Clause 192: Independent Report

424.     Subsection (1) enables the Bank of England to require that the operator of a recognised inter-bank payment system appoint an expert to provide a report on the effectiveness of the recognised inter-bank payment system.

425.     Subsection (2) specifies that the Bank of England can only impose this requirement where the Bank thinks that the operator is not adhering sufficiently to the principles (as set out in clause 185), or where the operator is failing to comply with a code of practice (as set out in clause 186), or where the Bank of England feels that such a report is necessary to help it carry out its functions in accordance with this Part.

426.     Subsection (3) enables the Bank of England to make certain stipulations such as the nature of the expert the operator of the payment system must appoint (for example experience and qualifications), the content of the expert’s report, how the report is subsequently treated (including whether or not it is to be published), and the timeframe within which the report must be produced.

Clause 193: Compliance failure

427.     This clause defines the use of the term “compliance failure” throughout this Part. A compliance failure is taken to mean the failure of an operator of a recognised inter-bank payment system to comply with a code of practice (clause 186), with a requirement regarding system rules (clause 187), with a direction made by the Bank of England (clause 188) or with a requirement made with regard to producing an independent report (clause 192).

Clause 194: Publication

428.     This clause gives the Bank of England the power to publish details of a compliance failure. This is, in effect, a power of public censure. Subsection (2) gives the Bank of England the power to publish details of a sanction imposed under clauses 195 to 197.

Clause 195: Penalty

429.     In the event of a compliance failure, subsection (1) gives the Bank of England the right to impose on the operator of a recognised inter-bank payment system a financial penalty.

430.     Subsection (2) provides that the financial penalty is to be paid to the Bank of England and is enforceable as a debt.

Clause 196: Closure

431.     This clause enables the Bank of England to give a closure order to an operator of a recognised inter-bank payment system.

432.     Subsection (1) provides that the Bank of England may make a closure order only if it is satisfied that any deficiencies in the design of the system, or any disruption of its operation, would be likely to threaten the stability of, or confidence in the UK financial system (consequences of a “systemic nature”) or could have serious consequences for business or other interests throughout the United Kingdom (“system-wide consequences”).

433.     Under subsection (2), the Bank of England can specify that the payment systems must cease operation for a specified time, until further notice, or permanently. The nature of the closure order will depend on the seriousness of the threat to financial stability or to other business interests in the UK and the individual circumstances of the case. Subsection (3) provides that a closure order may apply to some or all of the payment system in question.

434.     Subsection (4) makes it an offence for an operator to fail to comply with a closure order. A financial penalty may be imposed on a person found guilty of contravening the order.

Clause 197: Management disqualification

435.     This clause enables the Bank of England to make an order to disqualify a person from being an operator of a recognised inter-bank payment system (see subsection (1)) or from holding a position of management responsibility within such a system (see subsection (2)).

436.     Under subsection (3) it is an offence to breach a prohibition as set out subsections (1) or (2). A financial penalty may be imposed on a person found guilty of contravening the order.

Clause 198: Warning

437.     This clause requires the Bank of England to give a warning notice of its intention to impose a sanction (clauses 194(1)-197 (see subsection 2)) and allow 21 days for representations, which it must then consider before it imposes various sanctions under this Part. The Bank of England must issue a decision notice stating whether or not it intends to impose the sanction.

438.     In certain circumstances the Bank of England has the power, under subsection (3), to take immediate action (without giving notice) and to give a closure order under clause 196 or to make a disqualification order under clause 197. The Bank of England may make such orders if, for instance, the operator of a recognised inter-bank payment system is committing a compliance failure of such a serious nature that it poses an imminent threat to the stability of the UK financial system.

Clause 199: Appeal

439.     This clause provides for appeals against Bank of England’s decisions to impose sanctions under this Part (clause 198(1)(d)), or against the imposition of a sanction without notice (clause 198(3)), to be made to the Financial Services and Markets Tribunal.

440.     Subsection (3) applies Part 9 of the Financial Services and Markets Act 2000 with necessary modifications

Miscellaneous

Clause 200: Fees

441.     This clause enables the Bank of England to require the operators of recognised inter-bank payment systems to pay fees (see subsection (1)) but only in accordance with a scale of fees set by the Treasury in Regulations (see subsection (2)). Fees may be charged by the Bank of England to cover expenses incurred in undertaking its functions under this Part, for example, the cost of appointing an inspector under clause 190.

442.     Subsection (4) allows the Bank of England to enforce a fee as a debt.

Clause 201: Information

443.     This clause gives the Bank of England a statutory power to gather information which it considers will help the Treasury in its decisions about recognition orders or which the Bank requires in connection with its functions under this Part.

444.     Subsection (2) allows the Bank of England to impose a requirement on recognised inter-bank payment systems to notify it of certain events.

445.     The Bank of England may, under subsection (3), require this information to be provided in a specified form or manner, at a specified time, or in respect of a specified period.

446.     Subsection (4) allows the Bank of England to share information obtained under this clause with the Treasury and the FSA; the Treasury’s, the FSA’s or the Bank’s international equivalents; the European Central Bank; and the Bank for International Settlements. Subsection (5) provides that the Bank of England may disclose information in accordance with this clause irrespective of contractual rights or other confidentiality requirements.

447.     Under subsection (6) the Treasury can, by regulations, specify other persons with whom the Bank of England may share the information. Subsection (7), specifies that the Bank of England may publish information obtained under this clause, subject to any regulations concerning the manner and extent of publication, made by the Treasury under (subsection (8)). The Bank currently publishes an annual Payment Systems Oversight Report and this clause can be used to enable such a report to be published.

448.     Subsection (10) makes it an offence to fail to comply with a requirement under this clause or to knowingly give false information under this clause. A financial penalty may be imposed on a person found guilty of such conduct (see subsection (11)).

Clause 202: Pretending to be recognised

449.     This clause makes it an offence for the operator of a non-recognised inter-bank payment system to assert or otherwise do anything to suggest that their system is recognised. A financial penalty may be imposed on a person found guilty of such conduct (see subsection (2)).

Clause 203: Saving for informal oversight

450.     This clause ensures that the Bank of England can continue to engage in informal oversight of inter-bank payment systems (see subsection (1)) and to use means of oversight other than the provisions in this Part in relation to recognised inter-bank payment systems (see subsection (2)).

PART 6: BANKNOTES: SCOTLAND AND NORTHERN IRELAND

Introduction

Clause 204: Overview

451.     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 205: “Banknote”

452.     This clause defines what is meant in Part 6 by the term “banknote”.

Clause 206: “Issue”

453.     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.

454.     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 207: “Authorised bank”

455.     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 208 “Commencement”

456.     This clause defines what is meant in Part 6 by the term “commencement”. “Commencement” means the date set in an order made by the Treasury under clause 253 for the coming into force of clause 209.

Authorisation to issue

Clause 209: Repeal of old authorising enactments

457.     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 210: Saving for existing issuers

458.     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 211: Consequential repeals and amendments

459.     This clause sets out the further legislative repeals and amendments that are required as a result of the provisions of clause 209.

Regulations and rules

Clause 212: Banknote regulations

460.     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.

461.     By virtue of clause 249, 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 213: Banknote rules

462.     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.

463.     The banknote rules 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 214: Backing assets

464.     Subsection (1) provides that the banknote regulations must require authorised banks to have backing assets.

465.     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 specified bank account at the Bank of England or another institution or class of institution.

466.     Subsection (3)(a) requires the banknote rules to include provision for determining the value of backing assets to be held.

467.     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 223.

468.     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).

469.     Subsection (5) provides that the banknote regulations may make provision about the treatment of backing assets in relation to insolvency (as defined in subsection (6)). In particular, the banknote regulations may modify insolvency law 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 215: Information

470.     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.

471.     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. The regulations may also make provision enabling the publication or disclosure of anything done in contravention of this Part or banknote regulations or rules, and also details of any action taken under clause 218 (Offence: unlawful issue), clause 219 (Financial penalty), clause 220 (Termination of right to issue) or clause 221 (Application to court).

472.     Subsection (3) requires 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 18 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 216: Ceasing the business of issuing notes

473.     Subsection (1) provides that, if an authorised bank discontinues the issue of banknotes, its note-issuing privilege cannot thereafter be revived.

474.     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 217: Insolvency, &c

475.     Subsection (1) provides that the regulations may make provision in connection with the application of the special resolution regime to an authorised bank, or a provision about insolvency(as defined in clause 213(6)).

476.     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.

477.     Subsection (3) provides that the issuing rights of an authorised bank (as provided for in clause 210) cannot be transferred or acquired, particularly in connection with anything done under Part 1 of this Bill. This is consistent with the prohibition in this Part preventing any new commercial banks from issuing banknotes.

478.     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).

479.     Subsection (5) provides that an authorised bank that enters insolvency (within the meaning of clause 214(6)) will lose the right to issue notes.

480.     Subsection (6) permits the banknote regulations to make transitional provision where an authorised bank loses the right to issue notes.

481.     Subsection (7) provides that a reference in this clause to “special resolution regime”, includes a reference to any law of another country that the Treasury identifies in banknote regulations as serving a similar purpose.

Enforcement

Clause 218: Offence: unlawful issue

482.     Subsection (1) makes it a criminal offence to issue banknotes in Scotland or Northern Ireland otherwise than in reliance on clause 210.

483.     Subsection (2) sets out the penalties applicable to a person convicted of the unlawful issue of banknotes in Scotland or Northern Ireland.

484.     Subsections (3) to (5) 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 210. “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).

485.     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 219: Financial penalty

486.     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.

487.     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 220: Termination of right to issue

488.     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.

489.     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.

490.     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.

491.     Subsection (7) provides that the banknote regulations may make transitional provision where an authorised bank loses the right to issue notes.

Clause 221: Application to court

492.     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 222: Organisation

493.     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 223: Discretionary functions

494.     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 224: Exemption

495.     This clause provides that clause 218(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 225: Consolidated Fund

496.     This clause provides for any expenditure incurred by the Treasury in connection with the exercise of the powers in Parts 1 to 3 of this Bill, in connection with the giving of financial assistance to banks or other financial institutions 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.