An announcement made by The Chancellor, Alistair Darling, on February 4th confirming that the treasury are investigating ways to provide protection to bank customers and improve financial stability has sparked a political row after it emerged that Scottish banknotes may stop being produced as a consequence of the proposed legislation.
At present, three commercial banks issue notes in Scotland: the Clydesdale Bank, the Royal Bank of Scotland and the Bank of Scotland. Scottish banks have issued their own notes uninterrupted since 1695, when the Bank of Scotland began to issue notes.
To cover the value of their notes, the banks have to lodge funds with the Bank of England for three days out of seven. The change being investigated by the treasury would force the banks to lodge their funds for the entire week. The banks would lose out on the interest that they currently earn for the three days when they can invest it wherever they choose, meaning that it would no longer be commercially viable to continue producing the notes. It is estimated that there is £2.8 billion of Scottish notes in circulation and the banks make somewhere in the region of £100 million per year from issuing their own notes.
The Clydesdale bank laid out their opposition to the plans in a press release: "If this were to go ahead, it would force us to consider whether issuing bank-notes would be viable in the future, a position we do not want to be forced into." If the Scottish banks stopped issuing their own notes, the only notes that would be in circulation in Scotland would be issued by the central bank: The Bank of England.
The threat to Scottish banknotes is an emotive one, with many Scots seeing the notes as being part of their heritage. Alex Salmond, First Minister for Scotland, reacted vehemently to the news: "This is a dagger at the heart of Scottish bank-notes, which are a proud tradition in Scotland and hugely popular with the Scottish public. It would remove any advantage from issuing notes; therefore I am certain one or more of the banks would stop the notes issue…I think Alistair Darling should be hanging his head in shame that a Scottish Chancellor could allow his Treasury to attempt to undermine the Scottish note issue."
The review has also provoked a renewed debate on the legality of Scottish banknotes, with the issue of retailers in England and Wales refusing to accept Scottish notes being raised time and time again.
In short, no banknotes, whether they are issued by a Scottish commercial bank or the Bank of England, are legal tender in Scotland. The status of banknotes under Scots law is akin to that of a promissory note, as they are accepted as a means of payment between two parties.
The Treasury’s response to the furore surrounding the issue has been to focus on the fact that, should the proposed changes become law, all bank customers in the UK would have the same level of protection. A department spokesperson stated that: "The changes outlined in the consultation document will ensure that customers of Scottish and Irish banks are protected in the same ways as the rest of the UK's depositors, and will leave all British banks and their customers on a level playing field. The consultation proposes changes which will reduce the likelihood of individual banks facing difficulties, reduce the impact if, nevertheless, a bank gets into difficulties and also provide effective compensation arrangements in which consumers have confidence - changes which as are important to Scottish banking customers as they are to those across the UK."