Banking Bill

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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.
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 205

Ceasing 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.
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