Clause 60 - Bank of England levy

Financial Services and Markets Bill – in a Public Bill Committee at on 1 November 2022.

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Question proposed, That the clause stand part of the Bill.

Photo of Virendra Sharma Virendra Sharma Labour, Ealing, Southall 2:00, 1 November 2022

With this it will be convenient to discuss clause 61 stand part.

Photo of Andrew Griffith Andrew Griffith The Economic Secretary to the Treasury

It is a pleasure to serve under your chairmanship, Mr Sharma.

Clauses 60 and 61 deliver on the Government’s commitment to replace the Bank of England’s cash ratio deposit scheme with a new Bank of England levy. Under the cash ratio deposit scheme, banks and building societies with over £600 million in eligible liabilities must place a portion of their deposits with the Bank on a non-interest-bearing basis. The Bank then invests the deposits, and the income generated is used to fund the costs of the Bank’s monetary policy and financial stability functions.

However, the Bank of England’s policy remit and policy responsibilities have grown in recent years, and the cash ratio deposit scheme has not generated the income required to fully fund those functions. As a result, the shortfall has been funded by the Bank’s capital and reserves. Clause 60 replaces the scheme with a new Bank of England levy, repeals the provisions governing the cash ratio deposit scheme in the Bank of England Act 1998, and inserts new section 6A and new schedule 2ZA into the Act.

As with the cash ratio deposit scheme, the new levy will fund the Bank’s financial stability and monetary policy activities. The same eligible financial institutions participating in the cash ratio deposit scheme will pay the levy, with contributions proportionate to their size. Each year, the Bank will be required to publish information setting out the policy functions that it intends to fund through the levy, and the amount that it intends to levy.

The Bank will remain subject to National Audit Office value-for-money reviews to ensure that it remains cost-effective. The levy will deliver a more reliable and stable funding stream to the Bank, and banks and building societies will benefit from greater certainty about the size of their annual contributions towards those functions. Secondary legislation will be introduced in due course to set out further details of the operationalisation of the levy, including how institutions’ contributions will be determined. The Treasury will consult on the draft legislation and has committed to review it every five years.

Clause 61 simply makes a number of consequential amendments to the Bank of England Act 1998 that are required to reflect the new levy. The levy will provide greater certainty to the Bank, as well as to financial institutions. I therefore recommend that clauses 60 and 61 stand part of the Bill.

Photo of Emma Hardy Emma Hardy Labour, Kingston upon Hull West and Hessle

The operation of the cash ratio deposit scheme referred to in clauses 60 and 61 is subject to changes in two variables—the gilt rate and the size of deposits eligible for the scheme—so I have two quick questions for the Minister. How did the recent crisis in the gilt market affect the Bank of England’s income under the scheme, and how has the recent crisis in the gilt market, and the subsequent actions taken by the Bank, informed Government thinking on clauses 60 and 61?

Photo of Andrew Griffith Andrew Griffith The Economic Secretary to the Treasury

There is not a direct relationship between the recent turbulence in the gilt market and the Bank. The clauses will deliver a more reliable income stream to the Bank to fund its activities, because it will receive a levy rather than the income on the difference between interest-free deposits—the money that it gets from levy payers—and the returns that the Bank is able to harness from them.

The current scheme was set up in an environment of higher rates, when higher yields were obtainable. The recent experience over many years of much lower levels of return is the reason why the Bank has not been able to fully finance its activities simply from those interest-free deposits. I hope that answers the hon. Lady’s question.

Question put and agreed to.

Clause 60 accordingly ordered to stand part of the Bill.

Clause 61 ordered to stand part of the Bill.