IBS Journal February 2016


Bank of England to revamp UK payments system


Bank of England, London © Stan Higgins, Shutterstock


The Bank of England (BoE) will develop a blueprint to modernise the UK’s sterling settlement infrastructure to meet the de- mands from the rise of distributed ledger technology (DLT) and other innovations. In a speech to the payments sector,


Minouche Shafik, BoE’s deputy governor for markets and banking, says the way pay- ments are made has ‘changed dramatically’ in recent years. Shafik highlights two drivers which


are spurring the entry of new payment providers and changing the demands on payments infrastructure. She points to the range of cashless, re- al-time and mobile payments options that continue to increase and the emergence of DLT (aka blockchain) which enables verifi- cation of payments to be decentralised. In her opinion, regulation is evolving


from targeted interventions to a more dynamic focus on competition and inno- vation driven by the Payments Systems Regulator (PSR) which was launched in 2015.


Shafik says: ‘Looking forward … it is


again time to ask fundamental questions about the shape of the bank’s settlement operations.’


Keeping it real She says the future of sterling settlement matters to everyone in the UK and notes the vast majority of payments in the real economy – ‘from salaries to company invoices, from car purchases to coffee sales, from pensions to investment flows’ – ulti- mately settle over the bank’s 20-year-old real-time gross settlement (RTGS) service.


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According to the bank’s figures, RTGS settles almost a third of the UK’s annual GDP – or about £500 billion – every single day.


Shafik adds: ‘So it is no exaggeration to


say that RTGS is the beating heart of the UK payment system’. She’s not wrong. On 25th March 2015, the Bank of England published the results of an inde- pendent review by Deloitte concerning the nine-hour service disruption to the RTGS system on 20th October 2014. With its collapse, hundreds of billions


worth of deals were delayed. The bank had to keep it open an extra four hours to cope with all the outstanding transactions – including house purchases to major interbank money transfers. Last year, the bank ‘accepted all of


the review’s recommendations’ and said it would ‘further consider the contingency solutions for RTGS, as well as the future development of the system’. Back to the present, and with the


importance of RTGS in mind, Shafik states that ‘in the pursuit of financial stability, the importance of resilience can hardly be overstated: a persistent disruption to people’s ability to make and receive payments would cause great damage to the UK economy.’ As a result, the bank is looking to


support innovation in the payment system. In the speech, Shafik sets out four


‘overarching questions which the blueprint for sterling settlement will seek to answer’. First, what should the BoE’s policy objectives be in the delivery of sterling


© IBS Intelligence 2016 www.ibsintelligence.com


settlement in central bank money? Second, what functions should the UK


High Value Payments System have? Third, who should be able to access it,


and how? And, fourth, what should the role of the Bank of England be in the delivery of that service? Shafki emphasises: ‘When we make


investment decisions in systems that will last for a decade or more, they need to enable the kinds of changes that users will demand. ‘So we need to make sure that we have


“optionality” built in so that we can cope with different states of the world.’


A new heart The bank says it will design a blueprint that can support the future demands placed on the UK’s high-value sterling settlement system. In the first part of 2016 it will seek


input from a wide range of stakeholders, before consulting formally on a small number of alternative ways forward later in the year. By the end of 2016 the BoE says it will


have agreed a blueprint for high-value sterling settlement in the years ahead, with technological development of that blueprint beginning in 2017. Shafik concludes: ‘Innovation and sta-


bility can go hand in hand … our challenge will be to navigate a path that redesigns RTGS in such a way that its resilience is further enhanced, while at the same time enabling innovation for the public good.’ Antony Peyton


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