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

Volume 785: debated on Tuesday 7 November 2017

Motion to Approve

Moved by

My Lords, these statutory instruments improve the valuable legislation that has been put in place to bolster the financial stability of the UK. They are both about methods of payment, from the traditional banknotes that are familiar to us to the newer payment systems.

The Service Providers to Payment Systems order will enable the Bank of England to supervise service providers to payment systems for financial stability purposes. The UK’s payments infrastructure is the plumbing of our financial system. Every year, our payment systems process around 21 billion transactions, worth over £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 2009, through the Banking Act, the Government gave the Bank of England formal powers of oversight of certain interbank payment systems, with the aim of promoting the robustness and resilience of key UK payment systems. The Act also gave the Treasury powers to specify which interbank systems are to be supervised by the Bank. The Bank’s supervisory powers enable it to directly request information from the operators of the relevant payment systems, and to issue directions or impose regulatory requirements on them where necessary and appropriate. Amendments made via the Digital Economy Act in spring this year extended these powers to enable the Government to specify types of payment systems that are not interbank. These steps have gone a long way towards ensuring the security, stability and reliability of payment systems for the UK. This draft legislation is a further step towards achieving this aim. The proposed SI will enable the Bank of England to supervise service providers to the supervised payment systems. Service providers can include companies that provide infrastructure and technology to the payment systems, the firms that provide the hardware and software to payment systems that enable the transfer of these 21 billion transactions every year. In some cases, these services are critical to the smooth running of the payment systems. Enabling the Bank to have oversight of these service providers will support its supervision of systemically important payment systems.

This legislation will not automatically bring any service providers into the Bank’s oversight. As with payment systems, the Treasury will specify which service providers to recognised payment systems are to be brought into supervision with an order. HM Treasury will weigh up a number of issues when considering a service provider for supervision. The Treasury is required to consult the Bank of England, the PRA, the FCA and the PSR, notify the service provider and the payment systems to which it provides services and consider any representations made before specifying that service provider for Bank supervision. The Government believe that oversight should be proportionate to the level of risk presented by a firm, and the proposed legislation will give government the tools it needs to address any risk and to further shore up the robustness and resilience of the UK’s payments infrastructure.

The second SI moves the authority to issue banknotes in Scotland from one legal entity within the Royal Bank of Scotland group to another. This change is necessary due to the structural changes RBS is making to implement ring-fencing. The UK is unique in that certain banks in Scotland and Northern Ireland are authorised under the Banking Act 2009 to issue their own commercial banknotes alongside the Bank of England. Currently, four Scottish banks and three Northern Irish banks have this authority. These seven banks are proud of their authority to issue banknotes, and the Government are keen to support them.

Due to the ring-fencing legislation put in place after the financial crisis, from 1 January 2019 our ring-fencing regime will require structural separation of core retail banking from investment banking for UK banks with retail deposits of more than £25 billion. As a result of this, RBS is separating its retail bank from the rest of its banking group. The legal entity that currently has the responsibility for issuing banknotes will sit outside the retail part of the bank after separation. RBS believes that banknote issuance best sits within the retail bank, the Bank of England agrees—and so, less importantly, do I.

This change moves the authority to issue banknotes in Scotland from the non-retail legal entity to the legal entity that will shortly become the RBS retail bank. Authority to issue banknotes is inherent to a specific legal entity and cannot be moved from one legal entity to another without making these changes. These changes will not impact RBS’s ability to issue banknotes or the value of the banknotes already issued. It is purely a technical change required to implement ring-fencing legislation. The Bank of England and the Financial Conduct Authority both approve of this action. I beg to move.

My Lords, I thank the Minister for introducing the orders and regulations this afternoon. Both instruments amend the Banking Act 2009. The first, the Banking Act 2009 (Service Providers to Payment Systems) Order 2017, extends the Bank of England’s formal powers of oversight to service providers to recognised payment systems. The 2009 Act enabled the Bank to supervise interbank payment systems. However, Part 5 was extended to all payment systems by the Digital Economy Act 2017. The second instrument, the Scottish Banknote (Designation of Authorised Bank) Regulations 2017, will ensure that once the Royal Bank of Scotland has separated its core retail banking from its investment banking, the “new” ring-fenced RBS can continue to issue Scottish banknotes. We support both measures but I have a number of questions for the Minister.

First, on the extension of Bank of England supervision to all service providers, the Explanatory Memorandum states that in this context a service provider,

“may be an organisation that designs, builds or operates a payment system’s infrastructure”.

It goes on to say that,

“only service providers that are considered systematically important”,

to the UK,

“would be considered for supervision”.

In these circumstances it seems entirely appropriate that the Bank of England has oversight and regulatory powers as it relates to financial stability. But who in the Bank of England will have specific responsibility for this? Many of our discussions during the passage of the Bank of England and Financial Services Act 2016 came back to this exact point: what constituted “the Bank” and where did power, responsibility and, ultimately, accountability lie? I will be interested to hear what the Minister has to say on this point.

As the Minister stated in his opening remarks, this is just an enabling piece of secondary legislation. As the Explanatory Memorandum outlines:

“This instrument does not automatically bring any service providers into scope of supervision by the Bank”.

The Treasury needs to specify the service provider by including it in the “recognition order”. How many service providers does the Treasury intend to recommend to the Bank of England for supervision, and will these recommendations be subject to parliamentary scrutiny?

The order is surprisingly vague about what the process of being included in the recognition order would entail. What criteria are used to determine whether the Treasury recommends that the Bank of England supervises a service provider? What does this oversight entail in practical terms? Given that it will be for the Treasury to initiate the proceedings, I would have expected it to produce guidance regarding this instrument. However, the Explanatory Note suggests that it will be for the Bank itself to provide information to service providers.

When the Bank of England supervises banks, it has considerable powers of insight into those banks and has rights to alter structures and to constrain their behaviours. Will the Bank have the same powers when it comes to these service providers? I recognise that the Government say that they have consulted with industry. However, this was not a formal process, therefore I would be grateful for some more details. The Explanatory Memorandum states that the industry was “broadly supportive” of the measures that were bought forward. What elements were there disagreements about, and were amendments made to the draft regulations accordingly?

Finally, on this order, what has spurred the Government to act now? Was it the industry, the Bank of England or the Treasury that requested an extension in scope of the regulations? Closing a gap in supervision is an important step, which we support. However, I remain unclear as to why this change was deemed necessary, how many service providers will be affected and what the supervisory and regulatory framework will look like in practice. I look forward to the Minister’s response.

On the second instrument, which relates to the issuance of Scottish banknotes, page 2 of the regulations states that,

“the Treasury must determine the designation date for the purposes of these Regulations”.

Can the Noble Lord give the House an idea of when this date could be? How much notice do the Government believe is required before the ring-fencing deadline of 1 January 2019?

My Lords, I am grateful to the noble Lord, Lord Tunnicliffe, for his broad support for the regulations in front of us, his courteous response and for the questions he has asked, most of which I hope to be able to address; if I am not, I will write to him.

The noble Lord started by asking who in the Bank of England had the responsibilities set out in the regulations. The answer is that the Bank’s Financial Market Infrastructure Directorate is responsible for carrying out the supervision of FMIs, which includes the systemic payment systems that we are dealing with in these regulations. That directorate reports to the Bank’s FMI board, which is an executive committee constituted by the governor and chaired by the Bank’s deputy governor for financial stability. It exercises the Bank’s powers and, in turn, escalates issues to the Bank’s governors when appropriate. The Bank publishes an annual report on supervision of market infrastructure, which is laid before Parliament, and of course the governor and other officials of the Bank of England are regularly summoned to give evidence before the Treasury Select Committee.

The noble Lord asked how many service providers might be recommended to the Bank of England for supervision and whether these recommendations would be subjected to parliamentary scrutiny. To specify a service provider, the Treasury has to go through the process which I outlined of consulting the PRA and the FCA, and notifying the service provider and the payments system to which it provides services, after which it considers any representations made. The Treasury then specifies a service provider for recognition by an order, which is published on its website. The order is not subject to further parliamentary scrutiny or published as legislation because the process and criteria for making the orders specifying the service providers are already set out in the Act.

The noble Lord asked what sort of issues might trigger the Treasury into notifying a service provider. The answer is that it will look at: the size and systemic importance of the payment system to which the service provider provides the service; how critical that service is to the payments system; the substitutability of both the service provider and the payment system; and the changing payments market. It will consider the representations made by the Bank and others before finally making the appropriate designation.

Under the Act, the Bank has a power to publish the principles and code of practice to be followed. It can require rule changes, give directions to require or prohibit particular actions, set standards to be met and impose penalties for failures to comply. The Bank will publish its approach to the supervision of critical service providers shortly, to ensure that the approach is as transparent as possible.

I am not looking for an answer now but can the Minister check whether the powers will be similar to those that the Bank has with other banks, to intervene and require changes in their management and boards? Will those powers be paralleled under this order? I do not expect an answer now but would be grateful if he would write to me.

I am grateful for the noble Lord’s recognition that that information may not immediately be at my fingertips. It would be much safer to get an authoritative reply, rather than an off-the-cuff one. He asked what had spurred the Government to action now. Basically, the Treasury has identified the increasing importance of electronic payment systems and therefore of service providers to payment systems. We have done this as part of making sure that our payment system has robustness and can cope with risks and changes.

We did consult industry but it was not a formal process. As the noble Lord said, the industry was broadly supportive of the measures brought forward. In late 2016, the Treasury notified supervised payment systems and major service providers of its intention to lay this order and concluded that these stakeholders were broadly supportive, as no objections were raised.

I am conscious that I have not answered the noble Lord’s specific question about timing, relating to the second of these SIs. If he would agree, I would like to write to him when I have an authoritative answer to that question. In the meantime, I ask that the Motion be agreed.

Motion agreed.