The Economic Secretary to the Treasury (Ian Pearson): I beg to move,

It is a pleasure to serve under your chairmanship this afternoon, Mr. Streeter. As members of the Committee will be aware, the Banking Act 2009 contains a range of measures to enhance the resilience of the United Kingdom financial system now and in the future. The regulations laid before us today were made under parts 6 and 8 of the 2009 Act, and they update, strengthen and modernise legislation that dates from 1845.

Currently, seven banks are authorised to issue banknotes in Scotland and Northern Ireland, and the Government acknowledge the cultural importance of that. The fundamental objective of the legislation is to ensure that holders of Scottish and Northern Ireland banknotes have similar protection to holders of Bank of England banknotes and, in the event of an issuing bank failing, can obtain full face value for their notes. That is important for consumer protection and financial stability.

Part 6 of the 2009 Act contains the overarching principles of the new regulatory regime, details of which are contained in the regulations. The Treasury and the Bank of England have been working closely together and with the issuing banks to develop the regulations and ensure that the underlying policy objectives are met. They have also been working closely on the operational details of the new regime that will be contained in the banknote rules, which will be made under the regulations by the Bank of England and must be approved by the Treasury.

At the core of the regulations are the provisions relating to the holding of ring-fenced backing assets to ensure the protection of note holders. In the event of a note-issuing bank becoming insolvent, the Bank of England is required to make arrangements to ensure that the insolvent bank’s ring-fenced backing assets are applied for the purpose of satisfying note holders’ claims and that note holders may obtain full value for their notes by exchanging them for an equal value of banknotes, coins or funds of another bank.

Clearly, for the regime to operate effectively, the Bank of England needs to be able to require banks to provide such information as it may reasonable require for the purpose of exercising its functions, or for verifying or monitoring a bank’s compliance with the new regime. The regulations will therefore enable the Bank of England to make the relevant rules. Similarly, enforcement provisions ensure compliance with the new regime. The Bank of England may impose a financial penalty on an authorised bank if it has failed to comply with any provision of the banknote regulations or rules, subject to a maximum annual cap, as set out in the regulations.

I bring to the attention of hon. Members a point with regard to the operation of the enforcement provisions that came up via the consultation that the Treasury conducted on the draft regulations. Respondents to the consultation asked that an independent appeals or arbitration panel be established in the event that an authorised bank wanted to dispute a penalty imposed by the Bank of England. The Bank of England has confirmed that the penalty policy will set out an appeals process to which authorised banks may have recourse if they are dissatisfied with the Bank’s decision on such a penalty.

As I have said, the fundamental principle underlying the regulations is to offer holders of Scottish and Northern Ireland banknotes protection similar to that offered to holders of Bank of England banknotes. The powers conferred by the regulations on the Bank of England will equip it to carry out its role as regulator effectively and ensure that the objectives of the provisions are fully met. The regulations will therefore enable the current long-standing tradition of commercial bank issuance in both Scotland and Northern Ireland to continue, and I commend them to the Committee.

Mr. Greg Hands (Hammersmith and Fulham) (Con): It is a pleasure to serve under your chairmanship this afternoon, Mr. Streeter. As we know, the United Kingdom is almost unique in allowing commercial banks to issue banknotes, but although that might be regarded as a quirk of history, it is greatly valued by the people of Scotland and Northern Ireland and a tradition that Conservative Members strongly support. Indeed, we would like to encourage greater recognition of Scottish and Northern Irish banknotes elsewhere in the UK, where there is sometimes some reluctance to accept them.

My hon. Friend the Member for Dumfriesshire, Clydesdale and Tweeddale (David Mundell) introduced a private Member’s Bill on this very issue earlier this year, and I was delighted to respond to it for the official Opposition. It is an issue that we should certainly return to, although it is not quite the same as that before us today.

As the Minister said, the Government sought to update the legal framework underpinning notes from Scotland and Northern Ireland in the Banking Act 2009. The seven issuing banks had worked happily under the old scheme since 1845, but there were areas of ambiguity and risk. The Government were particularly concerned to ensure that sufficient ring-fenced backing assets were held at the Bank of England or in approved locations to protect note holders in the event of an issuing bank’s collapse or difficulties. That seems sensible. Note holders have no protected status as creditors, and although there was no discernible lack of confidence about the approximately £5 billion of outstanding commercial notes in circulation, recent events have caused everyone to look closely at what would happen if banks failed.

Backing assets were required before the 2009 Act, but they were not explicitly ring-fenced. As the explanatory notes state, banks have been

That was not necessarily improper, because issuing banks need to obtain a return on a proportion of the backing assets to fund the cost of producing the notes in the first place. However, it was a source of risk, and the upshot is the new 60:40 rule, with 60 per cent. of the assets held as Bank of England notes and 40 per cent. held in an interest-bearing account. Much of what we are considering today simply puts into effect part 6 of the 2009 Act.

I have some questions. First, I echo the point that my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) made in the Committee that considered the Banking Bill. He rightly said that the devil may be in the detail. One problem is that we do not know the details of the banking rules that the regulations will authorise. We know from the Treasury’s published summary of responses to its consultation that the banks have seen a preliminary draft of the rules; but unfortunately, the House has not. I appreciate that the primary legislation created the situation, but I remain concerned that we might be allowing the Bank of England to do as it pleases in this regard. Has the Minister seen a copy of the new banking rules, and what reassurance can he provide that the spirit of the regulations will carry over into the rules?

I am worried about the Bank of England’s intention to spend a relatively large amount of money on supervising the system. It sounds simple in the Minister’s explanation, but the annual administrative costs of the new framework across the seven issuing banks—not the Bank of England—is estimated to be £100,000, or approximately a modest £14,000 for each issuing bank, but the costs for the Bank of England are estimated to be £500,000. Perhaps the draft rules—unfortunately, we do not have them before us—explain why it costs 35 times as much to administer the rules in London as it costs to comply with them in Belfast or Edinburgh. Is the Bank of England gold-plating what is, conceptually at least, a simple accountancy task, and is the balance of costs between the Bank of England and the issuing banks the right one? I wonder whether the estimated cost to the banks is too low? Are the Government sure that they have correctly estimated both the direct and indirect costs of the regulations and associated new security regimes?

I should like some reassurance about the approved locations for Bank of England notes held as backing assets, which could be more of an issue in Northern Ireland than in Scotland. We know that great strides have been made in Northern Ireland, but an issue remains about security vehicles moving cash around there given the recent history. I should like some reassurance on what work the Treasury has done about that problem. It seems likely that a number of locations will be approved in Northern Ireland, so what assessment has the Minister made for both the consequences of security movements to and from those locations and, indeed, the security at the locations themselves for holding all the banknotes?

The Minister mentioned an independent appeals process. What cost estimate has he put on that process and will it add to the £500,000 costs that are already assessed for the Bank of England?

Mr. Jeremy Browne (Taunton) (LD): In addition to the cost of the appeals process, may I ask the Minister through the hon. Gentleman exactly what that appeals process will consist of, because that is not clear from the regulations?

Mr. Hands: The hon. Gentleman makes a pertinent intervention. I am looking forward to the Minister’s response on a little bit more of the detail, not just about the cost but the process.

The schedule for commencement of the regulations seems ambitious. Given that the Bank of England is still finalising the rules and that we do not even have them in front of us today, is the Minister confident that the banks will be able to meet all of the requirements by 23 November? Some in the industry think that a delay of a month or two would be sensible, and we would welcome the Minister’s view on how realistic the timetable might be.

Mark Durkan (Foyle) (SDLP): It is a pleasure to be here under your chairmanship this afternoon, Mr. Streeter. I have obviously talked to several banks in Northern Ireland that will be covered by the regulations to issue banknotes. It is really appreciated in the region that we have our own vernacular currency in a sense. It adds to the richness of the region, as the banknotes issued in Scotland do there. I hope that the regulations will encourage more people throughout the UK to appreciate the legality, worth and reliable value of the banknotes whenever they receive them.

I want the Minister to address only a couple of issues. First, can we be given a bit more reassurance that the Bank of England will not use the wide rule-making powers under the regulations in a capricious way? Some banks are a little worried that, in a given situation, a problem with one bank might lead to quick rule changes that could create problems for another bank. The sweeping nature of the rule-making powers available to the Bank of England seems to enable it to exercise them at any time of its choosing to any degree. Will the Minister reassure us about that?

Secondly, in relation to what is essentially the introduction of a new system, banks are saying that they do not have a problem with the purposes and principles behind the regulations. However, they say that there might be an issue in the first few months about whether they can show full and robust compliance in reliance to each question that is asked. They want to drive on the hard shoulder for a little while, in the first few months—certainly, at least for the first three months—so that the introduction of the rules will not lead to undue difficulties or concerns for either the banks or banknote holders.

I can say on behalf of my constituents that we welcome the purposes with which the Government are acting today, in making sure that the holders of banknotes issued by banks in Northern Ireland have the same protection as those holding banknotes issued by the Bank of England. That rule and principle of equal protection is hugely important to the confidence that people can have in the banks in Northern Ireland, but it would be of help if the Minister explained how the Bank of England’s rule-making powers are likely to be conducted and how they will be applied and administered for the first few months.

Ian Pearson: I welcome the contributions from the hon. Members for Hammersmith and Fulham and for Foyle and their support for the general objectives of the regulations, which as I said earlier implement part 6 of the 2009 Act. The regulations have been widely welcomed outside this place.

I shall try to answer all the questions that have been asked. In response to the point made by my hon. Friend the Member for Foyle, the Bank of England will be operating its rule-making powers within the framework of primary legislation and the secondary legislation that we are implementing today. I further assure him that, as set out under regulation 3(4), the Treasury must approve the banknote rules, including amendments to, or revocation of, part of them. The Bank will be operating within the relatively narrow context of banknote rules that we are discussing today, and I have no reason to believe that it will want to do anything other than act reasonably.

The hon. Member for Hammersmith and Fulham asked whether I had seen a copy of the draft rules. I have the second working draft with me, but I would not recommend it as an exciting read. It goes into a lot of detail, and it gives a flavour of how the Bank will implement the policy, which is sensible way of dealing with process.

Mr. Hands: Will the Minister clarify the status of the second draft rules? I am sure he is right that they do not make for particularly enjoyable bedtime reading, but are they available, for example, to hon. Members who have an interest in such matters? If the hon. Gentleman has sent them out to the banks, they should be available to those in the House.

Ian Pearson: My understanding is that the draft rules have been circulated to the banks. They are at a working draft stage. As the banks will be the users of the rules, it is not unreasonable that they receive such information. It will not be normal practice for working drafts to be circulated on every issue on which the Government consult interested parties, but I do not anticipate a problem in making copies of the rules available. I imagine that the Bank will want to publish them on its website. Having said that, I am looking at my officials, but there is no reason why anyone should want to be anything other than completely transparent about how such rules are to be operated.

In addition to the other points raised by the hon. Gentleman, I shall deal with the appeals process. As for the charge that the Bank of England might be gold-plating the costs of implementing the regulations, I do not believe that it is gold-plating its proposals. He will know from the impact assessment that the costs are relatively modest. The assessment was completed with all the information that was available at the time, including an acknowledgment of the potential additional costs to bring some sites up to the required standards.

The hon. Gentleman will be aware of the issues about whether some sites might require additional work, a subject on which we have consulted the banks. The impact assessment may be updated when the regulations are made if, at that time, a quantitative evaluation can be made of the costs once the Bank of England has visited sites and the relevant conditions have been completed. Much work is going on in that area. In the general scheme of things, we are not expecting significant costs to be incurred either by the banks in complying with the Bank of England’s request or, indeed, by the Bank of England in doing such work to make sure that the overall policy objectives are met.

Mr. Hands: The Minister is being generous. Will he confirm what he said about the costs for bringing the sites up to standard? I think the implication of what he is saying is that those costs will be met by the Bank of England, not the issuing banks. Are those costs included in the £500,000, or is he saying that they will be met by the issuing banks?

Ian Pearson: I am certainly not saying that the costs will be met by the Bank of England. We are talking about whether sites currently operated by some of the issuing banks are up to scratch and secure enough to meet the highest standards that are required. If those sites are judged not to meet the relevant standards, it will be up to those banks to meet the costs of making sure that they do so. That is the right thing to do. The issuing banks did not query the assumptions about additional costs. We have not had any strong push-back from banks on the costs of applying the regulations, and we have proceeded in a co-operative spirit on these matters.

On the appeals process, it is envisaged that the Bank of England will set up a dedicated appeals panel with an independent element that will hear appeals against any penalties imposed by the Bank of England. That gives banks a right of appeal in a way that best suits the requirements of the banknote issuer. The appeals process does not deprive the authorised banks of their right to judicially review the Bank of England once the appeals process is complete. My understanding is that it will have a standard independent element and follow normal practice.

Mr. Hands: I am not sure that the Minister has properly answered my question about getting the balance right on costs. Does he think that it is right for the Bank of England to meet the cost of £500,000, while the issuing banks will meet only a £14,000 cost? Is he sure that the Treasury has got that balance right?

Ian Pearson: As I said, there will be some costs to the Bank of England in implementing this regime. We do not believe that those costs are unreasonable. The costs to the authorised banks are as stated in the impact assessment. However, I have indicated that they may rise if costs are incurred in getting some sites up to the appropriate standards required by the Bank of England. In all those areas, I am sure that the hon. Gentleman agrees that the costs are not substantial.

The final point raised by the hon. Gentleman concerned the time scale. He asked whether the regime was being implemented too quickly. As he will be aware, we first consulted on the issue of Scottish and Northern Ireland banknotes in 2005. Since then, we have continued to engage with the authorised banks as proposals were developed through the two consultations in 2008 and through the consultation this year on the regulations. Since the Banking Act received Royal Assent in February 2009, work with the issuing banks has continued to ensure that all parties are ready for implementation. I do not think that we are moving too fast. The time scale is fully realisable, and we envisage that the new regime will be up and running in the final quarter of 2009. That covers all the points that have been raised during this brief debate.

Mr. Jim McGovern (Dundee, West) (Lab): I thank the Minister for giving way. If I may digress slightly, perhaps my hon. Friend the Member for Foyle and even my hon. Friend the Member for Leeds, East will have experienced how, when a Scottish banknote is handed over in England, it is held up to the light as if it is a forgery. Does the Minister agree that it is infuriating when people in England seem to regard Scottish and Irish money as a foreign currency?

Ian Pearson: I understand the point that my hon. Friend makes about Scottish and Northern Irish banknotes not being universally accepted in England and Wales. The hon. Member for Hammersmith and Fulham made the same point. There is absolutely no reason why those notes should not be widely acceptable. There does not seem to be much of a problem in places such as London and other major cities. It is not an issue of legal tender, as some people think. Bank of England banknotes have legal tender status only in England and Wales; they do not have such status in Scotland or Northern Ireland, but they are regularly accepted there. It is just an issue of acceptability in the normal process of trade. I do not think that I should go into any more detail at this point.

Mr. Browne: On a related but not identical point—

Ian Pearson: I am more than happy to give way on such a point.

Mr. Browne: The related point is that, occasionally, retailers accept euros even if they will not accept Scottish and Northern Irish notes. Does the Minister imagine that the provisions would have implications if Britain joined the single currency? What would the implications be for Scottish and Northern Ireland bank issuers? Would they no longer be allowed to issue independently?

The Chairman: Order. Will the Minister be brief, as we are straying wide of the regulations?

Ian Pearson: At the moment people understand what a fiver, tenner or £20 note looks like when it is issued by the Bank of England. There is less familiarity in the UK as a whole with banknotes issued by some of the Northern Irish banks and, for that matter, some Scottish banknotes. Familiarity is one of the barriers to wider acceptability. The only way of getting around that is greater publicity. I would not want to speculate on the introduction and acceptability of the euro. My hon. Friend the Member for Foyle lives in a part of the United Kingdom where sterling and the euro are widely accepted and pretty much interchangeable. That does happen in the north of Ireland. In London, retailers can be found who accept euros just as they do pounds. It is for the individual company or organisation to decide whether they want to accept that currency, just as it is for them to decide whether they want to accept Scottish and Irish banknotes as well.

In my opinion, nothing should be allowed to get in the way of sensible commerce and trade. What we are talking about is sensible protection to ensure that holders of Scottish and Irish banknotes in what will be unforeseen and exceptional circumstances have similar protection to that afforded to holders of Bank of England banknotes. We believe that that is the right thing to do, as I think do members of the Committee.