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Scottish Banknotes (Acceptability in United Kingdom) Bill

I always like to respond to questions that are put to me in the House, but I hear your comments, Mr. Deputy Speaker. I say only that it is wrong to believe that Scottish—or, indeed, any—banknotes will be printed as a result of the measures that the Bank of England set out yesterday. I would like to explain the reasons behind the Government's position, especially our scepticism about some of the enforcement methods that the Bill proposes. The issuance of national banknotes is usually a function undertaken by the central bank, which is the Bank of England in the United Kingdom. As the hon. Member for Somerton and Frome (Mr. Heath) said, with the exception of Hong Kong, the UK is highly unusual in allowing several commercial banks to issue their own banknotes. I note that the Bill relates only to Scottish notes, but, of course, as my hon. Friend the Member for Thurrock (Andrew Mackinlay) pointed out, there are also four commercial issuing banks in Northern Ireland. I hope that the hon. Member for Dumfriesshire, Clydesdale and Tweeddale will forgive me if my remarks cover both jurisdictions. I do not think that making a distinction between them is appropriate, as it sets up an unnecessary two-tier system. We may have some positive effects on the practical problems that he outlined if we consider the two jurisdictions together. This right to issue is set out in the Bank Notes (Scotland) Act 1845, the Bankers (Ireland) Act 1845 and the Bankers (Northern Ireland) Act 1928. Parts of legislation will be repealed and replaced by part 6 of the Banking Act 2009. It modernises and strengthens the regime for note issue, which is more than 160 years old. Currency, legal tender and banknotes are specifically reserved to the UK Parliament under the Scotland Act 1998, and are excepted matters under the Northern Ireland Act 1998. They are, therefore, matters on which the UK Parliament continues to legislate after devolution. The Bank Charter Act 1844 prohibited any new banks in England and Wales from issuing banknotes. The 1845 legislation in Scotland and Ireland makes similar provision for banks in those nations. At that time, a total of 21 banks applied to become certified to continue issuing banknotes in Scotland and Ireland. As the hon. Gentleman said, that number has reduced over time through mergers, insolvency, or by banks choosing simply to stop issuing, to a total of seven issuing banks today. As my hon. Friend the Member for Thurrock said, in Scotland they are: the Bank of Scotland, which is a subsidiary of Lloyds Banking Group; Clydesdale bank, which is a subsidiary of National Australia Bank Ltd, and the Royal Bank of Scotland. In Northern Ireland they are: the Bank of Ireland; Allied Irish Banks Group (UK); Northern bank and Ulster bank. I confirm that the Government are committed to maintaining that long-standing tradition of commercial banknote issuance in Scotland and Northern Ireland, and are not seeking to discourage those commercial issuers of banknotes from continuing that practice. The hon. Member for Somerton and Frome mentioned retailers in Somerset and I note with interest an odd coincidence. The last private bank to issue notes in England and Wales was a Somerset bank—Fox, Fowler & Co., which issued its final notes in 1921. The hon. Gentleman might want to look around some of the shops in his constituency to see whether he comes across a few examples of those banknotes and to contemplate the role that Somerset has played in issuing banknotes in England. The hon. Member for Dumfriesshire, Clydesdale and Tweeddale is seeking to address genuine issues with his Bill. When we talked before today's debate, he gave me examples of where Scottish notes had been refused. I have heard examples anecdotally from my Scottish colleagues on the Government Benches many times, and the point has been reflected in all the contributions that we have heard this afternoon. The problem manifests itself in many different forms, not all of which are addressed by the Bill. It occurs to me, both from the anecdotal evidence the hon. Gentleman has presented and from the evidence that I have come across, that the problem tends to manifest itself more often in areas where such notes are less common and are seen less frequently. The issue is unfamiliarity with the notes, as the hon. Members for Somerton and Frome and for Hammersmith and Fulham (Mr. Hands), speaking from the Opposition Front Bench, both mentioned. There are 22 different Scottish banknotes in circulation and their designs—I have pictures of them here—are beautiful, interesting and varied. Many of them are collector's items. One can add to that the 17 different bank notes issued in Northern Ireland. That creates a plethora of notes, which can cause consternation in areas where they are not seen regularly and where people are not familiar with them, even though they are perfectly safe and backed by Bank of England deposits. That unfamiliarity is one of the problems that we must deal with. If we are trying to deal with unfamiliarity, the web should be the first port of call. However, people have to go on it, but often small traders do not have the time, and certainly not in the shop. If something odd turns up—something with, say, a depiction of Jack Nicklaus on it—one might think that it was not a real note. Indeed, it might give one pause. However, before we resort to the legislative sledgehammer, we should think about whether we can come together to put in place a campaign that would encourage the many retailers in this country to become more familiar with the different banknotes that they may, perfectly safely, take in payment. Scottish banknotes circulate widely in Scotland and in those areas that are close to the border with Scotland. Also, Scottish banknotes tend to be more readily accepted in other centres of significant interchange of people between England and Scotland, such as airports. Familiarity is clearly one of the keys to improving the problems that the Bill seeks to address. It is clear from the work that we did on the Banking Act 2009 that there will no longer be any legitimate worries about backing assets that stemmed from the rather old legislation—it is 160 years old—that was brought to bear in backing both Northern Ireland and Scottish banknotes until the passage of that Act. The changes that will come into effect later this year will ensure not only that the backing arrangements for those notes will confirm that they are risk-free and that they have the same backing as Bank of England notes, but that although some might think that those issues are an excuse for not accepting such notes—there might have been a technical reason for arguing that before the passage of the 2009 Act—that will no longer be a legitimate worry. The level of protection involved will be similar to that given to holders of Bank of England notes, and, in the event of an issuing bank failing, those who end up with the notes in their possession can expect to obtain full face value. That should close any loopholes that businesses might have used as an excuse for not accepting Scottish banknotes. A further difference between Bank of England notes and commercially issued notes relates to the fact that commercial banks have control over certain elements of their own banknotes that might be material to acceptability, and that might differ from the approach taken by the Bank of England. One of those elements is the design of the banknotes, as my hon. Friend the Member for Thurrock said in his extremely thoughtful speech. It is reasonable to assume that the more designs there are in circulation, the less familiar people will be with them. We have looked at the numbers involved, and I note that, while there are 39 Scottish and Northern Irish banknote designs in circulation, there are just five Bank of England notes. One of the Bank of England notes, the Edward Elgar £20 note, is going through a transitional period, and is in the process of being withdrawn, to be replaced by the Adam Smith £20 note. The Bank of England's policy is to have one current series of banknote design per denomination—two when transitioning from one design to the next—and to withdraw old series from circulation. This has the benefit of minimising confusion among holders of the notes, because there are fewer designs to recognise and remember. It also reduces the risk of counterfeiting, because people become more familiar with the anti-counterfeiting features on the notes, which can often differ from one generation of note to the next. None of the commercial banks in Scotland or Northern Ireland withdraws its previous series of notes from circulation, which leads to a much greater number of different designs passing around the country at any point in time and with varying anti-counterfeiting features on them. It might therefore be harder for businesses and the public at large to know exactly what a genuine Scottish banknote should look like, just because there are more variations in circulation. People should not be blamed for this; it just goes back to the question of familiarity, which has been recognised as an issue by hon. Members on both sides of the House. The hon. Member for Dumfriesshire, Clydesdale and Tweeddale referred to the use of a fancy pen. They are good as far as they go, but it is important to stress that the anti-counterfeiting features used within a banknote often vary across issues, series and denominations. For example, the new Adam Smith £20 note includes a holographic strip not featured on its Edward Elgar predecessor. New anti-counterfeiting features are always being developed, but the rate at which they are adopted varies across issuers as they almost always increase the production cost of a note. An unfortunate consequence of this lack of uniformity means that an anti-counterfeiting check carried out by a business for one note—such as the Adam Smith note with the holographic strip—might not be suitable for another note. This problem might also be compounded by the number of different types of notes in circulation at any given time. There is also the question of denominations. Traditionally, all the Scottish issuing banks have chosen to issue £100 banknotes, which the public might be less willing to accept as payment. In a similar vein, the Bank of England £50 note is not commonly found in circulation, and therefore when people come across them they are often more circumspect about accepting them. All these elements—banknote liabilities and the backing asset regime, the number of different note designs and security features in circulation, the level of educational activity undertaken, and differing policy regarding denominations—might influence the acceptability of Bank of England notes, compared with commercially issued notes. It is important for us to consider, ahead of a legislative process, the issue—