Here are some FAQs relating to the S&NI regime – FAQs on banknotes more generally can be found on our Frequently Asked Questions page
Q1. What is the Scottish and Northern Ireland banknote legislation designed to achieve?
A. The legislation is designed to ensure that holders of genuine banknotes issued by the authorised banks receive a level of protection similar to that provided to holders of Bank of England notes. Under the Regulations the authorised banks are required to hold backing assets for their notes at all times. In the event of an authorised bank entering an insolvency process as defined in the Regulations, those assets will be ring-fenced for one year or any longer period that HM Treasury may decide, for the sole purpose of reimbursing noteholders through a Note Exchange Programme.
Q2. What are Backing Assets?
A. To back their note issue, authorised banks may use a combination of Bank of England notes, UK coin and funds in an interest bearing bank account at the Bank of England. Bank of England notes held as backing assets may be held at an authorised location or at the Bank of England. Notes held at the Bank may include £1 million notes (Giants) and £100 million notes (Titans), which in physical terms are permanently held at the Bank. These backing assets would be used in the event that the Bank had to implement a Note Exchange Programme.
Q3. Are Scottish & Northern Ireland notes "legal tender"?
A. In short ‘No’ these notes are not "legal tender"; furthermore, Bank of England notes are only legal tender in England and Wales. Legal tender has, however, a very narrow technical meaning in relation to the settlement of debt. If a debtor pays in legal tender the exact amount he/she owes under the terms of a contract (and in accordance with its terms), or pays this amount into court, he/she has good defence in law if he/she is sued for non-payment of the debt.
In ordinary everyday transactions, the term "legal tender" in its purest sense need not govern a note's acceptability in transactions. The acceptability of a Scottish or Northern Ireland note as a means of payment is essentially a matter for agreement between the parties involved. If both parties are in agreement, Scottish and Northern Ireland notes can be used in England and Wales. Holders of genuine Scottish and Northern Ireland notes are provided with a level of protection similar to that provided to holders of Bank of England notes. This is because the issuing banks must back their note issue using a combination of Bank of England notes, UK coin and funds in an interest bearing bank account at the Bank of England.
Q4. What would happen to any banknotes I hold if an issuing bank stops issuing notes?
A. If an authorised bank decides to stop issuing its own notes then it will make arrangements for their withdrawal from circulation. This is called voluntary cessation. The S&NI banknote Rules (specifically Rule 10) give more detail on this, including the minimum amount of public notice (two months) that needs to be given regarding cessation and the arrangements the authorised bank will put in place to enable noteholders to exchange their notes. Rule 10 does not apply if the bank becomes insolvent.
Q5. What is a Note Exchange Programme?
A. If an authorised bank becomes insolvent it can no longer issue banknotes (unless a temporary continuation is granted). In these circumstances, the Scottish and Northern Ireland Banknote Regulations 2009 require the Bank of England to make arrangements to exchange the banknotes of the insolvent issuer for an equal value of other issuers’ notes, coin or other funds as the Bank of England specifies. This exchange is called a Note Exchange Programme (NEP). The existence of backing assets, which are under the control of the Bank of England during the NEP, mean that holders of genuine banknotes can be assured that these notes retain their full value and can continue to be used immediately following an authorised bank becoming insolvent, An NEP has the effect of withdrawing that bank’s notes from circulation over time and ensures that all holders of that bank’s notes presented whilst the NEP is operating, can receive full value for their notes.
In practice an NEP is likely to see the public (including individuals, retailers, businesses etc) continuing to use the notes of the insolvent issuer in the normal way, spending them and/or paying them into their bank account and getting full value for them in the normal way. But instead of re-circulating the notes as would normally happen, banks will return the notes paid in to them to the Bank of England and receive full value for them from the Bank. These notes will then be permanently removed from circulation.
At the same time, when making cash withdrawals (e.g. from either an ATM or bank branch counter) members of the public will not receive notes of the insolvent issuer (unless a temporary continuation has been granted), but will instead receive the notes of another issuing bank.
An NEP would not begin immediately upon a bank becoming insolvent. It would probably begin a few months later and would last for around a year. There would be widespread publicity about this, giving holders of the insolvent bank’s notes ample time to exchange them. And because the backing assets which fully cover the value of the notes would be under the control of the Bank, holders of genuine notes exchanged before the end of the NEP would receive full value for them.