. Unless the Bank of England has authorised or qualified that person, it is difficult to see how it can disqualify that person. Is it intended that people who are in some sort of management position of responsibility in these payment systems will have to be authorised by the Bank and then that authorisation could be withdrawn, or will the Bank of England effectively be able to override any service agreement that an individual bank has entered into in respect of its personnel? In other words, can it in some way insist that the bank disqualifies the person who is operating in that way? That would be a massive change in the way in which any regulator operates in relation to the institutions under its powers. At the moment, yes, a regulator can regulate a company, a bank, a business and everything else, but unless it is going to specifically authorise individual people and they are going to have to maintain that sort of qualification or authorisation, it is difficult to see how the Bank of England can do that.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman will be aware that in entities regulated by the Financial Services Authority, there is an approved persons regime. Before one can perform a controlled function with an FSA-regulated entity, it is necessary to have obtained approval from the FSA, and the FSA is entitled to withdraw that approval and so on. In that sense, there is a parallel. Does he agree that the distinction under clause 186 is that there is not an approval regime in the first place? Perhaps there is a point to be made about notification and the Bank of England being aware of who is employed. That matter does not appear to have been specifically addressed.

Colin Breed (Liberal Democrat, South East Cornwall)

That is the specific point I am making. If we are going to get down to the situation of people being authorised to undertake management functions in this way and therefore carrying some sort of approval by the Bank of England, that is fine, because that approval can be removed. The fact that approval has been removed will mean that they cannot continue to operate in the management role and so on. What is not clear is to what extent the Bank of England is now involving itself in the approval of management in those instances.

Peter Viggers (Conservative, Gosport)

My point is rather similar. I derive my text from the proverb, “You don’t shoot the pianist, you shoot the person who asked him to play.” Clause 186 says:

“The Bank of England may by order prohibit a specified person from being an operator”.

It goes on to say:

“The Bank may by order prohibit a specified person from holding an office”.

What it does not say is that the Bank may by order prohibit a bank from appointing a certain person. I wonder whether there is a provision in the Bill that enables the Bank of England to move against banks and not just individuals who are operators or who are holding an office or position?

Ian Pearson (Labour, Dudley South)

Again, I would like to make it clear that we are talking about exceptional circumstances. Provisions in the Bill allow action to be taken against the bank as an entity. It is right to ensure that the inter-bank systems are robust, that there is no risk to those recognised systems that are of systemic and system-wide significance, and that they are being operated by responsible people. We have no reason to doubt that that is the case. It is right to take powers in legislation to disqualify a person from being an operator of a recognised inter-bank payment system, or from holding a position of management responsibility within such a system depending on circumstances, to make it clear that the disqualification could be

“for a specified period, until further notice, or permanently,”

and to make it a criminal offence to breach such a prohibition.

The clause is necessary to prevent a person from being an operator of a recognised inter-bank payment system if there is a potential threat to the stability of the financial system or to business interests in the UK. I am sure that the Committee will support that overall intention.

This power is intended to capture a situation in which the Bank of England feels strongly that a person who has been involved in the operation of a payment system that has been ordered to close should not be in a similar position in an alternative payment system. It also covers cases in which the Bank of England may be aware that a particular person is unsuitable to run a payment system because of inappropriate conduct elsewhere. I stress that there are also checks on the Bank’s power, including a requirement to give a warning, unless the Bank’s emergency power under clause 187(3) is used. There is a right of appeal to the independent financial services and markets tribunal.

The power of direction under clause 177 will not be used by the Bank of England to order an operator to remove or sack a person from its operation. I am happy to give the assurances that the hon. Member for South-West Hertfordshire seeks. This is not within the scope of the power, but I can confirm that clause 186 deals with the disqualification of specific persons from holding office. Obviously, the meaning of a “person” relates to the Interpretation Act 1978, which refers to natural and legal persons, so it can include banks and other corporate bodies.

John Pugh (Liberal Democrat, Southport)

I am not sure whether the Minister is making it perfectly clear to all of us, but could he tell me whether there is a presumption in the clause that anybody who holds a senior management position in an inter-bank payment system is necessarily in danger of being referred to as an operator, or is in the class of people who may be operators? Are there some exclusions?

Ian Pearson (Labour, Dudley South)

What we are trying to do in clause 186 is to be clear that we are talking about a person who is an operator of a recognised inter-bank payment system. If this power were ever to be used—I would expect its use to be extremely rare—it would be clearly targeted at individuals where the Bank felt very strongly that that person was not an appropriate person to be running a payment system, because of the reasons that I have cited elsewhere.

Colin Breed (Liberal Democrat, South East Cornwall)

We are edging our way there. Can the Minister envisage a circumstance, therefore, wherein such a person would not necessarily have already been dismissed or taken out by the operator—the company—before the Bank of England became involved?

Ian Pearson (Labour, Dudley South)

As I said, I imagine that this power, if it was going to be exercised, would be exercised extremely rarely, because I would have thought that in normal circumstances the operator would have already taken that decision. So I think that it is a power that would be used only very rarely, because, as I have said, we would expect the operator to have taken action previously.

Clause 187

David Gauke (Conservative, South West Hertfordshire)

The clause relates to the warning procedure that will exist before a sanction is made under clauses 183 to 186. We welcome subsections (1) and (2). Subsection (3) provides an exception from the warning procedure, where it says:

“if satisfied that it is necessary the Bank may without notice—

(a) give a closure order under section 185, or

(b) make an order under section 186.”

The wording is very vague:

“if satisfied that it is necessary”.

Perhaps this is one of those circumstances where I would be tempted to insert a “reasonably” somewhere along the line and the Minister would have argued against that.

The explanatory notes provide a little more detail. They say:

“Such situations may arise if, for instance, delaying the cessation of the operation of the payment system...were to pose an imminent threat to the stability of the UK financial system.”

Clearly that is a fairly high benchmark but it is not in the Bill, which is probably regrettable. However, may I encourage the Minister to be as emphatic as possible that the exception from the warning mechanism contained in subsection (3) will only be used in the most exceptional circumstances? I do not know whether the wording

“imminent threat to the stability of the UK financial system”

is merely illustrative or whether that is, in fact, the test that should apply. However, I think that there is some argument for considering whether subsection (3) should be amended to toughen it up.

John Pugh (Liberal Democrat, Southport)

May I ask about subsection (1)(c) and the words “consider any representations made”? I assume that there is a narrow reading and a broad reading of those words. Clearly, we are judging people against a code of conduct and the code of conduct can obviously be broken to a major or minor degree, and when it is broken people can simply judge whether there are extenuating circumstances. However, the words “any representations” seem to go a bit further than that. Again, I am inspired by the hon. Member for Wellingborough and his comment that a representation that might be relevant is that it is an inappropriate thing to do given the state of commercial markets, and so on. I had a very satisfying answer from the Minister about appeals, but the other issue is discretion and how it is used, and I want to know whether the Bank of England, in receiving representations, has to concentrate simply on the narrow business of whether the code of conduct has been breached and the operator is bang to rights on a very narrow reading of it, or whether the Bank can receive from the payments agency broader representations, such that it may be inappropriate, given the state of the market, to act at that particular moment.

Ian Pearson (Labour, Dudley South)

Two points of substance have been made about the clause, which covers warnings in relation to the previous four clauses, which have all been about sanctions. The hon. Member for Southport made a specific point about considering representations, and the clause potentially covers all four sets of circumstances that we have discussed: publication, penalty, closure and management disqualification. The likely representations will differ, depending on the category to which they are applied. Representations could be made, for instance, by an individual, if they were to do with a management disqualification, or they could be made by a company. Representations can be made in confidence to the Bank, and it will be the Bank’s responsibility to consider all the representations made to it.

The hon. Member for South-West Hertfordshire—

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister for giving way. My point was about the circumstances in which no warning was necessary, and the fact that the explanatory notes illustrate that situation.

Ian Pearson (Labour, Dudley South)

I thank the hon. Gentleman. That was the second key point of substance to be raised, and I am happy to confirm our intention that a high benchmark be set. We are talking about situations in which a compliance failure would threaten the stability of the financial situation—the threat being so immediate that closure or disqualification should be imposed without delay. In normal circumstances, subsections (1) and (2) would be the relevant processes, and we would expect the warning process and the 21-day period to be used.

Peter Bone (Conservative, Wellingborough)

Will the Minister give a practical example of when the provision would come into practice, and a practical example of the failure that would cause immediate action?

Ian Pearson (Labour, Dudley South)

No particular practical example comes to mind, but the legal counsel who draft the measures like to consider all potential eventualities, and as I think I explained earlier, we are talking in all these cases about unusual or exceptional circumstances. However, it is right that all theoretical possibilities be considered, because it would not be appropriate for us to come back to the House to pass emergency legislation owing to something that, at this stage, had not been thought of and had therefore not been included. The measure is a backstop, but it is completely exceptional, and in that spirit, I hope that the Committee will accept that the clause should stand part.

Clause 188

David Gauke (Conservative, South West Hertfordshire)

The clause contains an appeals mechanism, which is welcome. It makes use of the financial services and markets tribunal, which generally applies for FSA-authorised entities seeking to make an appeal. The provision shoehorns the payment systems legislation into this, so will the Minister assure the Committee that he is satisfied that the tribunal will have the necessary expertise in this specialised area? It deals generally with FSA-regulated entities rather than Bank of England-supervised entities, so will he assure the House on that point?

Ian Pearson (Labour, Dudley South)

Yes, I believe that I can. Thought was clearly given when coming up with an appropriate body to consider appeals, and we believe that the financial services and markets tribunal will have the experience to consider the sort of decisions that may be referred to it. I have confidence in the tribunal, and believe that it is appropriate for the Bill to have an appeals procedure that refers to it.

Clause 189

David Gauke (Conservative, South West Hertfordshire)

Given that the Bank of England may require operators of inter-bank payment systems to pay fees, is it the intention that supervision of the payment systems will be essentially self-financing? Will the fees more or less equate with the costs incurred by the Bank, and will the Minister state the Bank’s likely costs of supervising and overseeing the systems, notwithstanding any fees that it may levy?

Ian Pearson (Labour, Dudley South)

The clause, as the hon. Gentleman rightly says, enables the Bank to require the operators of recognised inter-bank payment systems to charge fees. The Bank does not currently intend to charge fees for its routine oversight of payment systems under this part of the Bill, and instead will meet its costs from its overall budget for financial stability policy functions, as is the case for its non-statutory oversight. However, the clause ensures that the Bank could continue to resource its oversight activity if the overall funding model changed.

In addition, if the Bank incurred exceptional expenses on its oversight activities—for example, due to the engagement of an expert to carry out an inspection under clause 179—it would aim to recover those costs from the system concerned. The scale of fees would be set by the Treasury in regulations to ensure that they are proportionate. The provisions are sensible and straightforward.

Clause 190

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 20, in clause 190, page 94, line 7, at end insert—

‘(4A) Subsection (4)—

(a) overrides a contractual or other requirement to keep information in confidence, and

(b) is without prejudice to any other power to disclose information.’.

The clause enables the authorities involved in the regulation of payment systems to obtain and share information effectively. Subsection (4) allows the Bank to disclose information obtained under the clause to the Treasury and the FSA, and their international counterparts—the European Central Bank and the Bank for International Settlements. It also gives the Bank the right to publish information obtained under powers conferred by the clause.

The amendment inserts an additional provision to ensure that the Bank may share information obtained under the clause with those authorities, notwithstanding any contractual or other confidentiality obligations in place, and without prejudice to other disclosure powers. The Committee will be aware that the gathering and sharing of information between domestic authorities and their colleagues in overseas authorities plays an important role, and will play an increasingly important role in informing and co-ordinating international regulatory activity, both to pre-empt and to address problems in financial markets. Similarly, the sharing of information plays a fundamental role in the framework governing the formal oversight of payment systems.

Therefore, it is vital that the Bank of England should be able to share information obtained under this section, notwithstanding any contractual or other confidentiality requirements, in the interests of financial stability, among other things. Accordingly, the amendment is appropriate in order to provide a statutory gateway for the Bank of England to share information.

It is appropriate to note that similar gateways are available to other public authorities—for example, the FSA and the Competition Commission—which may, in some circumstances, disclose confidential information without seeking the consent of the person from whom the information was obtained.

It is important to note that the provision means that the common law of confidentiality can be overridden. However, the power will, of course, be exercised by the Bank of England in a way that is compatible with the safeguards set out in the Data Protection Act 1998 and the Human Rights Act 1998. The amendment is equivalent to the provision in clause 224(3), which relates to information that is relevant to the financial stability of an individual financial institution, or one or more aspects of the individual systems of the UK, which may be shared with the FSA or the Treasury. I commend the amendment to the Committee.

Colin Breed (Liberal Democrat, South East Cornwall)

Will the Minister clarify two brief points? The use of the word “share” seems to indicate that information will be provided on a reciprocal basis. Conversely, can the Minister confirm that should it not be reciprocal—in other words, if the other country’s FSA, Treasury or similar organisation were not willing to provide reciprocal information to us—frankly, we would not provide information to them? Sharing means genuinely sharing things, not just our side disclosing to someone else.

Secondly, can the Minister confirm whether disclosure would include the personal details of individual organisations and persons in respect of payments that may or may not have been made to them through the system on which information is being shared?

Peter Bone (Conservative, Wellingborough)

As regards the Government amendment on overriding confidentiality, I would like to reinforce the point that the hon. Member for South-East Cornwall made. I do not think that information that is being shared under subsection (4)(c) with an overseas authority similar to the Bank of England, the FSA or the Treasury should be shared unless there is a similar agreement from that organisation. I would like the Minister to give an assurance that information will be shared only if we have that co-operation from overseas.

Ian Pearson (Labour, Dudley South)

I am happy to explain that, in normal circumstances, we expect there to be reciprocal arrangements with the international partners with which we co-operate. As I mentioned when introducing the amendment, we are talking about the European Central Bank and the Bank for International Settlements. We think that it is right to have such arrangements with them. If we think that it is appropriate in the interests of financial stability to share information, even if the arrangements are not reciprocal, we should do so, because we all share an interest in financial stability. However, I have absolutely no reason to believe that the European Central Bank or the Bank for International Settlements would not want to share with us information that they believed was important to global financial stability.

Peter Bone (Conservative, Wellingborough)

We accept the point about the European Central Bank and the Bank for International Settlements, but paragraph (c) refers to other Governments and organisations in other countries. It is a blanket thing. Are the Government saying that we will share this information regardless, or will we require the other country to participate as well and share information with us?

Ian Pearson (Labour, Dudley South)

It is important to be clear that we are talking about a narrow and exceptional set of circumstances. If the Bank of England has information that it believes is of importance to the stability of the financial system, the right and responsible thing to do is to share that information. Likewise, if an authority from another country was in a similar position, we would expect it to want to share that information as a matter of course.

On the question of sharing personal details, I want to repeat that the Bank of England is subject to the Data Protection Act and must abide by data sharing principles which confer particular protections with regard to personal information. It must also act in accordance with its obligations under the Human Rights Act, particularly article 8, and have regard to the right of protection of private and family life. There are a lot of safeguards there and in the very unlikely eventuality that information which threatens the financial stability of the system comes to the attention of the Bank, the responsible thing to do is to share that with our international partners.

Clause 191

David Gauke (Conservative, South West Hertfordshire)

The clause states that it is an offence to pretend to be recognised under these provisions. If I remember correctly, the Financial Services and Markets Act 2000 has similar provisions. I do not know whether the Minister is in a position to tell us how frequently prosecutions have been brought under those provisions. I know that there have been some and in those circumstances they tend to be very much at the retail end. Given that participants in inter-bank payment systems will be banks and sophisticated institutions, does the Minister think it necessary to do this and to have this provision?

Secondly, will a central list of recognised inter-bank payment systems be available on the Bank of England website, in the way that there is a list of authorised entities on the FSA website? There is a legitimate point about wanting to make it clear which entities are recognised and where participants could get some sort of regulatory protection. Does the Minister intend to have such a list? In those circumstances it would not really be necessary to have this provision. I do not see that it does any great harm, but I am not sure that it adds to the efficacy of the provisions we are debating today.

Ian Pearson (Labour, Dudley South)

This is yet another backstop. I perfectly accept the logic of the hon. Gentleman’s argument. It is not the policy intention that any value should be attached to a payment system being recognised as such. However, simply to deter operators of payment systems from trying to exploit the new framework in such a way it is necessary to impose a criminal offence on anyone who wilfully misrepresents a payment system as being recognised when it is not. It is highly unlikely that someone would want to do that, but I am advised that it is helpful to have a deterrent there. That is what the clause does.

Clause 193

Angela Eagle (Labour, Wallasey)

I wish to spend a little time setting out the broad structure and intent of part 6 of the Bill, and then I will not make a habit of leaping up to speak on clause stand part debates unless I have to.

Clause 193 provides an overview of part 6, which repeals and replaces certain provisions regarding the commercial issuance of banknotes in Scotland and Northern Ireland. Before we discuss the details of clauses in part 6, it might help the Committee if I set out the background. The issuance of national banknotes is usually a function undertaken by the central bank, which in the UK is the Bank of England. With the exception of Hong Kong, the UK is highly unusual in allowing a number of commercial banks to issue their own banknotes. The right to issue is set out in the Bank Notes (Scotland) Act 1845, the Bankers (Ireland) Act 1845 and the Bankers (Northern Ireland) Act 1928—for ease I shall refer to them in future discussions on part 6 as “the current legislation”. Although 1845 might not seem all that current, we are in the process of updating it in part 6 of the Bill.

The provisions in part 6 update, modernise and strengthen the current regime for note issue, which dates back, as I just said, more than 160 years. Clearly, the world today is a very different place from when the legislation was first enacted, so I should like to take the opportunity to discuss some of the history of banknote issuance in the UK, to ensure that our future debates are informed of the context.

The Bank Charter Act 1844 prohibited any new banks in England and Wales from issuing banknotes and barred existing note-issuing banks from expanding their issue. The 1845 legislation in Scotland and Ireland made similar provisions in respect of banks in those nations. At the time, 21 banks applied to become certified to continue issuing banknotes in Scotland and Northern Ireland. That number has decreased over time through mergers, insolvency or by banks choosing to stop issuing, so a total of seven issuing banks remain. Those seven banks are currently authorised to issue banknotes and will continue to be authorised to do so with the commencement of part 6, provided that they abide by the requirements placed on them under the provisions of this part.

Stewart Hosie (Scottish National Party, Dundee East)

It was my understanding that banks would continue to be able to issue, but that there would be a higher bar should a new bank emerge and say, “I want to issue a banknote”, which is highly unlikely. However, a question emerges from that: if the Lloyds TSB-HBOS merger goes ahead, would the Bank of Scotland part of the new organisation continue to be an authorised bank under the new legislation, and therefore entitled to continue to issue notes?

Angela Eagle (Labour, Wallasey)

The answer is that the issuing rights are vested in the underlying corporate entity. What happens to the issuing rights depends on the individual circumstances of a takeover. I can assure the hon. Gentleman that in the specific case of Lloyds TSB and HBOS, the Bank of Scotland, which is a subsidiary of the latter, is the issuing bank, and the issuing rights attach to that corporate entity alone. The change in ownership—in this instance, of Bank of Scotland—would not mean that a bank would be forced to stop issuing banknotes, so it continues under the current proposals to be eligible to issue banknotes. I hope that that reassures him.

I was discussing the history of the matter—it might seem odd to do so, but it creates a context for subsequent debate. To reassure the hon. Gentleman even more, the Government are committed to maintaining the long-standing tradition of commercial banknote issuance in Scotland and Northern Ireland and we are not seeking to discourage commercial issuers of banknotes from continuing the practice. However, our priority is to ensure that holders of Scottish and Northern Ireland banknotes have a level of protection similar to the holders of Bank of England notes, so that in the event that an issuing bank fails, they can expect to obtain full face value for their notes. This is an important part of the Government’s commitment to protect consumers. There is more detail in part 6 on how that is to be achieved.

With that small history lesson and my reassurance to the hon. Gentleman, I commend the clause to the Committee.

David Gauke (Conservative, South West Hertfordshire)

I thank the Minister for her informative introduction to part 6. There are various issues that we want to address, not least the issues of backing assets and the balance between Bank of England notes and other assets. I will address those when we come to the appropriate clauses.

I should be grateful at this stage if the Minister would list the commercial banks that are currently entitled to issue notes. She stated that the Government are keen to continue to allow commercial banks to issue notes. We do not disagree with that. It is an historical curiosity, but there is nothing wrong with historical curiosities. The Minister will not be surprised to hear a Conservative say that. Will she elaborate on why the Government are keen to continue to allow that to happen?

Finally, I thank the Minister for publishing the draft regulations that relate to this matter. They will help our debate as we proceed through the coming clauses.

Peter Bone (Conservative, Wellingborough)

I was not expecting to speak on this matter. However, as I understand it, the Minister said that if I had a Scottish note issued by the Bank of Scotland and the Bank of Scotland failed, I would not get my money back. I did not think that that was the position.

Angela Eagle (Labour, Wallasey)

It is not.

Peter Bone (Conservative, Wellingborough)

The Minister says that I got that totally wrong. It would not be the first time.

Was this legislation brought about because of the current crisis, or was it planned before that? If something has worked for close on 200 years, it probably works pretty well and there is no reason to change it for the sake of changing it. Is there any difference between legislation in Northern Ireland and Scotland? How many banks in Northern Ireland issue notes?

Stewart Hosie (Scottish National Party, Dundee East)

I thank the Minister for her helpful reassurance on the Bank of Scotland notes. The bulk of my concerns come under the banking assets debate in clause 203. I put it on the record at this point that after numerous consultations over the past 15 months or so, we finally have something that almost works and that the industry by and large is satisfied with.

Angela Eagle (Labour, Wallasey)

The hon. Member for South-West Hertfordshire asked me to list the seven remaining banks that have rights of issuance. In Scotland, they are the Bank of Scotland, which as has been mentioned is a subsidiary of HBOS; the Clydesdale; and the Royal Bank of Scotland. In Northern Ireland, they are the Bank of Ireland, First Trust Bank, the Northern bank and the Ulster bank.

The hon. Member for Wellingborough asked whether the legislation was brought about because of the financial crisis that we are living through. It was not. As the hon. Member for Dundee, East hinted, this is the end of a process that began in 2005 with consultations that have been ongoing since then between the Bank of England, the Treasury, the authorities and the banks that issue to try to bring more reassurance in the backing assets issue.

The hon. Member for Wellingborough asked whether current banknotes were in danger, or were not worth as much as they are meant to represent. Clearly that is not the case, but some aspects of how the notes are backed are old-fashioned—they date to 1845—and do not fit in with current approaches, so they need tightening up. That is what part 6 will do. There is nothing wrong with the current legislation that cannot be put right by modernising and refocusing bits of it, and part 6 seeks to do so. I hope that, with those reassurances, the Committee will be able to agree that clause 193 should stand part of the Bill.

Clause 195

David Gauke (Conservative, South West Hertfordshire)

I have a brief query for the Minister. The clause relates to the definition of “issue”. The explanatory notes state:

“The definition ensures that a banknote is regarded as issued once it enters circulation, even if it enters circulation in error or as a result of theft.”

I assume that the reason is that a note issued in that way still needs to be treated as issued to protect the position of noteholders. There could be a mismatch for the protection of noteholders. Was equivalent protection provided under the old regime?

Angela Eagle (Labour, Wallasey)

The hon. Gentleman has alighted on one of the points that we were keen to modernise in the legislation around commercial issuance of the banknotes, to ensure that there was no ambiguity about which existing notes could be regarded as issued for the purpose of backing assets. He has discovered immediately one of the areas of ambiguity that we seek to put right, and he is right to point out to the Committee why it is important to do so. If a note has been issued accidentally or because of theft, it is still a promise to the individuals using it, and it needs to be backed by the appropriate assets.

The hon. Gentleman is quite right. He has alighted on an ambiguity, and he has pointed out why it needs to be made unambiguous. That is what the clause will do.

Clause 196

David Gauke (Conservative, South West Hertfordshire)

I thank the Minister for listing the various banks that supply us. It is one of those circumstances in which Wikipedia proved correct before the Committee. I thank her for providing clarification on what happens in mergers, which is topical and important. I have another question to ask, partly to provoke the hon. Member for Dundee, East. Were a bank falling within the definition of an authorised bank to relocate from Scotland or Northern Ireland to elsewhere in the United Kingdom, would it still be able to benefit from the provisions, or would it be disqualified from issuing banknotes?

Angela Eagle (Labour, Wallasey)

The hon. Gentleman is right. Clause 196 defines “authorised bank” as it is used throughout part 6. Since the current legislation was enacted, as I hinted earlier, there have been restrictions in place governing note issuance by these banks. As I said earlier, the Bill modernises and strengthens the framework for note issuance, with a view to enhancing noteholder protection.

The hon. Gentleman asked specifically whether a bank relocating elsewhere in the United Kingdom would still be able to issue notes. If it moved elsewhere and relocated in the UK, it would still be able to benefit. It would not lose its authorisation on the grounds of relocation elsewhere in the UK. I hope that that answers the hon. Gentleman’s question about the definition of “authorised bank”.

Clause 199

David Gauke (Conservative, South West Hertfordshire)

Essentially, the position created by these provisions is that those banks that can currently issue banknotes may continue to do so, but new ones cannot. Why not?

Peter Viggers (Conservative, Gosport)

What is the Government’s assessment of the value to each of the issuing banks of their having the authority to issue banknotes? Assessments have been made and have been disputed by the Government, but what is their assessment of the global value of all those banks that have the right to issue banknotes, broken down into the separate constituent parts of the individual bank?

Angela Eagle (Labour, Wallasey)

The hon. Member for South-West Hertfordshire asked, “Why no new issuers?” As I said in my prefacing remarks about part 6, banknote issuance is usually a function reserved for central banks. The UK is almost, but not quite, unique—if we count Hong Kong—in allowing a number of commercial banks to issue their own banknotes. Under the existing legislation, only the banks that had issuing rights at the time of the enactment of the legislation in 1845 that sought the necessary certifications to continue issuing in accordance with those enactments may issue banknotes—and only in Scotland and Northern Ireland. As I said earlier, only seven of the original 21 entities remain after 160 years of commercial operation. That is the attrition rate.

The Government support the continuation of this tradition of commercial issuance, simply because it is a—

David Gauke (Conservative, South West Hertfordshire)

Tradition.

Angela Eagle (Labour, Wallasey)

A tradition that does no particular harm and is particularly welcome in Scotland. A different debate goes on in Northern Ireland about the practice. The Government do not wish to see that tradition draw to a close by enacting legislation that would ban it; it is appreciated particularly in Scotland. We are not seeking to discourage note-issuing commercial banks from continuing to issue their own banknotes, but it is a privilege and is not a right that should be open to all. It is not a commodity that should be bought and sold. It is an historical quirk that we can support, but for obvious reasons, we would not seek to revive or expand it. The hon. Member for Dundee, East is getting to his feet.

Stewart Hosie (Scottish National Party, Dundee East)

It is certainly historical, but I think that it is more than a quirk. Perhaps I can help the hon. Member for Gosport with his question. Although the value may be modest in cash terms, the promotional value is enormous, not only for Scotland, but particularly for the banking sector in Scotland. It is probably an incalculable amount of money. This is rather more than an historical quirk.

Angela Eagle (Labour, Wallasey)

Well, it is an historical quirk in that it has survived through the ages and not been centralised as has happened in every other country except Hong Kong. There are costs for banks that issue their own notes—not least the costs of printing, safeguarding, designing and ensuring that backing assets are kept to back up the cost of note issuance. I assure the Committee that the Government do not seek to extend the right to issue to any new institutions. The original issuing legislation was careful to close down that eventuality—it applied only to the commercial banks that existed at the time and since then, their number has gradually declined.

Peter Bone (Conservative, Wellingborough)

In her earlier remarks, the Minister said that the decline was partly due to mergers and that is why those involved dropped out. There is a massive merger at the moment regarding one of those banks. We must follow the consequences of what the Minister was saying, namely that we do not want to expand the right to issue notes to different banks. However, lawyers will get involved with the bank that does issue them. If we follow the logic of the argument, would that not be a reason for stopping it at that stage?

Angela Eagle (Labour, Wallasey)

It depends on how the merger is done. As I said earlier, issuing rights are vested in the underlying corporate entity. If that corporate entity were to disappear in a merger with another institution, its issuing rights would go. In the case of Lloyds TSB-HBOS, the Bank of Scotland—a subsidiary of HBOS—is the issuing bank. A change of ownership at Bank of Scotland, as long as it remains an entity, will not affect its issuing rights. If Lloyds TSB was going to take over and extinguish the Bank of Scotland, I am sure that the hon. Member for Dundee, East would have a few words to say. If the Bank of Scotland ceased to exist, that would extinguish its issuing rights. However, the fact that it remains a subsidiary means that that is not an issue in this case.

The hon. Member for Gosport asked what the value of the authorisation to issue was. This is a commercial matter. During three rounds of consultation about the changes that are now in part 6, no bank responded that the right to issue caused distortion or unfair competitive advantage. That issue was not raised. I do not have the figures that the hon. Gentleman requested to hand—as I said, this is a commercial matter. However, I think that £3.5 billion of Scottish banknotes and £1.6 billion of Northern Irish banknotes are in circulation. To the value of £40 billion of Bank of England notes are in circulation. That will at least give the hon. Gentleman a view about the larger part of the circulating currency that we are talking about.

I hope that with those answers, the Committee will support clause 199.

Clause 201

David Gauke (Conservative, South West Hertfordshire)

May I make a point that could be made in relation to either clause 201 or clause 202? Clause 201 states that the banknote regulations must be made through the affirmative procedure, which we welcome, but clause 202 states that the Bank of England may make banknote rules. In those circumstances, there will be no direct parliamentary scrutiny, and I query whether the affirmative resolution procedure will prove to be as useful as it at first appears. The Minister has provided us with an early draft of the banknote regulations, but am I right to think that Parliament might not have an opportunity to scrutinise those rules?

Stewart Hosie (Scottish National Party, Dundee East)

I am confident that the regulations and the rules will cover matters such as standard size, security features and the weight of notes. I know that the banks have been lobbying hard regarding concerns that they had in the early stages of consultation. Will the Minister confirm—we will cheer if she does—that the Government do not intend to have a single note of each denomination? Will they continue to allow limited edition notes, which are valuable for many reasons, to be issued, as long as they meet all the rules and regulations that will cover all notes?

Angela Eagle (Labour, Wallasey)

The framework governing the issue of Scottish and Northern Irish banknotes is set out in the primary legislation. The detail of the provisions in part 6 are, as the hon. Member for South-West Hertfordshire said, to be captured in regulations that will be subject to the affirmative resolution procedure. A draft set of the regulations has been provided to the Committee to assist our debates. Further, there is provision for making banknote regulations that contain details about the treatment, holding and issuing of banknotes by authorised banks. As hon. Members will see when we debate clause 203, the regulations will require authorised banks to have backing assets. They will also contain detailed provisions on important issues such as how backing assets may be held, how they may be treated in an insolvency, and how reports about them should be made by authorised banks.

I welcome hon. Members’ comments on the draft regulations, but I ask them to bear in mind that they are in draft form. I sent them to the Committee merely to illuminate debate on the relevant clauses. They are not totally baked and out of the oven, but are to some extent a work in progress; some of them need further work before they can be consulted on.

The draft regulations contain detailed provisions relating to, among other things, the conditions attached to approved or designated locations or agents, the proportion of backing assets to be held in a particular form or location and the scope of the banknote rules. Those rules are intended—this brings us to a question that the hon. Member for South-West Hertfordshire asked—to be even more detailed in relation to how the regulations work. In essence, the banknote rules are even more detailed and rely and hang on the statutory instruments—the secondary legislation—that we will pass, which is why I do not agree with the hon. Gentleman’s worry that somehow the banknote rules will avoid parliamentary scrutiny. The regulations will be passed by this House in affirmative form and voted on. The banknote rules will then iterate even more detail about how the Bank of England will fulfil its obligations in that respect.

The regime needs flexibility to adapt to changes and developments in banknote issuance that might occur in future. The authorities might also have to act quickly by making regulations or rules to ensure that the integrity of the currency is maintained at all times. The idea of the balance between secondary legislation and the banknote rules will again focus first and foremost on protecting noteholders in order to ensure that confidence is not lost in any of the currency. Banknote rules mainly make provision as specified in the banknote regulations; they cannot do things that are not connected to the regulations that will be debated and voted on in this House.

In answer to the perfectly reasonable question about limited edition notes asked by the hon. Member for Dundee, East, I can confirm that it will still be possible to issue limited edition notes. With those reassurances, I hope that hon. Members will agree that clause 201 stand part of the Bill.

Clause 203

Angela Eagle (Labour, Wallasey)

I beg to move amendment No. 21, in clause 203, page 98, line 7, leave out ‘processes’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss Government amendments Nos. 22 to 27.

Angela Eagle (Labour, Wallasey)

The amendments are a technical clarification of references to insolvency in clauses 203 and 206 of part 6. The need for the amendments was not appreciated until a comparatively late stage, and I regret the inconvenience to the Committee in having to table Government amendments. As I have said, the provisions of part 6 are primarily concerned with ensuring that noteholders of commercial issuing banks are protected in the event that the issuing bank gets into difficulties. Clause 203(5) specifies:

“Banknote regulations may make provision about the treatment of backing assets in relation to insolvency processes”.

Clause 206(1) states:

“Banknote regulations may make provision in connection with the application to an authorised bank of ...the special resolution regime (under Parts 1 to 3), or...an insolvency process”.

The insolvency process is defined in clause 203. It is the policy intention for the Bill to enable banknote regulations to make a provision in relation to the law of insolvency and the law of an insolvency process—for example, in relation to the treatment of backing assets. As hon. Members will be aware, that is necessary because not all insolvency processes start on insolvency.

The state of affairs where a bank can no longer afford to pay its debts is defined in section 123 of the Insolvency Act 1986. As currently drafted, the provisions only allow banknote regulations to make provisions in relation to insolvency processes, so the amendments are necessary to ensure that banknote regulations can make provision for insolvency or an insolvency process. Amendments Nos. 23 and 24 mean that insolvency can be taken to include a reference to insolvency process, which may include liquidation, administration, receivership and so on. The provisions are of integral importance to part 6 to ensure that provision can be made to ring-fence backing assets in order to back those notes in the event of insolvency or an insolvency process.

Stewart Hosie (Scottish National Party, Dundee East)

The way in which the Bill treats Scottish and, indeed, Northern Irish banknotes constitutes a pragmatic approach. This may be the only time during this Parliament that I say these words, but I think that the Government have listened to the sector. I am pretty confident that by ensuring that banknotes can be backed by both interest-bearing and non-interest-bearing assets, we now have a platform that will secure the long-term future of the issuing of Scottish banknotes, while having the flexibility to ensure the integrity of the issue of all banknotes in the UK. In particular, the comments that the Minister made a short time ago about possibly having to act quickly in certain circumstances were absolutely right.

In a previous contribution, the Minister identified the fact that significant costs are associated with the printing, distribution and holding in security of Scottish notes. Those will need to be offset by the ability to earn interest on a reasonable proportion of the assets that are backing the notes in circulation. However, as drafted, the Bill remains silent on the precise mix of assets that the issuing banks will be allowed to hold. Striking the right balance between interest-bearing assets and non-interest-bearing assets will be critical to ensuring the future of banknote issuance in Scotland, and its profitability or its being economic at all. If future regulations are too restrictive on the level of interest-bearing assets that can be held against the notes, it could fatally undermine the ability of the issuing banks to continue to produce and issue the notes. Will the Minister therefore provide the Committee with an assurance that any future regulations on that matter will be drafted so as to ensure that the activity of issuing Scottish notes remains economic?

I know that there is general discussion of a 60/40 asset split. That will be finalised at some point and I hope the Minister can confirm that today. Will she also provide assurances that any such split will remain broadly as it is—at 60/40—and that there is no intention, certainly by her or by the Government, to use the regulations to change the balance between interest-bearing and non-interest-bearing assets backing the notes?

David Gauke (Conservative, South West Hertfordshire)

Backing assets may be the key subject that we shall consider during the Bill’s proceedings. The current arrangement, as I understand it, is that a small level—described as the fiduciary level—of notes issued by Scottish and Northern Irish banks is not covered by backing assets. When I say “a small level”, it appears to be very small; 0.125 per cent. of notes issued, according to the 2005 figures. That fiduciary level allows the banks to make a return on issuing notes in a process called seigniorage—I hope I pronounced it correctly.

In 2005, the Government proposed removing the fiduciary level and requiring 100 per cent. backing. They said at the time that it was to ensure that there was protection for all noteholders and to provide a level playing field. That produced quite a response and, as the hon. Member for Dundee, East said, the Government have listened. In the July 2008 consultation document, the Treasury stated that some respondents felt that insufficient account had been taken of the costs associated with issuing banknotes and the social benefit supported by the income derived. [Interruption.] Yes, I should be grateful if the Minister could explain the meaning of social benefit supported by the income derived. Are we talking about particular charities that are supported by seigniorage? The proposal in the consultation document is implemented in the draft indicative regulations that the hon. Lady has circulated and which suggest the 60/40 split, whereby 60 per cent. of the value of banknotes is backed by Bank of England banknotes and the remainder is in a segregated interest-bearing account.

I understand how the proposal deals with the provision of support to noteholders and ensures protection for them. Subject to the speed at which some noteholders can obtain payment from the segregated account—an issue to which we shall return in a moment—and a level playing field, does that give those note-issuing banks an advantage? Will there be a source of income that is not available to their competitors? I assume that the Government’s intention is to provide sufficient incentive to make it worth while for the banks continuing to issue the notes, and that they do not want to stop that. Equally, however, they do not want to provide an additional source of income that would not otherwise be available. Is that the intention driving the Government?

Furthermore, although the Minister may correct me, I should have thought that the balance between interest-bearing assets and non-interest bearing assets would depend on what interest rates were at a particular time, and that there might be certain periods when 60/40 was adequate, but at other times the income for the banks would be insufficient or excessive, so we run into issues relating to a level playing field. Will the hon. Lady say whether such a concern is legitimate or, if it is not, can she explain why?

Angela Eagle (Labour, Wallasey)

The provisions are intended to ensure that holders of Scottish and Northern Irish banknotes issued by authorised banks will be afforded a level of protection similar to that for holders of Bank of England banknotes. That is the first and foremost aim of part 6 of the Bill. The clause states:

“Banknote regulations must require authorised banks to have backing assets”

to make a reality of that protection. Backing assets are assets of the sort specified in banknote regulations. Regulation 3 of the draft indicative banknote regulations that I have circulated to the Committee sets out three types of backing asset: Bank of England banknotes, current coin of the UK and funds placed on deposit in sterling from the account held by the Bank of England.

The regulations then set out precisely what form the backing assets should take in relation to banknotes in circulation and notes that have not been issued, but are held otherwise than in designated locations, for example, in bank tills, in ATMs or in transit. It is not surprising that they were not mentioned in the 1845 legislation, but we thought it was time that we acknowledged their existence. Those notes are considered to have the potential to enter circulation, including in error or by theft, so it is necessary for them to be fully backed to protect holders of Scottish and Northern Ireland banknotes.

Of key importance is subsection (5), which provides that banknote regulations make provision for the treatment of backing assets in relation to insolvency processes. That is the ring fence we were talking about earlier. It means that should one of the issuing banks have such difficulties, there will be no ambiguity whatever about the fact that the backing assets are there to back the notes. That again features in part 6 of the Bill.

Part 3 of the draft indicative regulations, in particular regulations 11 and 12, makes it clear that, in the event of a banknote issuer becoming insolvent, noteholders can obtain full value for their notes from the backing assets. The ring fence will last for a protective period defined in regulation 13(2) as one year from the date on which the insolvency procedure commences. It can be extended by the Treasury in consultation with the Bank of England.

David Gauke (Conservative, South West Hertfordshire)

Perhaps the Minister can allay my fears. Is it possible that there will be one class of noteholders who will be able to get to the relevant bank and exchange for a Bank of England note quickly, which will cover the first 60 per cent., whereas the rest will be left waiting for up to a year for the segregated account to sort itself out?

Angela Eagle (Labour, Wallasey)

I do not think that that will be the case. The banking assets are held at the Bank of England. In the event of an insolvency, the ring fence will keep those assets there so that they cannot be used in the other insolvency procedures. That is in order that any holder of an issued note from the appropriate bank can go to the Bank of England and exchange it for a Bank of England note of the same value. The year-long ring fence allows time for those notes to be properly exchanged.

Under the regulations, any backing assets that remain when the year is up can go back into the insolvency process. The ring fence is important because it guarantees the rights of those who would be left holding the issued notes. The aim of the regulations is to ensure that those who possess Scottish or Northern Irish banknotes have levels of protection that are as good as those for holders of Bank of England notes.

The regulations address deficiencies in the existing legislation, which does not explicitly set out the purpose of note-covering assets. There is currently no certainty that assets will be used in full or in part for the benefit of noteholders, should the issuing bank become insolvent. That worry must clearly be addressed and that is done in part 6.

Clause 203 and the draft regulations make specific provisions regarding the backing assets that each authorised bank must hold to give holders of Scottish and Northern Irish banknotes a similar level of protection to holders of Bank of England banknotes and to ensure that in the event of an issuing bank getting into difficulties, holders of its notes can expect to receive the value of their notes.

Hon. Members asked about the working of the regulations. The hon. Member for Dundee, East is right to point out that there was discussion in the consultation documents about the form in which the backing assets should be held at the Bank of England. He talks about a 60/40 split, which appears in regulation 5. The idea behind that is that there should be a revenue-neutral outcome in the seigneurage earned by the issuing banks and the Exchequer. The proposal was designed to maintain the status quo in the economics of commercial note issuance, while ensuring noteholder protection. That is the balance that the hon. Member for South-West Hertfordshire spoke about.

The Government have consistently stated that they are not seeking to discourage note-issuing commercial banks from continuing to issue their own banknotes. There are costs and benefits in issuing banknotes. The solutions, as set out in regulations on how the backing assets are held, are meant not to disturb those. Clearly, the hon. Member for Dundee, East is right that there is a certain kudos to having banknotes issued, and there may be advantages from that point of view, but there are also costs in terms of printing, protecting and having assets held to back them, and all the other associated issues.

The hon. Member for South-West Hertfordshire was talking about whether the interest rate was the issue, with respect to the 60/40 split, but it is more about the costs of printing notes and having security for them. All of those things have to be taken into account, but 60/40 seems to be widely accepted among the issuing banks as a fair, cost-neutral approach. As the figures are to be set out in secondary legislation they could be revisited if there were to be a sudden shift in costs that we cannot anticipate today.

Mark Todd (Labour, South Derbyshire)

It just occurs to me that, as the hon. Member for South-West Hertfordshire said, there presumably must lie some competitive advantage in being granted the right to issue notes, which we are sanctioning a continuance of; otherwise, unless these brave corporations are all charities, they would have discontinued that activity. I wonder whether anyone has assessed that advantage and quantified it.

Angela Eagle (Labour, Wallasey)

Interestingly, in responses to the consultation—here I will answer the question that the hon. Member for South-West Hertfordshire asked about the elaboration of social benefits—the issuing banks made the point that because these commercial banks produce banknotes, the Bank of England can produce fewer, thereby saving money. That is the social—

Stewart Hosie (Scottish National Party, Dundee East)

Will the Minister give way?

Angela Eagle (Labour, Wallasey)

Let me finish dealing with this point. They also then have to retain the security arrangements to ensure that their notes are safe. There is an opportunity cost to the Bank of England, and it has to do less of that work because the commercial banks are doing a bit of it.

I have not seen any work suggesting what the commercial advantages to producing banknotes are; I merely make the observation—

Mark Todd (Labour, South Derbyshire)

They must exist.

Angela Eagle (Labour, Wallasey)

I am assuming that those issuing banks that have continued to issue notes since 1845 think that it is a good thing to do. We do not have a problem with it, as long as we can ensure that the notes are properly backed, so that they are not a weak link in terms of confidence in our currency in this country. Also, if one has to have backing assets, that means that that money cannot be used to invest in other areas or to get interest. Having to hold large sums in backing assets that are Bank of England notes does not exactly earn a great deal of interest, so there is an opportunity cost in other investments that could be made. The hon. Member for Dundee, East no doubt has some other examples.

Stewart Hosie (Scottish National Party, Dundee East)

In terms of the social benefits, I am sure that the Minister knows and everybody in the Committee knows—they have simply forgotten—that it is not just the banks that use Scottish notes, but all the financial institutions as well. The modest commercial advantage that they may have had helped to increase the number of free-to-use automatic teller machines, which were filled with notes from the Scottish banks. That kind of social benefit is included, and that came from the modest advantage that the Scottish banks got.

Angela Eagle (Labour, Wallasey)

I was just going to come on to that argument, which featured in the consultation.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister for giving way, and to the hon. Member for Dundee, East for stressing the modest benefits. If memory serves me, a few minutes ago he was talking about the incalculable benefits, but there we go.

The rest of the debate is in Hansard.