The bizarre story of banknotes in the United Kingdom

Over the past while we’ve been debating a number of things around “special status” for Northern Ireland. Coincident with this debate was the announcement from Ulster Bank of a plan to issue new, verticially-oriented banknotes. I found myself in rare agreement with North Antrim MP Ian Paisley, who suggested on twitter that we could look at a move to Bank of England notes. I noted again this morning that the topic on discussion on the Nolan Show, where the proprietor of the local business @belfastbooks announced that he would be refusing to accept Bank of England notes as a protest. You can listen back to the broadcast here.

We’ve all experienced problems where we’ve tried to spend First Trust, Danske/Northern Bank and Ulster Bank notes outside of NI. Those of us who have worked in retail or the trades have been similarly reticent about accepting Bank of Scotland notes, knowing that they will be difficult to spend locally. We’ve all argued with a shop assistant about what is “legal tender”. Many of us, preparing for trips to GB, visit a local bank branch to obtain Bank of England notes for this purpose.

It’s not hard to imagine that this imposes additional costs on businesses. As well as having to deal with angry customers who want to spend currency, the wider variety of notes makes it harder to train staff to spot frauds. Automated note-counting machines need to be configured to count the different types of notes, which is additional expense being incurred somewhere along the line

I  can find no other country in the world where multiple private commercial banks are permitted to issue their own banknotes in the sovereign currency. So why do we, and our fellow citizens in Scotland, have to put up with this ? Furthermore, what exactly incentivises banks to go to the time and significant expense of printing and circulating their own notes ? The answers are interesting.

As noted on the Nolan Show, the law around banknotes is not generally well understood. Legal tender, for example, is a legal concept which is of limited use – not least because in Northern Ireland and Scotland, none of the notes issued by any bank in the UK are legal tender (only coins are). Bank of England notes are only legal tender in England and Wales. As such you have no right to demand that any retail business anywhere in the UK accepts an NI or Scottish banknote.

But the really interesting detail is that the NI and Scottish banks actually earn interest on the back of a proportion of their banknotes.

The legal basis for this is established under the Banking Act 2009, which among other things instituted a major tidyup of the banknote regulations dating back to the 19th century. This Act empowers the Treasury to make regulations to allow, in turn, the Bank of England to regulate banknotes in Scotland and Northern Ireland. The legislation sets up the concept of “authorised banks” which may issue notes.

Clearly, banknotes must be highly trustworthy, so there needs to be a framework to ensure that the public can be certain that the notes they hold will be honoured, even if the bank issuing them fails. To this end, the notes under issue must be backed by “backing assets”. The rules require that at least 60% of the value of an authorised bank’s notes in circulation must be backed by Bank of England notes and coin held at agreed locations (which may include, fascinatingly, specially-issues £1m and £100m Bank of England notes). Up to 40% may be backed by funds held at interest-bearing bank account at the Bank of England itself. These special deposit accounts pay interest at a rate of 0.5%.

According to the latest report under the regulations from the Bank of England, £7.62bn of Scottish and Northern Irish banknotes are in circulation and are backed up under these provisions. The Bank told me that they do not publish how much interest is being paid to each individual bank in respect of the regulations, or to what proportion in excess of the legal requirement that authorised banks maintain their backing requirement in notes and coin rather than on deposit. However, based on the rules, a total of £3.37bn is eligible to be kept on deposit, attracting a theoretical annual interest of about £16.8m per year.

Of course, it’s not likely that the authorised banks are netting £16.8m in clean profit. From this sum, the cost of printing and issuing their own notes must be met, alongside the costs of IT and monitoring compliance with the regulations. In addition, tying up £7.62bn in cash or deposit has an opportunity cost in that the sum cannot be invested more profitably elsewhere. Overall, though, it seems likely that the banks want the profile and prestige associated with having their own notes and brand presence in everyone’s purse or wallet, and in all certainty they retain some of the interest earned as profit.

So how can this practice be stopped ?

The option does exist for the Chancellor to make the process more expensive for banks by modifying the rules to end the practice of paying interest on the deposits held at the Bank of England, taking away the £16.8m mentioned above. However we can’t be sure that this would be sufficient to discourage this practice.

Under the 2009 Act (Section 223) banks may only have their right to issue notes withdrawn if they breach the prescribed banknote issuance rules, become insolvent, lose the right to accept deposits or otherwise lose the right to engage in regulated activities. These scenarios all involve some kind of catastrophe at one of the banks, which seems unlikely. That leaves primary legislation as the only option. Banknote regulation is an excepted matter under Schedule 2 of the Northern Ireland Act 1998, so this would have to come from Westminster.

As with the caller to the Nolan Show today, I think it’s high time this daft situation was ended. It’s not right that banks should get low-cost advertising and brand propagation by inconveniencing businesses and sowing constant confusion among the public about what kind of banknotes are valid. It’s also not right that they should act in a way that makes counterfeit detection more difficult by having so many more variants of notes.

Ian Paisley was right to say we should consider moving to national standardisation of Bank of England notes – perhaps the DUP will use their influence and have a chat with the Chancellor.



Software engineer living and working in greater Belfast. Pragmatic social democrat with the odd leaning towards capitalism. Political interests include economic policy, social and political reform.

Alliance Party member, but writing in a strictly personal capacity.