Banking Bill

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Angela Eagle: The hon. Gentleman has alighted on one of the points that we were keen to modernise in the legislation around commercial issuance of the banknotes, to ensure that there was no ambiguity about which existing notes could be regarded as issued for the purpose of backing assets. He has discovered immediately one of the areas of ambiguity that we seek to put right, and he is right to point out to the Committee why it is important to do so. If a note has been issued accidentally or because of theft, it is still a promise to the individuals using it, and it needs to be backed by the appropriate assets.
The hon. Gentleman is quite right. He has alighted on an ambiguity, and he has pointed out why it needs to be made unambiguous. That is what the clause will do.
Question put and agreed to.
Clause 195 ordered to stand part of the Bill.

Clause 196

“Authorised bank”
Question proposed, That the clause stand part of the Bill.
Mr. Gauke: I thank the Minister for listing the various banks that supply us. It is one of those circumstances in which Wikipedia proved correct before the Committee. I thank her for providing clarification on what happens in mergers, which is topical and important. I have another question to ask, partly to provoke the hon. Member for Dundee, East. Were a bank falling within the definition of an authorised bank to relocate from Scotland or Northern Ireland to elsewhere in the United Kingdom, would it still be able to benefit from the provisions, or would it be disqualified from issuing banknotes?
6.15 pm
Angela Eagle: The hon. Gentleman is right. Clause 196 defines “authorised bank” as it is used throughout part 6. Since the current legislation was enacted, as I hinted earlier, there have been restrictions in place governing note issuance by these banks. As I said earlier, the Bill modernises and strengthens the framework for note issuance, with a view to enhancing noteholder protection.
The hon. Gentleman asked specifically whether a bank relocating elsewhere in the United Kingdom would still be able to issue notes. If it moved elsewhere and relocated in the UK, it would still be able to benefit. It would not lose its authorisation on the grounds of relocation elsewhere in the UK. I hope that that answers the hon. Gentleman’s question about the definition of “authorised bank”.
Question put and agreed to.
Clause 196 ordered to stand part of the Bill.
Clauses 197 and 198 ordered to stand part of the Bill.

Clause 199

Saving for existing issuers
Question proposed, That the clause stand part of the Bill.
Mr. Gauke: Essentially, the position created by these provisions is that those banks that can currently issue banknotes may continue to do so, but new ones cannot. Why not?
Sir Peter Viggers: What is the Government’s assessment of the value to each of the issuing banks of their having the authority to issue banknotes? Assessments have been made and have been disputed by the Government, but what is their assessment of the global value of all those banks that have the right to issue banknotes, broken down into the separate constituent parts of the individual bank?
Angela Eagle: The hon. Member for South-West Hertfordshire asked, “Why no new issuers?” As I said in my prefacing remarks about part 6, banknote issuance is usually a function reserved for central banks. The UK is almost, but not quite, unique—if we count Hong Kong—in allowing a number of commercial banks to issue their own banknotes. Under the existing legislation, only the banks that had issuing rights at the time of the enactment of the legislation in 1845 that sought the necessary certifications to continue issuing in accordance with those enactments may issue banknotes—and only in Scotland and Northern Ireland. As I said earlier, only seven of the original 21 entities remain after 160 years of commercial operation. That is the attrition rate.
The Government support the continuation of this tradition of commercial issuance, simply because it is a—
Mr. Gauke: Tradition.
Angela Eagle: A tradition that does no particular harm and is particularly welcome in Scotland. A different debate goes on in Northern Ireland about the practice. The Government do not wish to see that tradition draw to a close by enacting legislation that would ban it; it is appreciated particularly in Scotland. We are not seeking to discourage note-issuing commercial banks from continuing to issue their own banknotes, but it is a privilege and is not a right that should be open to all. It is not a commodity that should be bought and sold. It is an historical quirk that we can support, but for obvious reasons, we would not seek to revive or expand it. The hon. Member for Dundee, East is getting to his feet.
Stewart Hosie: It is certainly historical, but I think that it is more than a quirk. Perhaps I can help the hon. Member for Gosport with his question. Although the value may be modest in cash terms, the promotional value is enormous, not only for Scotland, but particularly for the banking sector in Scotland. It is probably an incalculable amount of money. This is rather more than an historical quirk.
Mr. Bone: In her earlier remarks, the Minister said that the decline was partly due to mergers and that is why those involved dropped out. There is a massive merger at the moment regarding one of those banks. We must follow the consequences of what the Minister was saying, namely that we do not want to expand the right to issue notes to different banks. However, lawyers will get involved with the bank that does issue them. If we follow the logic of the argument, would that not be a reason for stopping it at that stage?
Angela Eagle: It depends on how the merger is done. As I said earlier, issuing rights are vested in the underlying corporate entity. If that corporate entity were to disappear in a merger with another institution, its issuing rights would go. In the case of Lloyds TSB-HBOS, the Bank of Scotland—a subsidiary of HBOS—is the issuing bank. A change of ownership at Bank of Scotland, as long as it remains an entity, will not affect its issuing rights. If Lloyds TSB was going to take over and extinguish the Bank of Scotland, I am sure that the hon. Member for Dundee, East would have a few words to say. If the Bank of Scotland ceased to exist, that would extinguish its issuing rights. However, the fact that it remains a subsidiary means that that is not an issue in this case.
The hon. Member for Gosport asked what the value of the authorisation to issue was. This is a commercial matter. During three rounds of consultation about the changes that are now in part 6, no bank responded that the right to issue caused distortion or unfair competitive advantage. That issue was not raised. I do not have the figures that the hon. Gentleman requested to hand—as I said, this is a commercial matter. However, I think that £3.5 billion of Scottish banknotes and £1.6 billion of Northern Irish banknotes are in circulation. To the value of £40 billion of Bank of England notes are in circulation. That will at least give the hon. Gentleman a view about the larger part of the circulating currency that we are talking about.
I hope that with those answers, the Committee will support clause 199.
Question put and agreed to.
Clause 199 ordered to stand part of the Bill.
Clause 200 ordered to stand part of the Bill.

Clause 201

Banknote regulations
Question proposed, That the clause stand part of the Bill.
Stewart Hosie: I am confident that the regulations and the rules will cover matters such as standard size, security features and the weight of notes. I know that the banks have been lobbying hard regarding concerns that they had in the early stages of consultation. Will the Minister confirm—we will cheer if she does—that the Government do not intend to have a single note of each denomination? Will they continue to allow limited edition notes, which are valuable for many reasons, to be issued, as long as they meet all the rules and regulations that will cover all notes?
Angela Eagle: The framework governing the issue of Scottish and Northern Irish banknotes is set out in the primary legislation. The detail of the provisions in part 6 are, as the hon. Member for South-West Hertfordshire said, to be captured in regulations that will be subject to the affirmative resolution procedure. A draft set of the regulations has been provided to the Committee to assist our debates. Further, there is provision for making banknote regulations that contain details about the treatment, holding and issuing of banknotes by authorised banks. As hon. Members will see when we debate clause 203, the regulations will require authorised banks to have backing assets. They will also contain detailed provisions on important issues such as how backing assets may be held, how they may be treated in an insolvency, and how reports about them should be made by authorised banks.
I welcome hon. Members’ comments on the draft regulations, but I ask them to bear in mind that they are in draft form. I sent them to the Committee merely to illuminate debate on the relevant clauses. They are not totally baked and out of the oven, but are to some extent a work in progress; some of them need further work before they can be consulted on.
The draft regulations contain detailed provisions relating to, among other things, the conditions attached to approved or designated locations or agents, the proportion of backing assets to be held in a particular form or location and the scope of the banknote rules. Those rules are intended—this brings us to a question that the hon. Member for South-West Hertfordshire asked—to be even more detailed in relation to how the regulations work. In essence, the banknote rules are even more detailed and rely and hang on the statutory instruments—the secondary legislation—that we will pass, which is why I do not agree with the hon. Gentleman’s worry that somehow the banknote rules will avoid parliamentary scrutiny. The regulations will be passed by this House in affirmative form and voted on. The banknote rules will then iterate even more detail about how the Bank of England will fulfil its obligations in that respect.
In answer to the perfectly reasonable question about limited edition notes asked by the hon. Member for Dundee, East, I can confirm that it will still be possible to issue limited edition notes. With those reassurances, I hope that hon. Members will agree that clause 201 stand part of the Bill.
Question put and agreed to.
Clause 201 ordered to stand part of the Bill.
Clause 202 ordered to stand part of the Bill.

Clause 203

Backing assets
6.30 pm
Angela Eagle: I beg to move amendment No. 21, in clause 203, page 98, line 7, leave out ‘processes’.
The Chairman: With this it will be convenient to discuss Government amendments Nos. 22 to 27.
Angela Eagle: The amendments are a technical clarification of references to insolvency in clauses 203 and 206 of part 6. The need for the amendments was not appreciated until a comparatively late stage, and I regret the inconvenience to the Committee in having to table Government amendments. As I have said, the provisions of part 6 are primarily concerned with ensuring that noteholders of commercial issuing banks are protected in the event that the issuing bank gets into difficulties. Clause 203(5) specifies:
“Banknote regulations may make provision about the treatment of backing assets in relation to insolvency processes”.
Clause 206(1) states:
“Banknote regulations may make provision in connection with the application to an authorised bank of ...the special resolution regime (under Parts 1 to 3), insolvency process”.
The insolvency process is defined in clause 203. It is the policy intention for the Bill to enable banknote regulations to make a provision in relation to the law of insolvency and the law of an insolvency process—for example, in relation to the treatment of backing assets. As hon. Members will be aware, that is necessary because not all insolvency processes start on insolvency.
The state of affairs where a bank can no longer afford to pay its debts is defined in section 123 of the Insolvency Act 1986. As currently drafted, the provisions only allow banknote regulations to make provisions in relation to insolvency processes, so the amendments are necessary to ensure that banknote regulations can make provision for insolvency or an insolvency process. Amendments Nos. 23 and 24 mean that insolvency can be taken to include a reference to insolvency process, which may include liquidation, administration, receivership and so on. The provisions are of integral importance to part 6 to ensure that provision can be made to ring-fence backing assets in order to back those notes in the event of insolvency or an insolvency process.
Amendment agreed to.
Amendments made: No. 22, in clause 203, page 98, line 8, leave out ‘an insolvency process’ and insert ‘insolvency’.
No. 23, in clause 203, page 98, line 18, leave out ‘“insolvency process” means’ and insert
‘a reference to “insolvency” includes a reference to’.
No. 24, in clause 203, page 98, line 19, leave out paragraph (a) and insert—‘(a) liquidation,’.—[Angela Eagle.]
Question proposed, That the clause, as amended, stand part of the Bill.
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