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The Deputy Chairman of Committees (Lord Haskel): My Lords, before the Minister moves that the first statutory instrument be considered, perhaps I may remind noble Lords that in the case of each statutory instrument, the Motion before the Committee will be that the Committee do consider the statutory instrument. I should perhaps make it clear that the Motion to approve the statutory instrument will be moved in the Chamber in the usual way.
That the Grand Committee do report to the House that it has considered the Scottish and Northern Ireland Banknote Regulations 2009.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord Davies of Oldham): My Lords, as the Committee may be aware, the Banking Act 2009 contains a range of measures to enhance the resilience of the UK financial system now and in the future. The regulations are made under Parts 6 and 8 of the Act. The provisions 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 this. The fundamental objective of the legislation is simply 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. This is important for consumer protection and financial stability.
Part 6 of the Banking Act 2009 contains the overarching principles of the new regulatory regime, the details of which are contained in these 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. We have also been working closely on the operational details of the new regime
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At the core of the regulations are the provisions relating to the holding of ring-fenced backing assets to ensure the protection of noteholders. 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 noteholders' claims, and that noteholders 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 reasonably require for the purpose of exercising its functions, or for verifying or monitoring a bank's compliance with the new regime. The regulations 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 that 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 would like to bring to the attention of the Committee one point in 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 underpinning these regulations is to offer holders of Scottish and Northern Ireland banknotes a similar level of protection to holders of Bank of England banknotes.
Baroness Noakes: My Lords, I thank the Minister for introducing the regulations, which are largely uncontroversial, although I would like to raise just a couple of areas, one of which is penalties, which he has partly touched on, and the other is costs.
Under paragraph 4 of Schedule 3, penalties can amount to 10 per cent of the relevant bank's notes in circulation annually. There are nearly £5 billion-worth of notes in circulation, so in the admittedly unlikely event of all the banks failing to fulfil their obligations and incurring a penalty, in theory the Bank could raise half a billion pounds a year. Even in today's climate of
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How did the Government arrive at the figure of 10 per cent? What conversations did the Treasury have with the Bank about how penalties would be calibrated? If I can put it another way, what is the Government's view of what would trigger the maximum penalty; 10 per cent of the notes in circulation?
When we debated penalties during the passage of the Banking Act 2009, the Minister noted that they would be dealt with in more detail in a statement of policy on penalties, which is required under these regulations in Schedule 3. We had very little time in the final stages of the Banking Act earlier this year, which I am sure the Minister recalls, so I cannot claim that we pursued this with the vigour that we might otherwise have done. The requirement for the Bank to issue a policy is clearly a move in the right direction, but it is a very modest one. Statements of policy, unlike the rules which are required under these regulations, do not require the Bank to consult on the policy, do not require Treasury consent and involve no parliamentary oversight whatever.
Can the Minister tell the Committee more about what the policy statement that is required under paragraph 5 of Schedule 3 will contain? Does a draft of the statement of policy exist, and is it available for public scrutiny? Is any consultation in practice being undertaken in respect of it, notwithstanding no formal requirement for there to be consultation?
Given the high level of potential penalty, it is no surprise that the consultation on the regulations revealed a desire for an independent appeals process or an arbitration panel, which the Minister has referred to. There is nothing in the regulations that sets out or requires an appeals process. The Minister has already repeated what the Government said in response to the consultation process, namely that an appeals process will be set out in the statement of policy on penalties, which is required by paragraph 5 of Schedule 3. I want to query that with the Minister. Paragraph 5 states:
It says nothing about the statement containing processes that might be available to an aggrieved note-issuing bank if that bank is handed a penalty. Is the Minister content that the Government's drafting of paragraph 5 covers policies for the remedies available to others? It seems to me to be drafted only in terms of actions by the Bank.
I find it difficult to see how a process, which the Bank must follow, can cover the administration of an appeals process that is independent of the Bank. I think that I heard the Minister say in his introductory remarks that there would be some form of independent appeals process. That being the case, it is difficult to see how an independent appeals process could fit within the wording of a statement of policy that the Bank will follow. I should be interested to hear how the Minister sees that operating in practice.
As I said, the statement of policy is of an even lower level than the rules that have to be issued under these regulations. Perhaps the Minister will explain why a matter as important as appeals has been left by the Government to a statement of policy by the Bank, and not even to rules issued under regulations to which the Treasury would have some say as it would have to give consent. Will the Minister say whether the interests of natural justice are served by this approach, which appears to leave the matter of appeals solely to the whim of the Bank?
My honourable friend Mr Greg Hands raised the issue of costs with the Minister when these draft regulations were considered in another place last week. I do not think that all of the answers given at that stage fully dealt with the matters, so I am returning in part to those issues. The impact assessment shows costs falling on the issuing banks of £100,000 in terms of start-up costs and ongoing annual costs. That does not seem a large sum spread over the number of banks, and the consultation did not unearth a major issue. By far the biggest cost will be borne by the Bank of England, which is a factor of five times the cost of the private sector. It is estimated that the Bank will incur £500,000 of start-up costs and then a similar amount each year. What was unexplained in the Delegated Legislation Committee in another place was why such a disproportionate amount of the total cost is being borne by the Bank of England.
It is unusual to find that the total cost of regulation is split so unevenly between the regulator and the regulatees. It is normal that the cost of regulation falls predominantly on those who are the object of regulation and not the regulators. Are the Government satisfied that the Bank of England is planning to carry out cost-effectively the functions that are required of it by the Banking Act 2001? At the end of the day, the Bank's costs affect the taxpayer if only by way of the dividend arrangements between the Bank of England and the Treasury, so the amount of costs incurred by the Bank is a matter for the Government. I hope that the Minister can shed more light than what was offered in another place on what the Bank will do and why.
Lord Newby: I am grateful to the Minister for explaining the detail of the regulations. As he and the noble Baroness said, they are completely non-contentious. However, given that these regulations are bringing procedures up to date, I was slightly surprised that in the unlikely event of a penalty notice being issued, it will be sent by post. A letter sent by post to the registered office of the authorised bank,
In current circumstances, that seems not only a hazardous basis on which to communicate important information, but a rather outdated method. I wonder whether using electronic forms of communication in addition to the post might be a policy usefully adopted by the Bank of England.
My final point relates to a short discussion that we had some time ago about who signs the banknotes. It was pointed out that at one stage Sir Fred Goodwin signed the banknotes of the Royal Bank of Scotland.
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Lord Foulkes of Cumnock: My Lords, normally in the Chamber or in Committee I am seen by Members opposite as one of a band of loyal supporters of Her Majesty's Government, here to defend at all costs, in all circumstances and in every way possible what the Government are doing. However, today I have one or two questions. I hope they are not too awkward for my noble friend, because I do not want to cause him undue problems on this special day that I look forward to celebrating with him later. I do not want to sour the occasion, but I have two or three questions that I hope he will answer.
We were within 24 hours of that happening in the case of the Royal Bank of Scotland, so it is not a theoretical issue. Now we are being told that banks will be disaggregated in line with competition legislation and because of representations from, and the requirements of, the European Union. What happens to the note-issuing responsibilities if a bank is disaggregated? The Royal Bank of Scotland, Lloyds Banking Group and the Clydesdale Bank have responsibility for issuing RBS notes, Bank of Scotland notes and Clydesdale Bank notes. If the Lloyds Group is disaggregated, as some people have suggested will happen, and an independent Bank of Scotland is set up, does the responsibility for issuing banknotes automatically transfer to the Bank of Scotland and its new owners? Heaven forbid that someone like Sir Fred Goodwin or Sir George Mathewson would be part of that new ownership. Would that worry my noble friend? I hope that he would be concerned if those who were involved in the near-collapse of a bank were then to take over responsibility for running a bank that had responsibility for issuing banknotes.
My second question relates to the excellent speech by the Prime Minister-here I am reverting to type-at St Andrews at the weekend. He suggested a number of alternative ways in which funds might be raised to finance banks that get into difficulties. He suggested the so-called Tobin tax on transactions, and also insurance arrangements under which either the banks might put money into a fund to provide insurance or have an external insurer provide it. How does this relate to the proposal today? It seems to conflict with what is being suggested. The noble Baroness opposite referred to costs and other aspects of it. It would be interesting to know whether any suggestions made by the Prime Minister in St Andrews will be adopted.
Finally, as a former Member representing a Scottish constituency in the other place and now a Peer with a Scottish title-not all Peers from Scotland have Scottish titles, but I am one of them, although the title is not as distinguished as that of one Member opposite-I welcome the fact that the banks in Scotland will be allowed to continued to issue notes, subject to these provisions, and I hope that that will continue for many
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The Duke of Montrose: My Lords, perhaps I may come in quickly, having experienced this amazing note of humility from an Ayrshire man. In backing up my noble friend's concern about costs, I want to make a very simple point, which may have an explanation. The Explanatory Memorandum says that if a bank goes bust, its notes will be redeemed by the Bank of England at no cost. However, if a worthless piece of paper is replaced by a note issued by the Bank of England, how can that be said to be at no cost? It seems to me that the Bank of England will have to pick up the tab for reimbursing people who hold those other notes.
Lord Kilclooney: My Lords, this is a timely matter in the present circumstances of banks in both the United Kingdom and the Republic of Ireland because those in business and those who handle notes have increasing concerns about banking in both territories.
The regulations mention that we have four issuing banks' notes in Northern Ireland: those of the Bank of Ireland, the Ulster Bank, the Northern Bank and the First Trust Bank. The Northern Bank and Ulster Bank are not matters of great concern in Northern Ireland because the Ulster Bank is, after all, a British bank owned in Scotland and the Northern Bank is owned by a Danish bank. Our problems in Northern Ireland relate increasingly to notes issued by the Bank of Ireland and the First Trust Bank, which is not really a separate bank as it is 100 per cent owned by the Allied Irish Bank.
Banking in the Republic of Ireland is pretty serious. Sometimes the press in Ireland refer to it as the next Iceland, and it is scary when you see language such as that. The Anglo Irish Bank in the Republic of Ireland has already collapsed, and the other two, the Bank of Ireland and Allied Irish Bank, which is the First Trust Bank, are often referred to in the press as being insolvent. Of course, the Republic of Ireland may have to seek support from the eurozone, but some economic journalists are saying that Germany may not come to its rescue and that it may have to go to the IMF in the first six months of 2010.
That is why I say that these regulations are timely. They are a means of further guaranteeing to people in Northern Ireland that the pound notes issued by the four banks, and in particular the two in the Republic of Ireland, will be guaranteed by the Bank of England. However, I want to comment on that.
First, I agree that the cost of this is amazing-£600,000 a year, and for what? For nothing. It would be much better to have a standard bank note in the whole United Kingdom, and here I disagree with the noble Lord from Scotland. Today, I have just three notes with me: from the Northern Bank, the First Trust Bank, which I stress is the Allied Irish Bank in the Republic, and the Bank of Ireland, which once again is a Republic of Ireland bank. Those notes are an embarrassment because when you go to Scotland, England, Wales, the eurozone or indeed the whole of
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One thing that would be much better would be to have the word "sterling" on the notes in larger print. It is the smallest word on each of the notes. When you try to explain to English people that the note has the same value as the Bank of England note, they look at you in horror. You look for the word "sterling" and find it. After some debate they might accept it, but you can be refused on many occasions. These notes are a hindrance and an embarrassment. They have one advantage; England still does not have £100 notes. We, however, need lots of money in Northern Ireland for our farmers, who deal in £100 notes. That is one advantage of having notes of our own in Northern Ireland, but the only one; there are disadvantages in the design.
Many banks in Northern Ireland, such as HSBC, Santander, Alliance & Leicester and Abbey, do not issue notes but work mainly with Bank of England notes. In this case, however, some consideration should be given in the future to the withdrawal of the right to issue local notes, which, as I say, are an embarrassment wherever you travel.
Lord Davies of Oldham: My Lords, I am grateful to all noble Lords who have participated in this short but interesting debate on what we all recognise is an important issue. One or two important questions were asked, as were some relatively complex ones. I am relieved that the noble Lord, Lord Newby, asked me one or two questions which I ought to be able to answer with one- or two-syllable words rather than in a long discussion of the issues.
The noble Baroness, Lady Noakes, began the discussion by making important points about this work in two areas, to which I shall refer first. Penalty notices are a small part of authorised banks' overall operations, but ensuring that banks comply with the regulatory framework is of the greatest importance for consumer confidence and for ensuring that commercial banknotes continue to play an effective role in the economy. It is therefore important for a financial penalty to carry enough weight to act as a deterrent against non-compliance while balanced against the need for a proportionate and reasonable response to breaches.
The maximum penalty of 10 per cent of a bank's notes in circulation is cumulative over the course of the year. However, I am sure the Committee does not have the slightest doubt about the importance of the strength of the penalty for a breach in this area, given the whole issue of confidence, as the noble Lord, Lord Kilclooney, indicated when he went on to discuss Irish banks at present.
The noble Baroness asked why we had arrived at 10 per cent and whether to incur any penalty could do more harm than good, such as tipping a bank into insolvency. The Bank must be able to impose a penalty that fits the nature of the breach and acts as an effective deterrent to prevent further such breaches.
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What will the statement on the Bank of England's policy on penalties look like? This is the Bank of England's responsibility. The Bank is currently consulting the issuing banks on the banknote rules and the penalty policy. I am not in a position to describe those in greater detail at present, but the Committee will draw solace from the fact that the Bank is consulting on these issues, which are part of the rules for which it is responsible.
The impact assessment contains full details of the costs. None of the consultation responses queried the assumptions for costs, or the difference between the Bank of England's and the issuing banks' estimated costs. The noble Baroness referred to a disparity between the two.
Baroness Noakes: My Lords, I suggest to the noble Lord that that is not surprising. Those who looked at the consultation, and at the impact assessment, would have been concerned about their own costs. These are quite modest for the banks concerned. I would not have expected anybody else reading the impact assessment to comment on the Bank's costs unless they had an impact on their own costs. I understand that there is no charge from the Bank of England to the banks that may issue notes, so it signifies nothing that there were no comments on the Bank's costs.
Lord Davies of Oldham: Nevertheless, my Lords, when one conducts consultations on these issues, one deals with informed individuals who have viewpoints. They do not occupy the same kind of role as the noble Baroness, but consultation among informed participants tends to throw up areas where there might be questions and difficulties. I am reflecting the fact that we have not met those issues in the way that the noble Baroness suggests.
Lord Kilclooney: My Lords, on the subject of consultation, the noble Lord said that the consultation was with people who understood these things. I was amazed that there were only eight responses. In what way was the public in Northern Ireland consulted about continuing to have separate notes?
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