Scottish and Northern Ireland Banknote Regulations 2009

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 a billion here and a billion there, that seems to be a large sum of money potentially accruing to the Bank of England. 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: ""The Bank of England must publish a statement of policy … in respect of … the process it will follow when it imposes a penalty"." 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.