John Hurley: The challenges ahead - SEPA and NPIP
Speech by Mr John Hurley, Governor of the Central Bank and Financial Services Authority of Ireland,
at the National Payments Conference, Dublin, 12 December 2006.
* * *
Ladies and Gentlemen,
I am delighted to be able to address this inaugural national payments conference, hosted jointly by the
Department of the Taoiseach and the Irish Payment Services Organisation in the historic surroundings
of Dublin Castle. At the outset, I would like to say that the Central Bank fully supports the conference's
broad objective of having open, ongoing and productive discussions involving everyone with an
interest in Irish payment systems.
I'd like to use the opportunity of this conference to address three payments-related topics, namely:
•
the Central Bank's role in relation to payment systems;
•
the Single Euro Payments Area - or SEPA, and
•
to share some thoughts from the Central Bank's perspective on the National Payments
Implementation Programme.
Role of the Central Bank
The Central Bank has significant responsibilities in the payments area. These take a number of forms.
At the broadest and most important level, the Bank acts as the overseer of payment systems. My
remarks today will concentrate on this function. Apart from this oversight role, we also have a
significant operational function.
With regard to the latter, we operate, manage and participate in the Irish real-time gross settlement
system, IRIS - the system for the settlement of wholesale payments at the interbank level. We are also
a participant in the local retail paper clearing system, and, of course, we fulfil the traditional central
bank role of supplying cash. We have also recently agreed to take on the role of settlement agent in
respect of euro-denominated securities transactions, mainly Irish equities, settled in the UK-based
CREST system. This role is currently carried out by the Bank of England, and will move to the Central
Bank in 2008.
I should probably also mention our involvement with the recent Eurosystem initiative known as
TARGET2 Securities. This is aimed at the provision by the Eurosystem of settlement facilities in
central bank money for all euro-denominated securities transactions. Discussions with the banking and
securities communities on this initiative are ongoing.
Oversight
The oversight of payment systems is a core central banking function. In carrying out this task, central
banks seek to minimize systemic risk, that is the risk that the failure of any payment system participant
could result in other participants being unable to meet their obligations, leading to a potentially
disastrous chain reaction of failures.
Minimizing systemic risk in payment and settlement systems is not only an objective in itself. It is also
a precondition for achieving financial stability and for the efficient conduct of monetary policy. These,
in turn, are necessary for the integrity of the euro as a major global currency.
Our oversight role is enshrined in both domestic and European legislation. Domestically the legal basis
is the Central Bank Act of 1997. In the broader European context, one of the basic tasks of the
European System of Central Banks (of which the Bank is a member) is "to promote the smooth
operation of payment systems". The Eurosystem is further empowered "to ensure efficient and sound
clearing and payment systems within the Community and with other countries".
Back in the early 1990s, central banks focussed on large-value netting systems where the safety
concerns were more evident. Gradually, however, the focus of oversight has been extended, to
varying degrees in different countries, to:
• real-time gross settlement systems,
• retail payment systems,
•
payment instruments such as payment cards, direct debits and credit transfers,
•
third-party service providers,
•
central counterparties, and
•
securities clearing and settlement systems.
The extensive range of activities now subject to oversight reflects their potential impact on financial
stability and their links to the smooth conduct of monetary policy. Central banks are organised so that
their operational role in payment systems does not conflict with their oversight role.
The Bank currently directly oversees the Irish real-time gross settlement system, IRIS, and the two
retail payment systems concerned with paper and electronic clearing. In doing so, it applies the
provisions of the Central Bank Act, 1997 that require all payment systems operating in the State to be
approved, and have their rules vetted, by the Central Bank. In approving any payment system's rules,
we must have regard to the "...proper and orderly regulation of the payment system concerned and of
competition between payment systems...". In assessing the soundness of these domestic payment
systems, we use as reference the internationally recognised principles developed by the Committee
on Payment and Settlement Systems of the central banks of the G10 countries.
In addition to these direct arrangements, the Central Bank is involved in a number of co-operative
oversight roles. Thus, in relation to the TARGET system, which interlinks all EU euro-denominated real
time gross settlement systems, we participate in the Eurosystem's oversight arrangements. The
Central Bank will continue this oversight role in relation to TARGET2, the successor to the existing
TARGET system, which is due to come on stream in November 2007.
In addition to oversight of payment systems, the 1997 Act makes the Bank responsible for the
oversight of securities settlement systems. However, apart from the NTMA's settlement system for
Exchequer Notes, Ireland actually has no domestic securities settlement infrastructure. Trades in Irish
Government bonds are settled in the Belgium-based Euroclear Bank, while trades in Irish equities
settle in CREST which is located in the UK. Because of this, we have made arrangements whereby we
co-operate with the National Bank of Belgium in relation to the oversight of Euroclear Bank, under the
terms of a Memorandum of Understanding. Discussions are on-going with the UK's Financial Services
Authority in relation to a similar Memorandum of Understanding on the oversight of CREST.
These arrangements illustrate the increasingly cross-border nature of payments and settlement
activities that require co-operation among central bank overseers. In my view, central banks have
successfully met these challenges, as can be seen in the examples that I've mentioned showing the
variety, flexibility and co-operative nature of the arrangements in which the Central Bank here is
involved.
As I've already mentioned, the role of payment system oversight has expanded in recent years, and
the Eurosystem is becoming increasingly involved in the oversight of payment instruments such as
debit cards, credit cards and cheques and payment networks. As a consequence, the Central Bank
will also become more active in this area. Naturally, the intensity of this oversight will be
commensurate with the perceived potential systemic impact of these instruments.
I hope that this summary of the Central Bank's payment systems role has gone some way towards
explaining just what it is that we do in this field. In order to reach a wider audience it is our intention to
publish, in the coming year, a detailed report on our work in the area of payments systems oversight.
Our oversight role - covering, as it does, payment systems and payment instruments - leads naturally
to an interest in the issues being covered here today, SEPA and the National Payments
Implementation Programme.
SEPA
Moving on to the Single Euro Payments Area (or SEPA) initiative, its aim is to advance European
integration by putting in place a competitive and innovative euro-area retail payments market that
should bring with it higher service levels, more efficient products and cheaper alternatives for making
payments.
The origins of SEPA lie in the introduction of the euro in 1999. Although wholesale - or interbank -
payments were catered for by TARGET, citizens of the participating countries did not have a
comparable facility for making cross-border, non-cash, low cost, retail payments in euro, even though
they shared common banknotes and coins once the euro cash changeover took place in 2002.
Even now, each national retail payments market remains essentially isolated from those of other
euroarea member states, with levels of efficiency and service varying from one euro-area member state to
another. As a result, cross-border retail payments in euro can be slower and less efficient than
comparable payments made within any one country. This is because payment systems rules,
procedures, standards and technical systems vary from country to country. Therefore, while goods
and services can be traded freely across the euro area, the underlying payments are still hampered by
national borders and arrangements, so that the completion of the 'internal market' is to some degree
frustrated.
The SEPA project aims to ensure that all consumers throughout the euro area, whether individual
citizens or corporate entities, will have available to them common retail payment instruments. In
principle, at the end of the process in 2010, all euro-area bank customers will be able to use one
payment account and one set of standardized instruments. This simplified payments world that will
result from SEPA will be a major benefit for those who make cross-border payments.
When the SEPA project is completed, all euro area payments will, in effect, become domestic and the
current differentiation between national and cross-border payments will disappear. Competition should
be enhanced, since all consumers using payment services, and not just those making cross-border
payments, will be able to choose between payment service providers throughout the euro area,
regardless of where they might be located. This should foster innovation in the provision of payment
services. It should also not be forgotten that SEPA will bring the benefits associated with a very real
modernisation of payment functionality throughout the euro area. Thus, while it is acknowledged that
SEPA undoubtedly involves large-scale investment by the banking industry, in the longer-run, the
opening up of the euro area payments market to competition means that the industry itself should
share in the benefits of this project.
One very topical debate in the SEPA arena relates to how payment cards - in particular debit cards -
can become SEPA-compliant. In this regard, the Eurosystem recently issued a progress report on its
views on the development of the "SEPA for Cards". The challenge in this area is to ensure a
successful transition to a more integrated market while at the same time preserving the efficiency and
low cost levels that characterise existing national payment card schemes. SEPA migration should not
lead to any deterioration in conditions for cardholders and merchants. This is an area that is being
closely monitored by the Eurosystem and will be the subject of discussions with all of those involved.
While there is strong support from the Eurosystem and the EU Commission for SEPA, it remains
primarily a market-driven project. The role of the Eurosystem (of which the Bank is part) in relation to
SEPA is that of a catalyst, or facilitator, while leaving its implementation to the private sector.
However, the Eurosystem works actively with the EPC - the European Payments Council - and market
participants to ensure that the necessary planning and preparatory work is carried out in a
coordinated way.
Since its formation in 2002, the EPC has acted as the European banking industry's decision-making
and co-ordination body for SEPA, and has made significant progress towards making the project a
reality, and creating a solid foundation upon which it can be built. In practical terms, the EPC is the
body responsible for defining the rules, procedures and standards that will apply to the new
SEPAcompliant payment instruments that the banks will use to develop competitive products to offer to their
customers.
As the body with primary responsibility for the implementation of SEPA in Ireland, I'd like to take this
opportunity to commend IPSO on the speedy preparation of the Irish national SEPA migration plan,
which was agreed and signed off by the chief executives of all IPSO member banks in December last
year; Ireland was in fact one of the first countries to complete its national SEPA migration plan.
It is essential that the SEPA implementation and migration process include the necessary degree of
engagement with all interested parties. In this regard, I am pleased to see that a SEPA Stakeholder
Forum has been established by IPSO and has already held two meetings, at which government
departments, public utilities, other direct debit originators and business organisations have all been
represented. This is a development that the Central Bank very much encourages, and I hope that the
Forum, and conferences like this one, will play a significant role in increasing public awareness of
SEPA over the next couple of years. I also strongly support the focus on communication that, I
understand, is planned for 2007.
The European banking industry cannot, however, operate in a vacuum. SEPA is a major European
objective in every sense, and public authority support for SEPA is therefore vital. As with the
Eurosystem, SEPA is firmly rooted in EU Commission policy, and strongly supported and promoted by
both institutions. The EU Commission sees SEPA as part of the European integration process, and will
facilitate the initiative by providing a common EU legal environment via the proposed Payments
Services Directive. Strong support for the SEPA project has also been expressed recently by the EU
Council of Ministers of Economic Affairs and Finance, the ECOFIN Council.
National Payments Implementation Programme
Finally I'd like to turn to the National Payments Implementation Programme. In undertaking this
programme of work, IPSO has stated that its intention is to develop a future payments infrastructure in
Ireland that would be seen as a world class payments environment 'which delivers efficiencies to all
sectors of the economy, is inclusive of all sectors of society, and shares the benefits universally". The
Central Bank fully shares this objective and stands ready to assist, in any way that it can, the efforts of
all involved in delivering the goals of the strategy. Rapid progress in implementing the Programme
would do much to enhance the efficiency of the whole payments area and impact most positively on
the competitiveness of the entire Irish economy.
The importance of developing Ireland's payment systems infrastructure has been recognised at the
highest level; as well as IPSO and its member banks, various Government departments, the Central
Bank and the Financial Regulator have all been involved from an early stage. It is encouraging to note
that there has been extensive consultation with many other groups. The involvement of as broad a
constituency as possible is undoubtedly the best way to achieve a successful outcome.
The development of Ireland's payment systems infrastructure - particularly in the area of retail
payments will be very much influenced by external factors, principally driven by the SEPA project.
There is significant common ground between SEPA and the national payments implementation
programme, with the focus in both being very much on electronic payments. Both initiatives suggest
that there is little future for the cheque as a payment instrument, and certainly not in the context of
making cross-border payments.
Cheques have been characterised as both expensive and relatively inefficient, and the Central Bank
and the Eurosystem concur with this view. Indeed, in its SEPA 4th Progress Report, the Eurosystem
went as far as to state that "Cheques...will...ultimately disappear when it becomes clear to their users
that other means of payment provide better service. By 1 January 2008, it is expected that national
banking communities in the euro area will have put in place a strategy for promoting the use of
alternative electronic means of payment..." and that "By the end of 2010...the use of cheques...is
expected to follow a clear downward trend...".
To ensure that the national payments initiative achieves its full potential, the Irish banks must offer
electronic payment methods that are:
•
safe and efficient;
•
easy to use;
•
accessible to all, and
•
no more expensive than existing national instruments.
The public authorities also have an important role to play in ensuring the success of the Programme
by promoting, in respect of their own payments business, the use of electronic means of payments.
Conclusion
To conclude, I hope that I have been able to clarify for you the role of the Central Bank in the
payments area. I will reiterate that we stand ready to assist IPSO, the Irish banking community and
others involved in any way possible to deliver on SEPA and the National Payments Implementation
Programme. I would like to thank you for your attention, and also would like to extend to the
participants in this afternoon's 'breakout sessions' my best wishes for a successful outcome to their
deliberations.