Bank of England Levy (Amount of Levy Payable) Regulations 2024

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Bank of England Levy (Amount of Levy Payable) Regulations 2024.

My Lords, these draft regulations will ensure the implementation of the Bank of England levy following the passage of the Financial Services and Markets Act 2023, which made provision for the replacement of the cash ratio deposits scheme with this levy. Currently, the Bank of England’s monetary policy and financial stability functions, including work on resolution, international policy, financial stability and strategy, and risk and monetary analysis, are funded by the cash ratio deposits, or CRD, scheme. Under the scheme, banks and building societies with eligible liabilities greater than £600 million are required to place a proportion of their deposit base with the Bank of England on a non-interest-bearing basis. The Bank of England invests these funds in gilts and the income generated is used to meet the cost of its monetary policy and financial stability functions.

However, due to lower than expected yields from gilts, the CRD scheme has not generated sufficient income to fully fund the Bank’s policy functions. The shortfall has been funded by the Bank’s capital and reserves. Alongside this, the scheme has led to higher than expected deposit sizes and a lack of certainty for deposit payers.

Following a review of the scheme, the Government set out their intent to replace the CRD scheme with the Bank of England levy. This will provide greater certainty to firms on their contributions, create a simpler and more transparent funding mechanism for the Bank and ensure that the shortfall in funding is addressed moving forward. Sections 70 and 71 of the Financial Services and Markets Act 2023 amend the Bank of England Act 1998 to make provision for the replacement of the CRD scheme with the Bank of England levy.

The instrument under consideration by the Committee today makes provision for the eligible institutions that do not have to pay a levy, how the cost is apportioned between the eligible institutions that do have to pay it and how appropriate adjustments will be made for years in which there is a new levy payer. The instrument does not set the overall amount of the levy. The Bank determines which of its policy functions will be funded by the levy and the amount that it reasonably requires in conjunction with the funding of those functions for the levy year.

My Lords, it is obviously unacceptable that the Bank of England should be making a loss on its supervisory activities regarding the banking sector. We are happy to support this SI’s correction of that situation.

Before we allow the Bank to charge companies more, should we not ask ourselves whether there are any efficiencies that could or should be made in the Bank’s supervisory routines and systems? Could the Minister say whether the Bank has asked itself that question? If it has, perhaps the Minister could tell us what the answer was and how it was arrived at. If it has not asked the question, why not?

We note that the consultation on the levy produced only one relevant response—from, we assume, UK Finance. This response made five points; the Bank addressed four. The first was the rate of selldown of the Bank’s gilt portfolio. The concern appeared to be that this selldown would significantly increase the Bank’s costs and therefore the levy required. The Bank seemed to think that this was not an issue, but its explanation seemed very complex. May I ask the Minister for a “beginner’s guide” explanation? Is the industry right to worry about the levy increases potentially arising from a gilts selldown and, if not, why not?

The second point raised in the consultation response seemed the most important. The respondent suggested that the non-bank financial institutions, NBFIs, could in future be added as eligible levy-paying institutions in Schedule 2ZA to the Bank of England Act 1998. These NBFIs certainly seem large enough to be added. At the Managed Funds Association Global Summit in Paris in May last year, it was estimated that NBFIs now represent about 50% of global financial assets.

Addressing this point, the Bank simply says that the formal review referred to in paragraph 14.1 of the EM

“is expected to include assessment of which institutions are regarded as eligible to pay the Levy”.

My Lords, we fully support the replacement of the current cash ratio deposit and the proposed mechanics of the levy. We therefore support this statutory instrument.

I have only one question, related to the timing of this measure. As I am sure the Minister would agree, providing the banking sector with certainty is essential to securing the confidence needed to incentivise investment in the real economy. Can she therefore provide clarity on when this SI will come into force?

I am grateful to noble Lords for sharing their thoughts on this SI. It is a simple switchover from one scheme to another, but I recognise that there are points that deserve a bit more insight. I hope that, by the end of my closing speech, I will have an answer to the question about the coming-into-force and commencement date, including why that has not happened.

I turn to the comments from the noble Lord, Lord Sharkey. He made good points about the amount of money that will be spent on these policy functions. I asked the same question. It is clear to me that the Bank of England is independent and sets its own budget but does so in a prudent way. Each year, as I said in my opening remarks, the Bank determines the scope of the policy functions that should be funded and, therefore, what the total levy will be. However, the Bank’s policy costs to be recovered through the levy will require approval by the Bank’s Court of Directors, which is a bit like its board, I suppose, and which is responsible for the efficient use of funds—not only those raised by the levy but across the whole of the Bank’s budget.

The levy will also feature as part of already established arrangements for regular discussions between the Bank and the Treasury covering the Bank’s financial position. The Bank continues to be accountable to Parliament in respect of its finances and budget in various ways, including but not limited to through its annual report and accounts—some significant detail about this will be set out its report and accounts—and through regular public appearances by governors and members of the court before the Treasury Select Committee.

I will now embark on a guide to the cost of transition; let us see how we do. When the Bank moves from the CRD scheme to the levy, institutions will get their deposits back as there is no longer a legal basis for the Bank to hold deposits. Through this, a total of £13 billion in cash ratio deposits will be returned to firms. They will be returned as remunerated reserves as the Bank intends to hold on to the gilt portfolio that it has purchased under the scheme and allow this to roll off naturally. This is the most appropriate course of action; I suspect that that also means it is the cheapest. It means that, during a transition period, the Bank will need to pay a bank rate on the remunerated reserves. This is a policy cost that will be covered by the levy. The cost of the transition between the CRD scheme and the levy per year will depend on the rate at which the legacy CRD gilts mature or are sold. This is because the income available from the legacy CRD gilt portfolio will reduce the amount being recouped by the Bank under the levy.

It is, however, right that all policy costs are recovered through the levy and not the Exchequer, which has borne the costs of shortfall in the CRD scheme. The Bank has carefully considered how to minimise the impact of transition on eligible institutions and expects that the deposits returned to firms will be greater than any cost of transitioning from the CRD scheme to the levy. This will be of significant benefit to firms.

The issue with non-bank financial institutions goes beyond the Bank of England levy, which is why work in that area is ongoing. We accept that the work that the Bank of England does on policy goes beyond just deposit taking institutions and includes these other organisations. The regulations stipulate that a review should be conducted within five years of the start of the levy, but work on the regulation, oversight, paying for policy costs and all sorts of things to do with non-bank financial institutions will probably progress in the interim. It is probably beyond the scope of this SI to include that now, but it is something that the Treasury and the Bank of England recognise.

A number of suggestions were made, including whether the Bank of England can do a five-year rolling budget. I am personally quite attracted by that; the Bank of England has welcomed those who would like to see a five-year rolling budget and it intends to consider the suggestion further, but I have no date for when it might have considered this. The Bank of England is an independent institution, but of course we work closely with it to understand its direction of travel.

This SI will come into force on 1 March 2024. Regulations will be made in parallel to commence the primary legislation. I assume that those regulations do not require a debate. I might write with a little more information on that; I do not feel that I quite answered that question properly. In the meantime, I commend the instrument to the Committee.

Motion agreed.