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Introduction
Clause 193: Overview
428. This Part repeals certain existing provisions about permission to issue banknotes in Scotland and Northern Ireland, and replaces them (but only for banks which already have permission to issue banknotes).
Key terms
Clause 194: “Banknote”
429. This clause defines what is meant in Part 6 by the term “banknote”.
Clause 195: “Issue”
430. This clause defines, for the purposes of this Part, when a banknote is “issued”. The definition ensures that a banknote is regarded as issued once it enters circulation, even if it enters circulation in error or as the result of theft.
431. A banknote does not come out of circulation until it is returned to its issuing bank or its agent. If the note is subsequently put back into circulation, it is again regarded as “issued”.
Clause 196: “Authorised bank”
432. This clause defines what is meant in Part 6 by the term “authorised bank”. An “authorised bank” is a bank that, immediately before the coming into force of this Part, was authorised to issue banknotes in Scotland or Northern Ireland. References to “authorised bank” in these explanatory notes have the same meaning.
Clause 197 “Commencement”
433. This clause defines what is meant in Part 6 by the term “commencement”. In accordance with clause 238 in Part 8, this Part will come into force on the date set in an order made by the Treasury for the coming into force of clause 198.
Authorisation to issue
Clause 198: Repeal of old authorising enactments
434. Authorised banks were given permission to issue banknotes by certain provisions of the Bank Notes (Scotland) Act 1845 and the Bankers (Ireland) Act 1845, as subsequently amended. This clause repeals those provisions.
Clause 199: Saving for existing issuers
435. This clause ensures that authorised banks may still continue to issue banknotes, provided that they meet the requirements set out in this Part. No other banks may start issuing banknotes in Scotland or Northern Ireland. Authorised banks may issue banknotes only in the part of the United Kingdom in which they were authorised to do so before commencement of this Bill as enacted.
Clause 200: Consequential repeals and amendments
436. This clause sets out the further legislative repeals and amendments that are required as a result of the provisions of clause 198.
Regulations and rules
Clause 201: Banknote regulations
437. Subsections (1) and (2) require the Treasury to set out in secondary legislation provisions concerning the treatment, holding and issuing of banknotes by authorised banks. This secondary legislation is referred to as the “banknote regulations” in Part 6 and also in these explanatory notes. The banknote regulations are subject to the affirmative resolution procedure.
438. The banknote regulations may make provision generally or only for specified cases or circumstances. Where they do make provision for specified cases or circumstances, they may make different provision for different cases or circumstances.
Clause 202: Banknote rules
439. Subsections (1) and (2) provide that the banknote regulations may require or permit the Bank of England to make rules about any aspect of the treatment, holding or issuing of banknotes by authorised banks.
440. The banknote regulations may make provision generally or only for specified cases or circumstances. Where they do make provision for specified cases or circumstances, they may make different provision for different cases or circumstances.
Specific issues
Clause 203: Backing assets
441. Subsection (1) provides that the banknote regulations must require authorised banks to have backing assets.
442. Subsection (2) defines “backing assets”. The term means those assets of a kind specified in the banknote regulations. This may include Bank of England banknotes, UK coins, or funds held in a bank account at the Bank of England or another institution or class of institution.
443. Subsection (3)(a) requires the banknote rules to include provision for determining the value of backing assets.
444. Subsections (3)(b) and (3)(c) provide that the banknote regulations must require certain backing assets to be held at certain prescribed locations. Bank of England notes may be held only by the Bank of England or at locations approved by the Bank of England. UK coin may be held only at locations approved by the Bank of England. Approval will be subject to compliance with conditions determined by the Bank of England pursuant to clause 212.
445. Subsection (4) provides a broad power for the Treasury to make further provisions in the banknote regulations about backing assets, in particular for the purposes set out in paragraphs (a) to (d).
446. Subsection (5) provides that the banknote regulations may make provision about the treatment of backing assets in relation to insolvency processes (as defined in subsection (6)). In particular, the banknote regulations may modify insolvency processes to ensure that the backing assets are “ring-fenced” and are available only to noteholders for a certain specified period. The regulations may allow the Treasury to extend this period if required. The regulations may also make provision for a note exchange programme, in which noteholders would exchange their notes for Bank of England notes and coins, or for funds paid directly into their bank account.
Clause 204: Information
447. Subsection (1) permits the banknote regulations or rules to make provision about certain information to be provided by the authorised banks to the Bank of England. This power may be exercised to require authorised banks to submit reports to the Bank of England about the treatment, holding or issue of banknotes, or in respect of compliance with the banknote regulations or rules. It may also be used to require information to be given by the authorised bank or its agent more generally.
448. Subsection (2) permits the banknote regulations to make provision enabling the publication or disclosure of information provided to the Bank of England. Such information may include the value of authorised banks’ notes in circulation, notes with the potential to enter circulation and backing assets held, and any action taken by the Bank of England in connection with non-compliance with the regulations or rules.
449. Subsection (3) permits Her Majesty’s Revenue and Customs (HMRC) to transfer to the Bank of England all information held by HMRC in connection with HMRC’s functions under the 1845 legislation (as defined in paragraph 17 above). Subsection (4) limits the use of that information by the Bank of England to purposes in connection with the performance of its regulatory responsibility for commercial bank issuance of banknotes.
Clause 205: Ceasing the business of issuing notes
450. Subsection (1) provides that, if an authorised bank discontinues the issue of banknotes, its note-issuing privilege cannot thereafter be revived.
451. Subsection (2)(a) provides for the banknote regulations or rules to prescribe the procedures to be followed in connection with an authorised bank’s voluntary discontinuation of note issuance. Subsection (2)(b) provides that the banknote regulations or rules may apply to an authorised bank for two years after it stops issuing bank notes. This is designed to ensure, in particular, that authorised banks maintain sufficient backing assets until their notes leave circulation.
Clause 206: Insolvency, &c
452. Subsection (1) provides that the regulations may make provision in connection with application of the special resolution regime to an authorised bank, or an insolvency process as set out in clause 203.
453. Subsection (2) provides that the banknote regulations may make provision for the destruction of un-issued and exchanged banknotes, and for the extinction of any claim to or interest in such banknotes.
454. Subsection (3) applies where a property transfer instrument is made for the purposes of a sale or transfer in accordance with clauses 10 and 11. In such circumstances, the bank loses the right to issue notes, and the transferee cannot acquire that right. This is
consistent with the prohibition in this Part preventing any new commercial banks from issuing banknotes.
455. Subsection (4) is included to provide clarity concerning a bank taken into temporary public ownership. It ensures that, where an authorised bank is taken into temporary public ownership, that does not of itself deprive the bank from issuing notes. (However, if the bank is insolvent, then subsection (5) will deprive it of the right to issue notes.)
456. Subsection (5) provides that an authorised bank that enters insolvency or bank insolvency will lose the right to issue notes.
457. Subsection (6) permits the banknote regulations to make transitional provision where an authorised bank loses the right to issue notes.
458. Subsection (7) provides that a reference in this clause to “special resolution regime”, “bank insolvency” or “insolvency” includes a reference to any law of another country that the Treasury identifies in banknote regulations as serving a similar purpose.
Enforcement
Clause 207: Offence: unlawful issue
459. Subsection (1) makes it a criminal offence to issue banknotes in Scotland or Northern Ireland otherwise than in reliance on clause 199.
460. Subsection (2) sets out the penalties applicable to a person convicted of the unlawful issue of banknotes in Scotland or Northern Ireland.
461. Subsections (3) and (4) provide that the officers of an authorised bank may also be guilty of a criminal offence if the bank issues banknotes otherwise than in reliance on clause 199. “Officer” is defined in subsections (4) and (5), and the circumstances in which they may commit a criminal offence are set out in subsection (3).
462. Subsection (6) specifies the authorities in England and Wales, and Northern Ireland, who may prosecute an offence under this section. No provision is necessary for Scotland because, in Scotland, responsibility for the prosecution of crime resides solely with the Lord Advocate (Ministerial Head of the Crown Office and Procurator Fiscal Service).
Clause 208: Financial penalty
463. Subsection (1) provides that the banknote regulations may enable the Bank of England to impose a financial penalty on an authorised bank where the bank has breached the banknote regulations or rules.
464. Subsection (2) provides that financial penalties imposed by the Bank of England shall be paid to the Bank of England and are enforceable as a debt.
Clause 209: Termination of right to issue
465. Subsections (1) to (4) confer a power on the Treasury, following consultation with the Bank of England, to terminate an authorised bank’s note-issuing rights if:
- the bank has failed to comply with the banknote regulations or rules; and
- having regard to the nature of that failure, the bank should no longer be permitted to issue banknotes.
466. Subsection (5) provides that an authorised bank loses the right to issue notes if it ceases to have permission under Part IV of the Financial Services and Markets Act 2000 to carry out the regulated activity of accepting deposits.
467. Subsection (6) provides that the reference in subsection (5) to Part IV of the Financial Services and Markets Act 2000 includes a reference to a law of a foreign country that the Treasury may identify in banknote regulations as serving a similar purpose.
468. Subsection (7) provides that the banknote regulations may make transitional provision where an authorised bank loses the right to issue notes.
Clause 210: Application to court
469. This clause provides that the banknote regulations may permit the Bank of England to apply to the High Court or, in Scotland the Court of Session, for relief in respect of a failure to comply with the banknote regulations or rules, or for any order designed to ensure, or facilitate monitoring of, compliance with a provision of the banknote regulations or rules.
Bank of England
Clause 211: Organisation
470. This clause provides that costs incurred, and sums received (for example, from fines), by the Bank of England in the course of carrying out its functions under this Part constitute expenses and receipts of the Bank’s Issue Department.
Clause 212: Discretionary functions
471. This clause provides that banknote regulations may confer a discretionary power on the Bank of England. In particular, the regulations may require compliance with conditions imposed by the Bank of England, or make a permission or option subject to the approval of the Bank of England. By way of example, matters in which such a discretion may be exercised could include the approval of locations for the holding of un-issued banknotes or backing assets by the authorised banks.
Clause 213: Exemption
472. This clause provides that clause 207(1), which prohibits the unauthorised issue of banknotes in Scotland and Northern Ireland, does not affect the Bank of England’s entitlement to put its own notes into circulation in Scotland and Northern Ireland.
PART 7: MISCELLANEOUS
Treasury support for banks
Clause 214: Consolidated Fund
473. This clause provides for any expenditure incurred by the Treasury in connection with the exercise of the powers in Part 1 of this Bill, in connection with the giving of financial assistance to banks more generally or in connection with the provision of financial assistance to the Bank of England to be paid from money provided by Parliament. Financial assistance includes giving guarantees or indemnities. The clause also provides statutory cover where the expenditure has been incurred or the guarantee or indemnity given before Royal Assent.
Clause 215: National Loans Fund
474. This clause allows the Treasury to draw money from the National Loans Fund for the purpose of making a loan to a UK authorised institution. It may do this when the loan is required urgently, for example in circumstances where it would not be possible to delay the loan until Parliament had approved an Estimate for the purpose of making a loan under clause 214.
Bank of England
Clause 216: UK Financial Stability
475. This clause amends Part 1 of the Bank of England Act 1998, which relates to constitution of the Bank and the functions of the Court of Directors, to include provision relating to a financial stability objective. Subsection (1) inserts three new sections as 2A to 2C and subsection (2) amends the current section 2.
476. New section 2A(1) provides that the Bank has an objective of contributing to the protection and enhancement of financial stability in the United Kingdom.
477. New section 2A(2) provides that the Bank’s strategy in relation to Financial Stability shall be determined and reviewed by the Court of Directors of the Bank of England. The Court must consult the Treasury before it sets the strategy. (See also new section 2B(2) in relation to recommendations from the Financial Stability Committee.)
478. New section 2B(1) requires there to be a new sub-committee of the Court of Directors of the Bank of England - the Financial Stability Committee. This Committee is to be chaired by the Governor of the Bank of England (when present), with other membership consisting of the two deputy Governors and 4 directors of the Bank’s Court, who are to be appointed by the Chair of the Court of Directors.
479. New section 2B(2) sets out the functions of the Committee. One function is to make recommendations to the Court regarding the Bank’s financial stability strategy, which the Court must consider. Other functions include advising the Bank whether and how it should use the stabilisation powers conferred on it as part of the special resolution regime in Part 1 of this Act and advise on the actions the Bank should take in respect of a particular institution. This is most likely to be necessary in the case of a bank or building society that has entered, or is about to enter, the SRR. Another function of the committee is to monitor the Bank’s oversight of inter-bank payment systems. It also provides for the Court of Directors to delegate other functions to the Committee, as it considers appropriate for pursuing the Financial Stability Objective.
480. New section 2B (3) and (4) allow the Treasury to appoint a non-voting member to the Committee and the Committee to co-opt other non-voting members.
481. New subsection 2B (5) allows the Chair of the Court to replace the ‘non-executive’ members of the Committee, drawn from the membership of the Court of Directors.
Financial stability committee: supplemental
482. New section 2C (2) and (3) set the procedure to be followed if a member of the Committee has an interest in a matter to be considered by the Committee. Any such interest must be disclosed and the member has no vote unless the Committee resolves that there is no conflict of interest. Members must not vote and must be absent during any debate of any matter in which the member is concerned.
483. New section 2C(4) provides for the Committee to delegate certain of its functions to two or more of the voting members on the Committee.
484. Subsection (2) amends section 2 of the Bank of England Act 1998 by adding a new subsection (5) which makes the Bank’s powers to determine its objectives subject to the statutory objectives relating to monetary policy and financial stability.
Clause 217: Number of Directors
485. This clause amends the Bank of England Act 1998, and provides that the maximum size of the Court of Directors reduces from nineteen to twelve. As well as the Governors and two deputy Governors of the Bank of England it allows for there to be a maximum of nine other directors. In practice, these are likely to be non-executive directors, who are not employees of the Bank.
486. Subsection (4) provides that when this provision comes into force, the then current directors of the Bank must vacate office (but will be eligible for re-appointment).
Clause 218: Meetings
487. This clause amends the Bank of England Act 1998 (at paragraph 12 of Schedule 1) to provide that the Court of Directors of the Bank of England must meet at least seven times in each calendar year, rather than monthly as at present.
488. Subsection (3) enables the Governor or, in his absence, a Deputy Governor or the Chair of Court to summon a meeting of the Court.
Clause 219: Chair of Court
489. This clause amends the Bank of England Act 1998 (at paragraph 13 of Schedule 1) with a new sub-paragraph (3) which provides that the Chancellor of the Exchequer designates a member of Court as the Chair of Court (the current Act required the Governor to be the Chair of Court). It also provides for the Chancellor to designate deputies to serve in the absence of the Chair.
490. Subsection 2 substitutes a new section 3(4) of the Act to provide that the Chair of Court (when present) is to chair the sub-committee of non-executive directors established under the Bank of England Act.
Clause 220: Quorum
491. This clause amends the Bank of England Act 1998 to allow for the Committee of non-executive directors, and the Court of Directors to determine their own quorums.
Clause 221: Tenure
492. Subsection 1 of this clause provides for someone appointed as a Governor of the Bank or a Deputy to serve no more than two terms in either role. This does not stop a person serving in one role for two terms subsequently serving in another.
493. Subsection 3 provides that those members of the Monetary Policy Committee who are appointed by the Chancellor, rather than those appointed by the Governor, may serve a maximum of two terms.
Clause 222: Immunity
494. This clause provides that the Bank of England has legal immunity in its capacity as a monetary authority, which includes its functions as a central bank and its financial stability functions. This provides immunity from legal claims for damages. The clause protects the Bank, its directors, officers, and servants (or purporting to act as such). The immunity does not extend to actions taken in bad faith or actions taken in contravention of the European Convention on Human Rights.
495. The Government does not intend that the Bank of England shall have statutory immunity in its role as an employer, procurer of contracted services or in other roles not related to its statutory duties, as laid out in the Bank of England Act, 1998, or in this Bill.
Clause 223: Weekly return
496. This clause removes the requirement, established in the Bank Charter Act, 1844, that the Bank of England must produce a weekly return of accounts. As a result, the Bank of England will be able to determine whether, and in what form, it produces a return.
Clause 224: Information
497. This clause permits the Bank of England to disclose information relating to the financial stability of the individual financial institutions or aspects of the financial system of the United Kingdom. It may disclose information to HM Treasury and the Financial Services Authority. The provision overrides other confidentiality requirements and is without prejudice to any other power to disclose information.
498. This will enable the Bank of England to share relevant information that it may have received in relation to its financial stability functions, for example from an institution administered under the special resolution regime.
Clause 225: Bank of England Act 1946
499. This clause states that nothing in the Bill affects the generality of the powers in section 4 of the Bank of England Act 1946.
Financial Services Authority
Clause 226: Variation of permission
500. This clause amends section 45(1)(c) of the Financial Services and Markets 2000 to specify when the Financial Services Authority can use its power on its own initiative to vary the permission relating to the regulated activities which an authorised person may has permission to undertake, or to impose or change a restriction upon the authorised person. The Authority may use this power if it considers it desirable to do so to protect the interests of consumers. The amendment specifies that this means consumers relating to the authorised person in question or other authorised persons.
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