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General Committees

Debated on Tuesday 21 November 2017

Delegated Legislation Committee

Draft Drug Dealing Telecommunications Restriction Orders Regulations 2017

The Committee consisted of the following Members:

Chair: Phil Wilson

† Atkins, Victoria (Parliamentary Under-Secretary of State for the Home Department)

† Brown, Lyn (West Ham) (Lab)

† Dakin, Nic (Scunthorpe) (Lab)

† Graham, Luke (Ochil and South Perthshire) (Con)

† Haigh, Louise (Sheffield, Heeley) (Lab)

† Hoare, Simon (North Dorset) (Con)

† Lamont, John (Berwickshire, Roxburgh and Selkirk) (Con)

Lucas, Ian C. (Wrexham) (Lab)

McFadden, Mr Pat (Wolverhampton South East) (Lab)

† Mann, John (Bassetlaw) (Lab)

Martin, Sandy (Ipswich) (Lab)

† Newlands, Gavin (Paisley and Renfrewshire North) (SNP)

† Penning, Sir Mike (Hemel Hempstead) (Con)

† Percy, Andrew (Brigg and Goole) (Con)

† Rowley, Lee (North East Derbyshire) (Con)

† Stephenson, Andrew (Pendle) (Con)

† Villiers, Theresa (Chipping Barnet) (Con)

Jonathan Whiffing, Laura Jane Tiley, Committee Clerks

† attended the Committee

Seventh Delegated Legislation Committee

Tuesday 21 November 2017

[Phil Wilson in the Chair]

Draft Drug Dealing Telecommunications Restriction Orders Regulations 2017

I beg to move,

That the Committee has considered the draft Drug Dealing Telecommunications Restriction Orders Regulations 2017.

It is a pleasure to serve under your chairmanship, Mr Wilson. The regulations respond to an operational requirement of the police and National Crime Agency to support them in tackling the issue of county lines drug dealing and its related violence and criminal exploitation.

County lines is the police term for urban gangs supplying drugs to suburban areas and market and coastal towns, using dedicated anonymous mobile phone lines. We are particularly concerned about this form of drug dealing because of the high harm nature of the activity. These gangs target and exploit children and vulnerable adults who are then at high risk of extreme physical and sexual violence, gang recriminations and trafficking.

County lines operates in and around my constituency, so I am pleased to see the regulations and for this to be the Minister’s first statutory instrument. I congratulate her on getting the job.

One horrific thing about the way in which county lines works is that the dealers give children drugs to carry and then steal from them so that they owe the gang the money that the drugs were worth, thereby holding the children, in effect, in slavery and not giving them options. I am delighted to see these regulations. I just hope that the Minister has talked to the Chancellor to ensure we have the resources we need to tackle this heinous activity.

I am extremely grateful to the hon. Lady, and I know about the work she has done in her constituency. Sadly, this crime threat is emerging across the whole of the United Kingdom, which is why the regulations will have effect not just in England and Wales, but in Scotland and Northern Ireland.

We know that county lines gangs exploit children as young as 12 years old. One particularly chilling way in which they operate is that they take over the home of a vulnerable adult—perhaps someone with mental health issues—and literally confine them to one room and use the rest of the house as their drug den. Anything we can do to support the police and the NCA in tackling these heinous crimes will, I suspect, have the support of the Committee.

I commend the campaign led by my hon. Friend the Member for North West Hampshire (Kit Malthouse). He is not here, but he has taken an interest in this issue for a long time and was instrumental in ensuring that the regulations came about.

For those who are not familiar with the way in which these phone lines work, I add that they are highly profitable. They can make as much as £5,000 a day for the gangs. The phone is the method of business; it is how drug dealers communicate with their addicts. The phone is kept well away from street-level drug dealing, in, as it were, the headquarters of the drug gang. They then run operations across the country. That is why stopping these phone lines is so vital.

It goes without saying that, where possible, the police will pursue criminal prosecutions, but sadly that is not always the case. We do not always have the evidence to conduct such prosecutions. These regulations are targeted at those cases where we do not have enough evidence for prosecution but we want to disrupt the criminal activity.

I hope that hon. Members will approve the regulations. They will give the police a vital tool in their efforts to tackle county lines drug dealing and protect children and vulnerable people from being exploited by county line gangs. I commend the regulations to the Committee.

I welcome you to the Chair, Mr Wilson. It is a pleasure to serve under your chairmanship. I also welcome the new Minister to her place. If the reaction she had yesterday was anything to go by, she is a very popular choice to succeed the hon. Member for Truro and Falmouth (Sarah Newton).

I make clear the Opposition’s support for the regulations and reassure Committee members that I will not detain them for long. I am pleased by the urgency outlined in the explanatory memorandum and encouraged to read that the regulations will come into force almost immediately.

I have met dozens of chief constables and police and crime commissioners since taking up my position in July. As well as mentioning resources, they all raised with me the issue of keeping pace with the increasing sophistication of serious organised crime. The evolution of the powers available to the police is a substantial part of that. As the Minister and my hon. Friend the Member for West Ham have outlined, county lines is one of the most serious, exploitative crimes facing our police service. We know that organised crime gangs exploit vulnerable children and engage them in trafficking, forcing them away from home to sell drugs. The practice is growing in both the capacity of existing gangs and the number of gangs themselves, and it is therefore absolutely right that we give the police all the powers they need to disrupt this abhorrent crime.

I will raise a couple of operational points with the Minister. I appreciate the reasons that a consultation and a more thorough public analysis were not possible in this instance; she may wish to write to me about that, which I would welcome. The success of the entire system will be incumbent on the speed at which the restriction orders can be implemented. That will be critical in two ways. First, the use of the relay system to make illicit transactions means that it will be crucial for the police to simultaneously disrupt the entire network, or else the organised gangs may easily subvert the disconnected phone. Secondly, the low cost and ease with which criminals can buy a new phone and re-establish the network may require a fairly constant war of attrition between the police and organised gangs. For those reasons, it is critical that an order can be obtained with speed.

Given that the orders will be heard by county courts, which were recently subject to a punishing round of closures, can we have confidence that they will be issued and implemented with that necessary speed? The explanatory memorandum refers to resources being made available to Her Majesty’s Courts and Tribunals Service and to the police. Can the Minister be a bit more specific? Given that the Government’s own impact assessment states that it is impossible to know how many orders will be made, what measures do the Government have in place to ensure that the courts are not put under considerable pressure, particularly during the first year after the order is passed?

The impact assessment also makes reference to the courts benefiting from increased court fees. However, as county courts are under considerable pressure and currently subject to long delays, what assessment has been made of the impacts on courts beyond monetary gain? As I said, I am happy for the Minister to write to me with her responses, and I reiterate the Opposition’s support for the regulations.

It is a pleasure to serve under your chairmanship, Mr Wilson, and to see the Minister in her place. I will not detain the Committee for anywhere near as long as the hon. Member for Sheffield, Heeley because, at the end of the day, Scottish National party Members fundamentally agree with these Government proposals, for a change—it is always good to be collegiate.

It is estimated that drug misuse in Scotland costs about £3.5 billion a year, which amounts to nearly £1,000 for every adult in Scotland. As we know, the regulations for all proscribed drugs is still a reserved issue, and the policy is set by the UK Government, but the Scottish Government and police forces continue to work with the Home Office to implement a series of actions against drug misuse. However, this would not be an SNP response were I not to request—this is almost a contractual obligation—the immediate devolution of drug policy to Scotland, so that the Scottish Parliament can consider the options for harm reduction, including drug declassification, decriminalisation and regulation. I highly recommend that the new Minister does that at her earliest convenience.

I thank you, Mr Wilson, and the hon. Members for Sheffield, Heeley and for Paisley and Renfrewshire North. If I may, I will meet the hon. Lady’s request for me to write to her in detail. However, I reassure her that the regulations have been drawn up in consultation with all of the key bodies and organisations that will have control of them, particularly the judiciary. Six pilot courts have been selected to ensure that the applications are made as effectively as possible, and that the judiciary has the experience and resources.

Could the Minister also address that note to me, and will she tell us which six courts will be used?

Yes and yes. On the point raised by the hon. Member for Sheffield, Heeley about the cost and ease of getting a new phone, we all know that criminals try to run their businesses as effectively as business owners, but the key here is to disrupt their activities and make life as hard as possible for them. We have also future proofed the legislation as much as we can, so that if new methods of communication are involved, we very much hope they will be caught by the regulations.

Turning to the hon. Gentleman from Scotland, the hon. Member for Paisley and Renfrewshire North, I am beguiled by his attempt to get me to change drug policy, but I will have to say no at this stage. I thank him anyway.

Question put and agreed to.

Committee rose.

Draft Small Business Commissioner (Scope and Scheme) regulations 2017

The Committee consisted of the following Members:

Chair: Mr Virendra Sharma

† Docherty-Hughes, Martin (West Dunbartonshire) (SNP)

† Esterson, Bill (Sefton Central) (Lab)

† Fletcher, Colleen (Coventry North East) (Lab)

† Freeman, George (Mid Norfolk) (Con)

† Fysh, Mr Marcus (Yeovil) (Con)

† Green, Kate (Stretford and Urmston) (Lab)

† Harris, Rebecca (Castle Point) (Con)

† James, Margot (Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy)

† Maclean, Rachel (Redditch) (Con)

† Murray, Ian (Edinburgh South) (Lab)

† Nandy, Lisa (Wigan) (Lab)

† Perkins, Toby (Chesterfield) (Lab)

† Prisk, Mr Mark (Hertford and Stortford) (Con)

† Rashid, Faisal (Warrington South) (Lab)

† Sunak, Rishi (Richmond (Yorks)) (Con)

† Vickers, Martin (Cleethorpes) (Con)

† Wragg, Mr William (Hazel Grove) (Con)

Joanna Welham, Mike Everett, Committee Clerks

† attended the Committee

Sixth Delegated Legislation Committee

Tuesday 21 November 2017

[Mr Virendra Sharma in the Chair]

Small Business Commissioner (Scope and Scheme) Regulations 2017

I beg to move,

That the Committee has considered the Small Business Commissioner (Scope and Scheme) Regulations 2017.

It is a pleasure to serve under your chairmanship, Mr Sharma. The regulations set out further detail on which small businesses qualify for the Small Business Commissioner’s services, including the complaints scheme. Late payment remains a significant issue; according to Bacs Direct Credit figures, the overall debt owed to small and medium-sized businesses in July 2017 as a result of late payments was £14.2 billion. We all rely on the UK’s 5.5 million small and medium-sized businesses for jobs, goods and services. An unfair payment culture that hurts them has no place in a well-functioning economy, so the Government are taking several steps to tackle late payments. As well as the regulations before the Committee, these steps include the prompt payment code—an industry-led code of conduct that sets out best payment practice—and the payment practices reporting requirement, a statutory transparency measure for large companies.

The Enterprise Act 2016 established the Small Business Commissioner, whose role will be to support small businesses to resolve payment disputes and avoid future issues by encouraging a culture change in the way businesses deal with one another. The commissioner will provide general information and advice; direct small businesses to existing services; consider complaints from small business suppliers about payment issues with their larger business clients; and make relevant recommendations. The Act provides that he can consider only complaints that concern matters that occurred after his appointed start date. We set that date at 6 April 2017 to enable him to accept complaints relating to matters that occurred between 6 April and the formal launch of the complaints service, which will broaden access to the complaints service and help him to build momentum as soon as his office is formally opened. The complaints service will launch as soon as possible after Parliament’s approval of the regulations.

One challenge relating to late payments that I often see—as do other hon. Members, I suspect—is large companies disputing a payment so that it is put to one side. The dispute is often over a minor matter, but it allows those companies to get away with avoiding payment within 30 or 60 days. Will such abuse on the margins be part of the commissioner’s remit?

I thank my hon. Friend for that observation; he has considerable experience in these matters, and I would not be a bit surprised if what he says were the case. I will ask the commissioner to consider that practice and other known dodges—for want of a better word—in the course of his work.

The 2016 Act sets out the broad framework for the Small Business Commissioner. The regulations define “small business” for the purpose of qualification for the commissioner’s services, including the complaints scheme; they also provide further detail about the scheme.

Further to the point made by the hon. Member for Hertford and Stortford, a major issue faced by small businesses is that if they challenge late payments, their customers may simply cease trading with them. Small businesses therefore have to decide between waiting 90 or 120 days to be paid or getting no business at all. Changing the culture so that businesses can make complaints without customers knowing who they are will be crucial to solving this problem, which we have wrestled with for many years.

I agree that confidentiality is often a requirement and that the lack thereof is a disincentive for small businesses to challenge the late payment practices that have been a part of business culture. There is provision for the commissioner to respect the confidentiality of complainants and, indeed, it is his duty to do so unless the complainant gives permission for his or her name, or the company name, to be disclosed. We can discuss that further later in the debate because it is important. I am well aware that in a system that provides for confidentiality, there are occasions when it is impossible to conceal the true identity of the complainant company in reality. The hon. Gentleman raises a difficult issue.

The regulations set out: that a business must have a headcount of fewer than 50 staff on one of the assessment dates or during one of the assessment periods to qualify to use the commissioner’s services; the requirements that must be met before presenting a complaint; the requirements for the form and content of the complaint; the time limit for presenting a complaint; the power for the commissioner to fix and extend time limits and to dismiss complaints; the matters that the commissioner must take into consideration when determining whether an act or omission complained about was fair and reasonable; and factors to be taken into account when deciding whether to identify a respondent in any report of any complaint. They apply to the whole of the United Kingdom.

We consulted between 13 October and 7 December 2016 on how the Small Business Commissioner would handle complaints. We published draft regulations in February and interested parties were invited to comment on them between 24 February and 9 March. The key message from respondents to that consultation was that the regulations should be simple so that the Small Business Commissioner’s services would be as efficient and effective as possible. The regulations will enable the Small Business Commissioner to accept complaints on payment matters from small business suppliers about their larger clients. That is an important part of the Small Business Commissioner’s role in supporting small businesses.

Although the debate is limited to the regulations, I take the opportunity to welcome Mr Paul Uppal to his post as the UK’s first Small Business Commissioner. He competed against many other well-qualified candidates to secure the role. I thank all those who applied for the role and who engaged with the consultations and policy development inside and outside the House.

It is a pleasure to serve under your chairmanship, Mr Sharma. I, too, welcome the appointment of the commissioner. I know Paul Uppal from his time in the House. He has a strong business background. Having been a member of the governing party may have helped him, of course, in securing the post—I could not possibly comment on whether there is any truth in that scurrilous accusation.

The Minister pointed out that there are £26.3 billion-worth of late payments in the private sector according to the latest figures from Bacs, but she did not mention that the time businesses wait is 72 days on average. Members on both sides of the Committee have mentioned the sadly all-too-common game playing by larger companies in dealing with their smaller suppliers. It is fair to say that a reduction in that kind of game playing is one of the many things that I would like to see Mr Uppal and his team address. If he is to repay the faith that has been shown in him, perhaps that is something he can take on board and investigate, to see what recommendations he can come back with on how to address some of those endemic problems.

The relationship damage done when a small supplier challenges a larger customer is a serious block in challenging late payments. It is one of the reasons why, in the Enterprise Bill Committee, we pushed the Government extremely hard on alternatives to the very mild voluntary system that has been set up, which the Small Business Commissioner has before him and his team. The Australian system of binding arbitration, with proper fines behind it, appears from the evidence we discussed in Committee to have been a significant success in bringing down the number of days that small companies waited to be paid. I again urge the Minister not to rule out moving to such a system over a period of time, and urge the commissioner to consider whether that is the sort of system we should consider in this country as well at some stage.

I have previously raised concerns that the system is restricted to the private sector, and I raise them again. The public sector is a source of significant late payment concerns for smaller businesses. The Minister mentioned the prompt payment code; signatories to the code tend to be in the public sector, with some larger private sector firms, but they do not cover the entire public sector and it is too early to say how effective they have been in reducing the time that small companies must wait to be paid.

There are examples of Governments in other parts of the world—the United States is one that springs to mind—using the procurement system to ensure prompt payment. The rules in the United States are that if a company trades with the federal Government, it has to pay its suppliers promptly. I wonder whether that is something the Minister would take on board. Again, that is something we said in the Bill Committee during the passage of the Enterprise Act 2016 that created the post. All too often in this country, companies that procure from Government are paid within 30 days, often as quickly as five days, and then delay their own payments. That is an opportunity within the commissioner’s terms of reference and something else for him to investigate, because those are private sector companies potentially using their position to improve their own cash flow at the expense of their smaller suppliers, and using Government money to do so. That is a particular area where the Government should be interested and could act. As I say, if it is part of the agreement in America, why not in this country?

I am grateful to the hon. Gentleman for raising an important point. My understanding is that most transactions in America are for payment on receipt of goods or services, so there are no 30-day or 60-day terms in most common business practice. Is that something he recognises? It would change the nature of his question.

The hon. Gentleman is more familiar with what goes on in America than I am in that case. Certainly, the evidence that we were presented with when we discussed the matter in the Bill Committee suggested that that was not true of every contractual relationship in America. Perhaps we could discuss that outside and look further at the evidence. Payment on delivery is one way of addressing the point we have just been discussing.

Some questions emerge from the regulations before us. My understanding is that the commissioner, as constituted, has the power to name and shame. I wonder whether the Minister can shed some light on what the intention is for the use of those powers, and how quickly she feels the commissioner should look to set up some kind of naming and shaming system.

How many complaints does the Minister envisage the commissioner will be investigating every year? How many complaints does she expect him to receive every year? How many complaints could his office deal with every year? That relates to how many staff he has and what his budget is, which the Minister could perhaps address.

From some of the representations I have received, it appears there is a question mark over whether the construction sector will be included in the Small Business Commissioner’s work. Given that a significant number of the problems of late payment lie in the construction sector, can the Minister clarify whether that is true? The concerns around retentions of 5% or even 10% over a number of years are a very important part of why construction should be included.

My hon. Friend mentions the construction industry. Does he agree that small businesses in the construction industry are more vulnerable to late payments because they do not qualify for some of the services available to alleviate them, such as invoice finance and invoice discounting?

Yes, there are opportunities, as there are in other sectors, to use other forms of invoice finance. One of the big concerns is retention, and I should have thought the commissioner would want to look at concerns about the very lengthy delays that often happen with retentions.

One of the questions we raised in the Bill Committee is how to raise awareness of the commissioner’s existence and the services his office can provide. One way is through a website, but not every small business uses a website; actually, quite a lot of them do not use the internet. What proposals does the Minister have to ensure that all small businesses know that this facility exists? One route is through advisers, including accountants, but that is not an answer for everybody. We will have to wait to see how effective the commissioner is after a period, but can the Minister tell us the process for review of the commissioner’s effectiveness and how that will be carried out?

The regulations talk about a limit of businesses with a headcount of fewer than 50. How many businesses does the Minister’s Department estimate will be covered by the regulations, and how many businesses will not be covered? While I recognise that 50 is a figure for a small business, a business with 51 members of staff is still not particularly big, and when it trades with a larger customer, there is still a power imbalance. Will she give some thought to support for the next grade of businesses above those covered by the regulations? One of the reasons these regulations come in is the cost of going to court. For a business with 51 or even 101 members of staff, it is still an exceedingly big expense to take somebody to court.

I want the Small Business Commissioner to be effective in tackling the scourge of late payments. The success of small businesses is crucial for the overall economy. We do not have enough small businesses that are able to grow and become larger businesses—it is one of the structural weaknesses of our economy—and the delay in payment is one of the reasons that businesses find it difficult to do so. In fact, talking to the accountancy and insolvency professions, the main reason for business failure is cash flow, and late payment in particular, so anything that can be done to improve that situation must help individual businesses, those who own them, those who work in them and the wider economy.

However, the commissioner has to be effective if those goals are to be achieved. The title of commissioner suggests a responsibility and a scope that goes beyond the single goal of tackling late payment in the private sector. At the moment, a small business late payments signposting service is being created. I hope that it becomes a commissioner in time and can achieve far more as a support for small business. I look forward to the Minister’s answers and assurances that, in a very short time, that support, advice and guidance, as well as the single role of tackling the scourge of late payments, is where the Small Business Commissioner can and will end up.

I thank the shadow Minister for his thoughtful comments and I am grateful for his encouraging words about the choice of Paul Uppal to take up the post. I will do my best to answers the questions he posed about some of the details.

He mentions that the average late payment is 72 days, which was also part of the figures that I gave from Bacs’ data. That is quite unacceptable; it is effectively two and a half months, and if it is the average, we have a lot of work to do. On a more positive note, and as testimony to some of the voluntary work that has already been established through the prompt payment code, there has been a substantial improvement in Bacs’ data. The latest figures show an average of what is owed to small businesses at any one time of around the £14.2 billion mark, as opposed to £26.3 billion the year before. I have chaired roundtables of small businesses around the country and found some enthusiasm for the prompt payment code, and some companies reporting that they have been able to deploy accounts staff in more productive functions than simply chasing up late payment all the time as a result of the improvement that they have seen. As I say, there is clearly still a long way to go, but I think the prompt payment code and other measures the Government have introduced have started a change in culture.

The hon. Gentleman mentioned the Australian model and a more punitive function, and asked me to comment on whether that might be an end point for what we are setting up here today. I do not see it is a logical extension. The business support landscape in Australia is very different from that of the United Kingdom and I think that we can achieve more by trying to bring about a cultural change, rather than introducing hard-hitting measures and fines and going down that route straight away. I would not rule out such an approach if that does not work, but I am quite optimistic that, given the progress we have already made—as well as the progress of interventions in other sectors, such as the Groceries Code Adjudicator—we can achieve more with an approach that tries to take business with us. However, as I say, I would not rule out in the long run something of the sort that the hon. Gentleman described if it became clear that it was needed.

The hon. Gentleman asked about the public sector. There is perhaps a difference between what is required and what is seen as standard, by way of the letter of the law, and what is actually carried out in practice. Under the letter of the law, all public sector contractors are mandated to pay within 30 days and ensure that the 30-day policy applies all the way through the supply chain. I am sceptical about whether that always happens in reality, but that is the goal. The public sector is therefore not incorporated in the regulations.

The Minister says that payment within 30 days is mandated all the way through the supply chain, but that she is sceptical about whether that is really happening. What are she and her colleagues doing to enforce it?

I became aware of the issue only a few months ago, and I have not decided yet whether we need to do more than we are doing already. We fund a mystery shopper service that checks how public sector contracts are complied with, particularly in respect of late payment, and I will look closely at its findings. It is encouraging that payment within 30 days throughout the supply chain is the standard, but I will need to satisfy myself that it is being complied with and adhered to. The mystery shopper service may inform that process.

If the Minister finds that there is still a widespread problem with payment not being passed down the supply chain, is she prepared to take enforcement action? The mystery shopper service may identify the problem, but I am not convinced that it will stop it.

I shall have to return to that question once I have investigated what the service has identified. I cannot prejudge what we will do based on what we find out, so I hope the hon. Gentleman with bear with me to that extent. In answer to his question about the number of complaints on which the system is predicated and the resources at its disposal, the establishment cost of the Small Business Commissioner’s office is £1.1 million and the anticipated running costs are £1.4 million a year, based on an estimate of 70,000 companies referring just under 400,000 disputes, of which 500 result in full-blown complaints.

The hon. Gentleman also asked about construction. Construction is certainly included in the commissioner’s remit, but I would like to go further, because I recognise that there are special problems with late payment in the sector. Two weeks ago, we announced a consultation on the culture of late payment and payment retention in the construction sector. I urge individuals and companies to respond to that consultation, because there is widespread anecdotal evidence of a big problem of unfair treatment of small businesses in the construction sector.

I think I have answered the hon. Gentleman’s questions, so I thank hon. Members for their time and commend the regulations to the Committee.

The hon. Gentleman did ask that, and I failed to answer. We will promote the service’s launch heavily through all media, including traditional media—as he mentioned, a lot of businesses are not online. We will also use the routine communications of other Government agencies with businesses to alert them to the importance of this new development.

Question put and agreed to.

Committee rose.

Draft Banking Act 2009 (Service Providers to Payment Systems) Order 2017

The Committee consisted of the following Members:

Chair: Mr Laurence Robertson

† Afolami, Bim (Hitchin and Harpenden) (Con)

† Afriyie, Adam (Windsor) (Con)

† Barclay, Stephen (Economic Secretary to the Treasury)

† Clifton-Brown, Geoffrey (The Cotswolds) (Con)

Huq, Dr Rupa (Ealing Central and Acton) (Lab)

† Jones, Darren (Bristol North West) (Lab)

† Knight, Julian (Solihull) (Con)

† Lee, Ms Karen (Lincoln) (Lab)

† Linden, David (Glasgow East) (SNP)

† Maclean, Rachel (Redditch) (Con)

† Philp, Chris (Croydon South) (Con)

† Reynolds, Jonathan (Stalybridge and Hyde) (Lab/Co-op)

Shuker, Mr Gavin (Luton South) (Lab/Co-op)

Slaughter, Andy (Hammersmith) (Lab)

† Smith, Jeff (Manchester, Withington) (Lab)

† Stuart, Graham (Beverley and Holderness) (Con)

† Thomson, Ross (Aberdeen South) (Con)

Gail Bartlett, Dominic Stockbridge, Committee Clerks

† attended the Committee

The following also attended, pursuant to Standing Order No. 118(2):

Hoare, Simon (North Dorset) (Con)

Fifth Delegated Legislation Committee

Tuesday 21 November 2017

[Mr Laurence Robertson in the Chair]

Draft Banking Act 2009 (Service Providers to Payment Systems) Order 2017

I beg to move,

That the Committee has considered the draft Banking Act 2009 (Service Providers to Payment Systems) Order 2017.

It is a pleasure to serve under your chairmanship, Mr Robertson. The UK payments infrastructure is the plumbing of our financial system. Every year our payment systems process about 21 billion transactions, worth more than £75 trillion, between businesses and consumers. They underpin almost all commercial activity in the UK and are vital to the day-to-day lives of every member of the public. It is, therefore, extremely important that they are secure, stable and reliable.

In the Banking Act 2009, the Government gave the Bank of England formal powers of oversight over certain inter-bank payment systems, with the aim of promoting the robustness and resilience of key UK payment systems. The Act also gave Her Majesty’s Treasury powers to specify which inter-bank systems are to be overseen by the Bank. The Bank’s supervisory powers enable it to require information directly from the operators of relevant payment systems, and to issue directions or impose requirements on them, when necessary and appropriate.

The order extends the Bank of England’s powers to include oversight of service providers. Service providers can include companies that provide infrastructure and technology—the firms that provide the hardware or software—to the payment systems that enable the 21 billion transactions each year. The responsibility for carrying out the oversight lies with the Bank’s financial market infrastructure directorate, which reports to the Bank’s financial market infrastructure board. The Bank publishes an annual report on the supervision of market infra- structure, which is laid before Parliament. Under the 2009 Act, the Bank has the power to publish principles and codes of practice to be followed by the payment systems operators; require system rule changes; give directions and set standards; and impose penalties for failure to comply. The proposed changes would give the Bank the same powers over service providers. The Bank will publish its approach to oversight of critical service providers shortly, to ensure that it is as transparent as possible.

The legislation will not automatically bring any service providers under Bank oversight. As with payment systems, HM Treasury will specify which service providers to recognised payment systems are to be brought under oversight with an order. HM Treasury can specify only firms that provide services to payment systems that are not already overseen by the Bank for financial stability purposes—that is, systemically important payment systems.

The Act does not require any other criteria to be met for a service provider to be specified. However, when considering a service provider for specification, the Treasury will take into account a number of issues, including the systemic importance of the relevant payment system, the criticality of the service provider to that system and whether the system and the service provider can be substituted. It will also consider representations made by the Bank, the payment systems regulator, the Prudential Regulation Authority, the Financial Conduct Authority, the service provider and the relevant payment systems, as required by the Act.

In summary, the Government believe that oversight should be proportionate to the level of risk presented by a firm. The proposed legislation will give the Government, together with the Bank of England, the tools they need to address any risk and to promote the robustness and resilience of the UK’s payments infrastructure. I commend the order to the Committee and hope that colleagues will join me in supporting it.

Thank you for calling me to speak on behalf of the Opposition, Mr Robertson.

As we mark the 10th anniversary of the financial crisis, there still remains work to be done on strengthening and reforming our financial market infrastructure, to ensure that we never see a repeat of the events of 2008. One of the issues we faced at that time was that regulation could not keep pace with the speed at which markets were changing. That is vital in an era when financial innovation continues to surprise us all. Many of the recent developments have been exciting and encouraging, and indeed I spend much of my time in the City seeing at first hand how technology is being harnessed to the benefit of service provision.

It is also important, however, that new initiatives are given proper oversight, to ensure that consumers are protected and that the system is robust enough to withstand unforeseen consequences. The advent of the payment systems regulator under the auspices of the Financial Conduct Authority has been an important part of that. The PSR has already done critical work in the growing and changing market segment and is helping efforts towards better protection of consumers.

The Opposition therefore support the spirit of the order in ensuring that the appropriate supervision is in place. However, I ask the Minister for further clarity on the definitions of which service providers will come under the scope of the new rules. The draft legislation states that HM Treasury will have to specify which service providers are systemically important, in consultation with the Bank of England. It seems opaque that there are no draft guidelines on how that process will be undertaken.

In our consultation with stakeholders we have heard concerns that unintended consequences could arise from the legislation. For example, the proposed extension of part 5 oversight to service providers could distort competition in the market if applied unequally in the future. Will the Minister provide some insight into how that will be prevented and how the Government will ensure that application will be fair and proportionate? Further to the information provided by the explanatory memorandum, why do the Government feel that a shortfall needs to be met with further regulation, given that individual contracts already exist between payment service providers and system operators?

Our second concern is that the order gives additional supervisory responsibility to the Bank of England. We want to ensure that sufficient thought is given to how that will be resourced. In the previous 10 years, financial market infrastructure has become significantly more complex and systemically important following the financial crisis. It is important, therefore, that the role of the Bank of England is scrutinised in the wider context as its scope broadens.

The Opposition support any moves to make our financial system more robust. However, we believe that the purpose of this legislation and its scope must be crystal clear, with a strong case for its necessity, to ensure that its potential impact on the market can be fully understood in advance.

Thank you for calling me to speak, Mr Robertson. As chairman of the all-party parliamentary group on financial technology, I was excited to be selected to serve on this Committee. It is one of the most exciting Committees that I have sat on.

I welcome these measures, not least because they are part of a tidying up exercise that recognises that the modern landscape for financial technology and services and for payment services and operators has changed dramatically. We are the world’s No. 1 city for financial services and we are also in the No. 1 slot for financial technology services. With 21 billion transactions worth £75 trillion, and considering the content of Paul Krugman’s book on systemic risks, we need to take into account the new payment service providers and the new way in which the market operates. Our lead in financial services can be maintained—particularly as we leave the European Union—only if we are constantly vigilant in ensuring that our systemic risks are minimised.

My question is along the lines of those asked by the Opposition Front Bencher, the hon. Member for Stalybridge and Hyde. Given that the scope for supervision and regulation may broaden across various sectors, how many and what type of telecommunications and IT firms may be affected? I am concerned that that effect should not be too deep or onerous, given that they are the organisations that are fleet of foot and that deliver our competitive advantage.

If I may first turn to the question posed by my hon. Friend the Member for Windsor about how many service providers would be designated. We do not intend to set a specific number, as this is about the Treasury’s ability to react to risk where that is perceived. It is a question of what is seen as proportionate from an oversight perspective, with regards to the services that those providers pay to those critical infrastructure systems.

On the question asked by the hon. Member for Stalybridge and Hyde about transparency and how we will specify a service provider, a number of factors will be taken into consideration, including the systemic importance of the payment service to which the service provider is providing services; the service provider’s criticality to that payments service; and the extent to which another provider could be substituted in due course. On the issue of transparency, the decision will be taken in consultation with, and on the basis of representations from, the Bank, the payment systems regulator, the PRA and the FCA.

I thank the Minister for giving way and I apologise for being late. This small business commissioner will employ fewer than 50 staff. Will that organisation really be capable of taking on the big multinationals that are likely to be the main miscreants in late payments to small businesses?

This is about having oversight to set requirements on what information is needed, and being able to react to risk in a quick and proportionate way. This is a piece of enabling legislation that will allow the Bank to ask those questions of service providers rather than simply rely, as is currently the case, on the payment systems themselves to manage that risk. That is why this is a proportionate response. The order simply switches on a provision that is already in the existing legislation, but it allows the Bank to give force to it. The Banking Act already enables that; the issue is what it does once it is switched on. The order gives the Bank that power, facilitated by the Treasury.

Coming back to the point raised by the hon. Member for Stalybridge and Hyde about transparency, the decision will be taken in consultation with the relevant regulators, including the PRA and FCA, and following representations from the payments systems operators themselves. That reflects our proportionate approach.

In conclusion, the order will enable the Bank of England to oversee service providers to specify payment systems. In some cases those services are critical to the smooth running of our payment systems. The order will support the Bank’s supervision of systemically important payment systems and promote the robustness and resilience of the UK’s financial system.

I hope that the Committee has found this morning’s sitting informative and that it will join me in supporting the order.

Question put and agreed to.

Committee rose.