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.

As a consequence, the proportion of CHAPS payments made by direct members on their own account is set to increase from around 40% in 2007 to approaching 70%, substantively addressing the tiering risks that had previously existed in the wholesale sterling markets. In relation to the retail systems, we have also sought to address latent contagion risks by reforming the arrangements covering member default in two of our largest retail payment schemes (Bacs and Faster Payments). As currently structured, these default arrangements contain a heavy “survivors pay” element, where the other members of the payment scheme assume a portion of a failing member’s payment obligations (either temporarily, a liquidity risk, or permanently, a credit risk). This creates a clear contagion risk. Recently, the schemes have agreed to move to a full “defaulter pays” model, where all obligations are fully collateralised in advance, in cash, segregated in each bank’s account with us. The move from survivors to defaulter pays will take place in the next year or so. Separately, but driven by the same philosophy, we have sought to reduce the operational risks that we ourselves run as the core infrastructure provider within the sterling system. The Bank of England currently runs the UK’s RTGS infrastructure from twin operational sites so we can continue to provide RTGS settlement in the event of a problem at either. While this is a highly resilient arrangement, it would be vulnerable to a catastrophic failure which took out both sites simultaneously.