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Session 1997-98
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Arrangement of Clauses (Contents)

Bank of England Bill
 
 EXPLANATORY AND FINANCIAL MEMORANDUM
 
  The Bill introduces further statutory provision concerning the Bank of England (hereafter "the Bank"). It contains reforms to the constitution and duties of the court of directors, and makes new provision relating to the funding, the accounts and the profits of the Bank
 
  The Bill establishes a Monetary Policy Committee within the Bank, and gives a statutory basis to the Bank's operational responsibility in relation to monetary policy. The Bill sets out the framework in accordance with which the Bank's monetary policy functions are to be exercised. It gives the Bank an express monetary policy objective, the specific content of which will be determined by the Chancellor of the Exchequer.
 
  The Bill also transfers to the Financial Services Authority the Bank's functions under the Banking Act 1987 and the Banking Coordination (Second Council Directive) Regulations 1992, together with its functions under section 43 of the Financial Services Act 1986, the Investment Services Regulations 1995 and section 171 of the Companies Act 1989. The Bill makes provision consequential on the transfer of these functions.
 
  Provision is also included for the transfer to the Bank of England of the gilts registration function of the National Savings Stock Register, for a brokerage service in connection with gilt registration and for the amendment of section 207 of the Companies Act 1989 in relation to bearer securities.
 
 PART I
 
 CONSTITUTION, REGULATION AND FINANCIAL ARRANGEMENTS
 
  Clause 1 changes the composition of the court of directors of the Bank by providing for a second Deputy Governor to be appointed. It will require all the directors of the Bank holding office immediately before the Act resulting from the Bill comes into force to vacate their office so that new appointments can be made in accordance with the terms of the Bill.
 
  Schedule 1 is introduced by clause 1. It makes detailed provision concerning the offices of Governor, Deputy Governor and director, and the procedures and proceedings of the court.
 
  Clause 2 sets out the functions of the court of directors, namely the management of the Bank's affairs, other than the formulation of monetary policy. It will be the court's duty in particular to determine the Bank's objectives and strategy, with the aim of ensuring the effective discharge of the Bank's functions and the most efficient use of the Bank's resources.
 
  Clause 3 delegates certain functions of the court to a sub-committee of the court consisting of the directors of the Bank, whose chair may be designated by the Chancellor of the Exchequer. Those functions will be to keep under review the Bank's performance in relation to its objectives and strategy, to monitor the extent to which the Bank's financial management objectives have been met, to keep under review the internal financial controls of the Bank and to determine matters concerning the Governor's and Deputy Governors' remuneration and pensions.
 
  Clause 4 places the Bank's annual report on its activities on a statutory basis. It will in particular contain a report on the functions carried out by the sub-committee of directors, certain financial information, and the rates of remuneration of the directors. The report is to be published, and the Chancellor will lay copies before Parliament.
 
  Clause 5 makes provision concerning the custody and use of the Bank's seal.
 
  Clause 6 introduces Schedule 2, which makes provision concerning the maintenance of cash ratio deposits. This will place on a statutory basis arrangements for the placing of cash ratio deposits with the Bank. Institutions which will be covered by the arrangements are those authorised under the Banking Act 1987, European authorised institutions which have lawfully established branches in the United Kingdom for the purpose of accepting deposits, and building societies. The Bank is enabled to give an institution a written call notice specifying the amount of cash ratio deposit it is expected to have on deposit with the Bank during a specified period. This depositable amount is to be calculated by applying the appropriate ratio (or ratios) to an institution's liability base. The Treasury may by order prescribe the sterling and foreign currency liabilities which are to form an institution's liability base, as well as the ratios applicable to different value bands of eligible liabilities. If, at any time during the period specified in the call notice, an institution does not have on deposit with the Bank its notified depositable amount, the Bank may by notice in writing require a payment in lieu of deposit, which is to be calculated by applying a penal rate of interest to the average shortfall for the period in respect of which the requirement is made. There is also provision empowering the Bank to obtain the information needed for its functions under the Schedule. In making any order under the Schedule, the Treasury are to have regard to the financial needs of the Bank, and will be subject to certain consultation requirements.
 
  Clause 7 requires the Bank to keep proper accounts and to prepare a statement of accounts. It makes provision concerning the preparation of the Bank's annual accounts, and gives the Treasury power to require the publication of additional information relating to the accounts.
 
  Clause 8 makes changes to the Bank of England Act 1946 concerning payments to the Treasury in lieu of dividend. In the absence of agreement between the Treasury and the Bank on the amount of the payment, the default payment to be made to the Treasury in two instalments will be 50% of the Bank's post-tax profits for its previous financial year.
 
  Clause 9 makes consequential amendments to other enactments.
 
 PART II
 
 MONETARY POLICY
 
  Clause 10 amends the Treasury's power to give directions to the Bank under section 4(1) of the Bank of England Act 1946, so that it may not be used in relation to monetary policy. This means the Bank will have statutory operational responsibility for monetary policy, subject to any order made by the Treasury under the reserve power provided for by clause 19.
 
  Clause 11 states the monetary policy objectives of the Bank. These will be to maintain price stability and, subject to that, to support the Government's economic policy, including its objectives for growth and employment.
 
  Clause 12 requires the Treasury, for the purposes of clause 11, to give notice to the Bank at least once every twelve months specifying what price stability is to be taken to consist of, and what the Government's economic policy is to be taken to be. The Treasury are to publish the notice, and deposit a copy in the House of Commons library.
 
  Clause 13 establishes the Monetary Policy Committee, which will have responsibility within the Bank for formulating monetary policy, and makes provision for its members and their appointment. The Committee will comprise the Governor, his Deputies, and six other members. Two of those members will be persons responsible within the Bank for monetary policy analysis and monetary policy operations, respectively. Those two members will be appointed by the Governor, after consultation with the Chancellor. The remaining four members will be appointed by the Chancellor, having regard for their expertise in monetary policy.
 
  Schedule 3 is introduced by clause 13, and makes detailed provision relating to members of the Monetary Policy Committee, including their terms of office; qualifications for appointment; the criteria for removal of members of the Committee during their term of office; the timing of meetings; and proceedings of meetings, including voting procedures. The Monetary Policy Committee will be required to report monthly to the court of directors of the Bank.
 
  Clause 14 requires the Bank to publish as soon as practicable after each meeting of the Monetary Policy Committee a statement saying whether it took any decisions regarding monetary policy and, if so, what they were. Immediate publication of a decision relating to the Bank's intervention in financial markets will not be required if the Committee considers that this would impede or frustrate the achievement of the intervention's purpose. The Bank will be required to publish a statement as to such a decision, and when it was taken, as soon as practicable after the Committee has decided that publication would no longer impede or frustrate its aim.
 
  Clause 15 provides that the minutes of each Monetary Policy Committee meeting must be published not more than six weeks after the day of the meeting, and should include a record of the voting preferences of the members who took part in any decision. Mirroring the approach of clause 14, the minutes of any proceedings relating to a decision to intervene in financial markets or to a decision about the publication of any such decision need not be published as long as that may frustrate or impede the achievement of the intervention's purpose. But such minutes are to be published within six weeks of the day of any statement about the relevant decision made under clause 14.
 
  Clause 16 requires the court of directors to review the procedures followed by the Monetary Policy Committee. In particular, the directors of the Court will review whether the Monetary Policy Committee has collected the regional, sectoral and other information necessary for the purposes of formulating monetary policy.
 
  Clause 17 empowers the Bank to obtain the information about financial affairs needed for the purposes of its functions under Part II. The undertakings which may be required to provide information are listed, and the Treasury are empowered to amend the list. The Treasury may also provide what financial affairs are relevant for the purposes of the clause. Any order under the clause is subject to certain consultation requirements.
 
  Clause 18 provides for the publication by the Bank of a report which is to contain a review of the monetary policy decisions by the Bank over the period to which the report relates; an assessment of developments in inflation over the relevant period; and an indication of the expected approach to meeting the Bank's objectives for monetary policy. No report is to be published without the approval of the Monetary Policy Committee. The report is intended to be published on a quarterly basis; however provision is made for changes to that period if the Treasury and the Monetary Policy Committee agree.
 
  Clause 19 gives the Treasury reserve powers to direct the Bank with respect to monetary policy, if they are satisfied that such action is required in the public interest and by extreme economic circumstances. In such circumstances, the statutory monetary policy objectives of the Monetary Policy Committee cease to have effect. The Treasury would exercise such powers by order to be laid before Parliament and subject to affirmative resolution in both Houses of Parliament within 28 days of being made. The maximum period such an order could remain in force would be 3 months.
 
 PART III
 
 TRANSFER OF SUPERVISORY FUNCTIONS OF THE BANK TO THE FINANCIAL SERVICES AUTHORITY
 
  Clause 21 transfers to the Financial Services Authority ("the Authority") the Bank's functions in relation to the supervision of banks under the Banking Act 1987, the Banking Coordination (Second Council Directive) Regulations 1992 and section 101(4) of the Building Societies Act 1986. It also transfers to the Authority the Bank's functions relating to the listing of money market institutions under Section 43 of the Financial Services Act 1986 and the Investment Service Regulations 1995 and its functions under section 171 of the Companies Act 1989 relating to the listing of persons providing settlement arrangements.
 
  Clause 22 introduces Schedule 4 which makes supplementary provision in relation to the transfer of functions.
 
  Schedule 4 ensures that the transfer of functions will not affect the validity of anything done by or in relation to the Bank before the transfer. Anything in the process of being done by or in relation to the Bank immediately before the transfer may be continued by or in relation to the Authority. Similarly, if the effect of anything done by or in relation to the Bank needs to continue after the transfer, it will have effect as if done by or in relation to the Authority. In all these cases, references to the Bank in any relevant documents shall, where necessary, be construed as referring to the Authority and the Treasury may by order amend or add to these transitional provisions. Schedule 4 also ensures that the transfer of staff will be subject to the Transfer of Undertakings (Protection of Employment) Regulations 1981, whether or not it would otherwise have done so. It also provides for the Bank, with the Authority's agreement, to create a scheme to transfer property, rights and liabilities of the Bank to the Authority. The scheme must be approved by the Treasury, which may submit its own scheme if the Bank fails to do so or it does not approve the Bank's scheme. The scheme may provide for transferred rights and liabilities to be enforceable by or against both the Bank and the Authority, create rights or interests for the Bank in property transferred to the Authority and for the Authority in relation to property retained by the Bank, and require the Bank and the Authority to enter agreements with each other or execute instruments in favour of the other as necessary. Obligations to enter into agreements or execute instruments will be enforceable in the civil courts and any resulting transactions will be binding on third parties. The scheme may in particular provide that in connection with any transfer the Authority is to be treated as the same person in law as the Bank; that things done by or in relation to the Bank are treated as done by or in relation to the Authority; that references to the Bank in agreements or other documents are to have effect as specified in the scheme; that proceedings commenced by or against the Bank are to be continued by or against the Authority; and that the Bank and the Authority are to co-operate with each other in relation to the scheme.
 
  Clause 23 introduces Schedule 5 and enables the Treasury to make any amendments to subordinate legislation which may be required as a result of the transfer of functions.
 
  Schedule 5 gives details of consequential amendments necessary to the Banking Act 1987, the Banking Coordination (Second Council Directive) Regulations 1992, the Financial Services Act 1986, the Investment Service Regulations 1995, the Companies Act 1989 and other enactments.
 
  Clause 24 provides that, in carrying out the transferred functions, the Authority will not be regarded as acting on behalf of the Crown, nor will people working for the Authority be regarded as Crown servants.
 
  Clause 25 makes provision by amendment of the Financial Services Act 1986, the Investment Services Regulations 1995 and the Companies Act 1989 for immunity from liability for the Authority and its personnel in respect of acts or omissions in good faith relating to functions transferred under the Bill.
 
  Clause 26 introduces Schedule 6 and amends the Financial Services Act 1986 and the Companies Act 1989 so as to enable the Authority to impose application and periodic fees as conditions for admission to the lists maintained under sections 43 and 171 of those Acts respectively.
 
  Schedule 6 makes provision empowering the Authority to make regulations prescribing fees to be paid in respect of applications for authorisation under the Banking Act 1987 and notices under that Act by overseas institutions establishing representative offices in the United Kingdom. The Authority may also prescribe periodical fees to be paid by institutions authorised under the Banking Act 1987 and by European authorised institutions which have established deposit-taking branches in the United Kingdom (pursuant to the Banking Coordination (Second Council Directive) Regulations 1992).
 
  Clause 27 amends section 39(1)(a) of the Banking Act 1987, which currently allows the Bank to give notice to an authorised institution requiring it to provide the Bank with information for the performance of its functions under that Act. When the Authority takes over the Bank's functions under the Act, the amendment will have effect to allow the Authority to give notice requiring information to be provided to a person acting on its behalf.
 
  Clauses 28 and 29 make provision concerning the Board of Banking Supervision and Deposit Protection Board. In particular, it makes adjustments to their composition consequent upon the transfer of statutory functions from the Bank to the Authority.
 
 PART IV
 
 MISCELLANEOUS AND GENERAL
 
  Clause 31 amends Schedule 7 to the Financial Services Act 1986 by deleting the reference to the Governor of the Bank of England in the provision governing the appointment and removal of the chairman and other members of the governing body of a designated agency.
 
  Clause 32 exempts from authorisation under the Financial Services Act 1986 transactions between institutions listed under section 43 of that Act and the Treasury.
 
  Clause 33 empowers the Treasury by order to close the National Savings Stock Register to the registration of gilts on and after a specified day, and to make provision for the transfer to the books of the Bank entries in the Register on that day relating to gilts, as well as for the transfer to the Bank of rights and liabilities of the Director of Savings relating to the registration of gilts in the Register and to any associated transaction.
 
  Clause 34 amends section 47 of the Finance Act 1942 to enable regulations under that section to make provision with respect to the purchase and sale of government stock and bonds through the Bank of England.
 
  Clause 35 amends section 207 of the Companies Act 1989 so as to make clear that the Treasury's power to make regulations for the dematerialisation of securities (that is, their existence as computer records, without any written instrument) applies to bearer securities.
 
  Clause 36 makes minor amendments to Part V of the Banking Act 1987 (restriction on disclosure of information).
 
  Clause 37 introduces Schedule 7, which makes provision protecting information obtained by the Bank for the purposes of Part II (monetary policy) and Schedule 2 (cash ratio deposits). There will be no restriction on disclosure where the information has been made available to the public from other sources, or it is in a form which does not enable information about any particular individual to be ascertained from it. Restricted information may be disclosed to enable or assist the performance of certain functions of the Bank and of other authorities listed in the Schedule (which are subject to restrictions on onward disclosure), as well as for other specified purposes. There will be an offence of unlawful disclosure, which will carry penalties for conviction on indictment of imprisonment for a maximum of two years and/or a fine and, on summary conviction, of imprisonment for a maximum of three months and/or a fine not exceeding the statutory maximum (£5000). The Treasury are given the power, after consultation with the Bank, to amend the table of listed authorities.
 
  Clause 38 establishes criminal offences in respect of failure to comply with a requirement to provide information under clause 17 (monetary policy) or Schedule 2 (cash ratio deposits), and for providing false or misleading information. Summary conviction for failing to provide information will be punishable by a fine not exceeding level 4 on the standard scale (£2500); a person who provides information which he knows to be false or misleading, or recklessly provides such information, will be liable on conviction on indictment to a maximum of two years' imprisonment and/or a fine or, on summary conviction, to a maximum of three months' imprisonment and/or a fine not exceeding the statutory maximum (£5000).
 
  Clause 39 deals with the position where an offence under Part IV is committed by a body corporate.
 
  Clause 40 makes provision for the order-making powers conferred on the Treasury by the Bill. It gives details of the parliamentary procedures applying to the different powers.
 
  Clause 42 introduces Schedule 8 which provides transitional arrangements in respect of the disclosure of information provisions in the Banking Act 1987, consultation about fee regulations and membership of the Deposit Protection Board.
 
  Clause 43 introduces Schedule 9, which specifies repeals and revocations.
 
 Financial effects of the Bill
 
  The Bank of England performs a wide range of public policy functions in addition to its activities as banker to the banking system. The Bank has a number of sources of income:
 
 
      - the Treasury pay for agency services the Bank performs for Government. These include printing and distribution of banknotes, debt management and the management of the Government's reserves. These payments are classified as General Government Expenditure.
 
      - income from banks, financial institutions and Government Departments for direct banking services including the provision of settlements systems.
 
      - income from the assets which match unremunerated cash ratio deposits which are placed by banks with the Bank of England. The banks currently agree to place these deposits voluntarily with the Bank to assist in the overall funding of the Bank's activities.
 
      - income from the Bank's capital and reserves.
  The Bill has two principal effects on the Bank's finances and General Government Expenditure.
 
  The first effect arises from the transfer of Bank functions to the Authority. The direct cost of banking supervision is at present approximately £30 million a year. Making an allowance for an appropriate share of Bank overheads, this cost is roughly £50 million a year. The Bill gives the Authority powers to charge fees for supervision under the transferred functions. The Authority's expenditure will score in the National Accounts as General Government Expenditure and all or most of its charges as General Government Receipts. Currently, because the Bank's expenditure on banking supervision is funded out of a mixture of voluntary income from the banks and income on the Bank's own reserves, the cost of banking supervision does not score as public expenditure. In consequence the transfer of functions effected by the Bill will lead to an increase in General Government Expenditure, as presented in the National Accounts.
 
  The second effect arises from the provisions placing the cash ratio deposits on a statutory basis. Since cash ratio deposits have been voluntary in the past, the Bank's expenditure which has been funded out of the income on these deposits has not scored as General Government Expenditure. With the move to a statutory scheme, the income from these deposits will now score as General Government Expenditure.
 
  The increase in General Government Expenditure following the transfer to the Authority of Bank statutory functions and the introduction of the statutory regime for cash ratio deposits will be equal to the income on compulsory cash ratio deposits and the Authority's expenditure in relation to the transferred functions. The overall impact cannot accurately be assessed at this stage.
 
 Effects of the Bill on public sector manpower
 
  The merger of the National Savings Stock Register into the Bank of England's Registrar's Department will result in 60 fewer jobs in National Savings, but some additional jobs in the Registrar's Department. National Savings plan to offer jobs elsewhere in the organisation to all staff affected by the merger.
 
 Business compliance cost assessment
 
  The Government's expectation is that the overall cost to business under the new arrangements in respect of the transferred functions and cash ratio deposits will be no greater than under the current arrangements.
 
  A regulatory appraisal of the effect the Bill will have on the costs of business is available to the public from Stephen Pickford, HM Treasury, Parliament Street, London SW1P 3AG.
 
 
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© Parliamentary copyright 1997
Prepared 28 October 1997