Scottish and Northern Ireland Banknote Regulations 2009

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 that are to be contained in the banknote rules, which are 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 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. The powers conferred by these regulations on the Bank of England equip it to carry out its role as regulator effectively, and ensure that the objectives of these provisions are being met. These regulations will therefore enable the current long-standing tradition of commercial banknote issuance in Scotland and Northern Ireland to continue, and I commend them to the Committee.