Stewart
Hosie: The way in which the Bill treats Scottish and,
indeed, Northern Irish banknotes constitutes a pragmatic approach. This
may be the only time during this Parliament that I say these words, but
I think that the Government have listened to the sector. I am pretty
confident that by ensuring that banknotes can be backed by both
interest-bearing and non-interest-bearing assets, we now have a
platform that will secure the long-term future of the issuing of
Scottish banknotes, while having the flexibility to ensure the
integrity of the issue of all banknotes in the UK. In particular, the
comments that the Minister made a short time ago about possibly having
to act quickly in certain circumstances were absolutely
right. In
a previous contribution, the Minister identified the fact that
significant costs are associated with the printing, distribution and
holding in security of Scottish notes. Those will need to be offset by
the ability to earn interest on a reasonable proportion of the assets
that are backing the notes in circulation. However, as drafted, the
Bill remains silent on the precise mix of assets that the issuing banks
will be allowed to hold. Striking the right balance between
interest-bearing assets and non-interest-bearing assets will be
critical to ensuring the future of banknote issuance in Scotland, and
its profitability or its being economic at all. If future regulations
are too restrictive on the level of interest-bearing assets that can be
held against the notes, it could fatally undermine the ability of the
issuing banks to continue to produce and issue the notes. Will the
Minister therefore provide the Committee with an assurance that any
future regulations on that matter will be drafted so as to ensure that
the activity of issuing Scottish notes remains
economic? I
know that there is general discussion of a 60/40 asset split. That will
be finalised at some point and I hope the Minister can confirm that
today. Will she also provide assurances that any such split will remain
broadly as it is—at 60/40—and that there is no intention,
certainly by her or by the Government, to use the regulations to change
the balance between interest-bearing and non-interest-bearing assets
backing the
notes?
Mr.
Gauke: Backing assets may be the key subject that we shall
consider during the Bill’s proceedings. The current arrangement,
as I understand it, is that a small level—described as the
fiduciary level—of notes issued by Scottish and Northern Irish
banks is not covered by backing assets. When I say “a small
level”, it appears to be very small; 0.125 per cent. of notes
issued, according
to the 2005 figures. That fiduciary level allows the banks to make a
return on issuing notes in a process called seigniorage—I hope I
pronounced it
correctly. In
2005, the Government proposed removing the fiduciary level and
requiring 100 per cent. backing. They said at the time that it was to
ensure that there was protection for all noteholders and to provide a
level playing field. That produced quite a response and, as the hon.
Member for Dundee, East said, the Government have listened. In the July
2008 consultation document, the Treasury stated that some respondents
felt that insufficient account had been taken of the costs associated
with issuing banknotes and the social benefit supported by the income
derived. [Interruption.] Yes, I should be grateful if the
Minister could explain the meaning of social benefit supported by the
income derived. Are we talking about particular charities that are
supported by seigniorage? The proposal in the consultation document is
implemented in the draft indicative regulations that the hon. Lady has
circulated and which suggest the 60/40 split, whereby 60 per cent. of
the value of banknotes is backed by Bank of England banknotes and the
remainder is in a segregated interest-bearing
account. I
understand how the proposal deals with the provision of support to
noteholders and ensures protection for them. Subject to the speed at
which some noteholders can obtain payment from the segregated
account—an issue to which we shall return in a moment—and
a level playing field, does that give those note-issuing banks an
advantage? Will there be a source of income that is not available to
their competitors? I assume that the Government’s intention is
to provide sufficient incentive to make it worth while for the banks
continuing to issue the notes, and that they do not want to stop that.
Equally, however, they do not want to provide an additional source of
income that would not otherwise be available. Is that the intention
driving the
Government? Furthermore,
although the Minister may correct me, I should have thought that the
balance between interest-bearing assets and non-interest bearing assets
would depend on what interest rates were at a particular time, and that
there might be certain periods when 60/40 was adequate, but at other
times the income for the banks would be insufficient or excessive, so
we run into issues relating to a level playing field. Will the hon.
Lady say whether such a concern is legitimate or, if it is not, can she
explain
why?
Angela
Eagle: The provisions are intended to ensure that holders
of Scottish and Northern Irish banknotes issued by authorised banks
will be afforded a level of protection similar to that for holders of
Bank of England banknotes. That is the first and foremost aim of part 6
of the Bill. The clause
states: “Banknote
regulations must require authorised banks to have backing
assets” to
make a reality of that protection. Backing assets are assets of the
sort specified in banknote regulations. Regulation 3 of the draft
indicative banknote regulations that I have circulated to the Committee
sets out three types of backing asset: Bank of England banknotes,
current coin of the UK and funds placed on deposit in sterling from the
account held by the Bank of
England. The
regulations then set out precisely what form the backing assets should
take in relation to banknotes in circulation and notes that have not
been issued, but are
held otherwise than in designated locations, for example, in bank tills,
in ATMs or in transit. It is not surprising that they were not
mentioned in the 1845 legislation, but we thought it was time that we
acknowledged their existence. Those notes are considered to have the
potential to enter circulation, including in error or by theft, so it
is necessary for them to be fully backed to protect holders of Scottish
and Northern Ireland
banknotes. Of
key importance is subsection (5), which provides that banknote
regulations make provision for the treatment of backing assets in
relation to insolvency processes. That is the ring fence we were
talking about earlier. It means that should one of the issuing banks
have such difficulties, there will be no ambiguity whatever about the
fact that the backing assets are there to back the notes. That again
features in part 6 of the
Bill. Part
3 of the draft indicative regulations, in particular regulations 11 and
12, makes it clear that, in the event of a banknote issuer becoming
insolvent, noteholders can obtain full value for their notes from the
backing assets. The ring fence will last for a protective period
defined in regulation 13(2) as one year from the date on which the
insolvency procedure commences. It can be extended by the Treasury in
consultation with the Bank of
England. 6.45
pm
Mr.
Gauke: Perhaps the Minister can allay my fears. Is it
possible that there will be one class of noteholders who will be able
to get to the relevant bank and exchange for a Bank of England note
quickly, which will cover the first 60 per cent., whereas the rest will
be left waiting for up to a year for the segregated account to sort
itself
out?
Angela
Eagle: I do not think that that will be the case. The
banking assets are held at the Bank of England. In the event of an
insolvency, the ring fence will keep those assets there so that they
cannot be used in the other insolvency procedures. That is in order
that any holder of an issued note from the appropriate bank can go to
the Bank of England and exchange it for a Bank of England note of the
same value. The year-long ring fence allows time for those notes to be
properly
exchanged. Under
the regulations, any backing assets that remain when the year is up can
go back into the insolvency process. The ring fence is important
because it guarantees the rights of those who would be left holding the
issued notes. The aim of the regulations is to ensure that those who
possess Scottish or Northern Irish banknotes have levels of protection
that are as good as those for holders of Bank of England
notes. The
regulations address deficiencies in the existing legislation, which
does not explicitly set out the purpose of note-covering assets. There
is currently no certainty that assets will be used in full or in part
for the benefit of noteholders, should the issuing bank become
insolvent. That worry must clearly be addressed and that is done in
part
6. Clause
203 and the draft regulations make specific provisions regarding the
backing assets that each authorised bank must hold to give holders of
Scottish and Northern Irish banknotes a similar level of protection to
holders of Bank of England banknotes and to ensure that in the event of
an issuing bank getting into difficulties, holders of its notes can
expect to receive the value of their notes.
Hon. Members
asked about the working of the regulations. The hon. Member for Dundee,
East is right to point out that there was discussion in the
consultation documents about the form in which the backing assets
should be held at the Bank of England. He talks about a 60/40 split,
which appears in regulation 5. The idea behind that is that there
should be a revenue-neutral outcome in the seigneurage earned by the
issuing banks and the Exchequer. The proposal was designed to maintain
the status quo in the economics of commercial note issuance, while
ensuring noteholder protection. That is the balance that the hon.
Member for South-West Hertfordshire spoke
about. The
Government have consistently stated that they are not seeking to
discourage note-issuing commercial banks from continuing to issue their
own banknotes. There are costs and benefits in issuing banknotes. The
solutions, as set out in regulations on how the backing assets are
held, are meant not to disturb those. Clearly, the hon. Member for
Dundee, East is right that there is a certain kudos to having banknotes
issued, and there may be advantages from that point of view, but there
are also costs in terms of printing, protecting and having assets held
to back them, and all the other associated issues.
The hon.
Member for South-West Hertfordshire was talking about whether the
interest rate was the issue, with respect to the 60/40 split, but it is
more about the costs of printing notes and having security for them.
All of those things have to be taken into account, but 60/40
seems to be widely accepted among the issuing banks as a fair,
cost-neutral approach. As the figures are to be set out in secondary
legislation they could be revisited if there were to be a sudden shift
in costs that we cannot anticipate today.
Mr.
Mark Todd (South Derbyshire) (Lab): It just occurs to me
that, as the hon. Member for South-West Hertfordshire said, there
presumably must lie some competitive advantage in being granted the
right to issue notes, which we are sanctioning a continuance of;
otherwise, unless these brave corporations are all
charities, they would have discontinued that activity. I
wonder whether anyone has assessed that advantage and quantified
it.
Angela
Eagle: Interestingly, in responses to the
consultation—here I will answer the question that the hon.
Member for South-West Hertfordshire asked about the elaboration of
social benefits—the issuing banks made the point that because
these commercial banks produce banknotes, the Bank of England can
produce fewer, thereby saving money. That is the
social—
Stewart
Hosie: Will the Minister give
way?
Angela
Eagle: Let me finish dealing with this point. They also
then have to retain the security arrangements to ensure that their
notes are safe. There is an opportunity cost to the Bank of England,
and it has to do less of that work because the commercial banks are
doing a bit of it.
I have not
seen any work suggesting what the commercial advantages to producing
banknotes are; I merely make the
observation—
Mr.
Todd: They must
exist.
Angela
Eagle: I am assuming that those issuing banks that have
continued to issue notes since 1845 think that it is a good thing to
do. We do not have a problem with it, as long as we can ensure that the
notes are properly backed, so that they are not a weak link in terms of
confidence in our currency in this country. Also, if one has to have
backing assets, that means that that money cannot be used to invest in
other areas or to get interest. Having to hold large sums in backing
assets that are Bank of England notes does not exactly earn a great
deal of interest, so there is an opportunity cost in other investments
that could be made. The hon. Member for Dundee, East no doubt has some
other examples.
Stewart
Hosie: In terms of the social benefits, I am sure that the
Minister knows and everybody in the Committee knows—they have
simply forgotten—that it is not just the banks that use Scottish
notes, but all the financial institutions as well. The modest
commercial advantage that they may have had helped to increase the
number of free-to-use automatic teller machines, which were filled with
notes from the Scottish banks. That kind of social benefit is included,
and that came from the modest advantage that the Scottish banks got.
Angela
Eagle: I was just going to come on to that argument, which
featured in the consultation.
Mr.
Gauke: I am grateful to the Minister for giving way, and
to the hon. Member for Dundee, East for stressing the modest benefits.
If memory serves me, a few minutes ago he was talking about the
incalculable benefits, but there we go.
Angela
Eagle: I hope that with that long discussion of the costs
and benefits of the measure, and given the information before the
Committee, particularly regarding backing assets, how they will be
held, and how the ring fence in the event of insolvency will work, hon.
Members will support the clause.
Question
put and agreed
to. Clause
203, as amended, ordered to stand part of the
Bill.
Clause 204
ordered to stand part of the
Bill.
Clause
205Ceasing
the business of issuing
notes Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke: The clause
states: “If
an authorised bank at any time after commencement stops issuing
banknotes, it may not resume issuing banknotes in reliance
on” these
provisions. Can the Minister confirm that that would not apply if a
bank stopped issuing banknotes owing to circumstances beyond its
control, such as industrial action or damage to the printing works?
That is not clear in the Bill.
| 
