Recent priorities Amongst the numerous lessons from the financial crisis were: don’t under-estimate tail risks, do worry about contagion, and liquidity matters. Although the payments systems in the UK (and elsewhere) performed well during the crisis, those insights prompted us to address a number of credit, liquidity, and operational risk issues within our core systems with more vigour than previously, and have shaped much of our recent work programme. Concerns about tail risks and contagion have prompted changes in both the wholesale and retail spheres. In the wholesale sphere, the recent focus has been on tiering. Historically, CHAPS had a very tiered structure, with the majority of payments being made by settlement banks on behalf of their customers, a practice which generated significant intraday credit and liquidity exposures between direct participants and their customers. This model also concentrated operational risks, given that an outage at one of the big settlement banks would have prevented its customers from making payments. These risks would be exacerbated in periods of stress, potentially contributing to contagion as payment services were withdrawn or collateral suddenly demanded. Since the crisis, the Bank, working with the scheme manager CHAPS Co, has acted to reduce tiering. Five banks have become direct participants of CHAPS since 2007, and a further five have given us formal indication that they will do so soon.

The new regulator will be created under the UK’s Financial Conduct Authority (FCA), and will have extensive powers over payment scheme companies, infrastructure providers and individual scheme members. The government has already asked it to undertake, as a priority, studies in relation to account portability and the ownership of payment systems – whether partial or full divestment by banks would address market failures in competition or innovation. As with all situations where there are two regulators for a single activity, effective coordination will be required. This is recognised in the clauses put before Parliament which ensure “the Bank of England will retain effective rights of veto over anything the Regulator might do impacting upon [its stability objectives]”3. This recognises that the integrity of the payments system has to be the first priority, but, most of the time, integrity and the important competition and innovation objectives will align without difficulty. For example, increasing direct membership of CHAPS improves integrity in terms of mitigating liquidity, credit and operational risks, while also enabling greater competition in the market. And similarly pre-  3  Paragraph 2.22 of the HM Treasury response to the “opening up UK payments” consultation, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/249085/PU1563_Opening_up_ UK_payments_Government_response.pdf. This is clause 85 in the Financial Services (Banking Reform) Bill, http://www.publications.parliament.uk/pa/bills/lbill/2013–2014/0054/14054.pdf. 4  BIS central bankers’ speeches  funding in retail systems improves integrity as members do not have to take on defaulters’ liquidity obligations, and also removes a potential barrier to entry.