ANNEX (continued)
BANK OF ENGLAND BILL
Memorandum by Her
Majesty's Treasury
Origin of the Bill
1. The Bank of England
Bill gives effect to the Government's policy on the future role
and operations of the Bank of England (hereafter "the Bank")
as set out in the Chancellor of the Exchequer's statements of
6 May 1997 and 20 May 1997. The Bill received its first reading
in the House of Commons on 28 October 1997. Second reading took
place on 11 November 1997 and third reading on 22 January
1998, the Bill having completed its committee stage on 11 December
1997.
Aim of the Bill
2. The Bill reforms
the constitutional and financial arrangements of the Bank. It
gives a statutory basis to the Bank's operational responsibility
in relation to monetary policy. It transfers to the Financial
Services Authority the Bank's functions in relation to banking
supervision and the listing of money market institutions and persons
providing settlement arrangements. The Bill also makes provision
for the transfer to the Bank of the gilts registration function
of the National Savings Stock Register.
Delegated powers in the Bill
3. For the convenience
of the Committee, a complete list of the delegated powers in the
Bill is attached to this Memorandum. These powers can be grouped
together according to subject matter in six categories: Treasury's
reserve powers in relation to monetary policy; transfer of supervisory
functions; cash ratio deposits; collection and disclosure of
information; closure of the National Savings Stock Register to
gilts; and commencement. The Committee will wish to note that,
with the exception of the Treasury's reserve powers (clause 19),
the Parliamentary procedure to be followed in connection with
the exercise of any particular delegated power is stipulated in
clause 40.
Group 1: Treasury's reserve
powers
A. Summary
4. The new monetary
policy arrangements set out in Part II of the Bill remove
the Treasury's power to give directions to the Bank in relation
to monetary policy. This means the Bank has statutory operational
responsibility for monetary policy, subject to the Treasury's
reserve powers under clause 19. Clause 19 provides
that the Treasury may direct the Bank with respect to monetary
policy if they are satisfied that such action is required by extreme
economic circumstances and is in the public interest.
B. Reasons
5. Although the purpose
of Part II is to give the Bank statutory operational responsibility
for meeting the Government's monetary policy objectives, in extreme
economic circumstances there may be a need to override the Bank's
operational responsibility for monetary policy decisions. Because
the action required would depend on the nature of the extreme
economic circumstances, it is appropriate that this is left to
delegated legislation, which can then be tailored to the needs
of the particular circumstances which have arisen.
C. Procedure
6. The powers delegated
by this provision are exercisable by statutory instrument laid
before Parliament after being made. The order will cease to have
effect after 28 days, unless it has by then been approved
by resolution of each House of Parliament. In reckoning
this period of 28 days, no account is to be taken of any
time during which Parliament is dissolved or prorogued or during
which either House is adjourned for more than 4 days. Even
if approved, an order will cease to have effect 3 months
after the day it was made.
7. Because these reserve
powers may only be exercised in extreme economic circumstances,
which are likely to necessitate emergency action, it is considered
appropriate that they should have immediate effect. It is also
appropriate, however, that the continued effect of such action
should require the approval of Parliament.
Group 2: transfer of supervisory
functions
A. Summary
8. This group of powers
concerns the transfer of supervisory functions from the Bank to
the Financial Services Authority:
- Clause 23(2)
enables the Treasury to amend or revoke subordinate legislation
as required in consequence of the transfer of functions.
- Paragraph 1(5)
of Schedule 4 allows the Treasury to exclude,
modify or supplement the provisions of that paragraph relating
to the continuity of exercise of the transferred functions and
to make other transitional provisions.
- Paragraph 1
of Schedule 6 gives the Financial Services Authority
power to prescribe banking supervision fees.
B. Reasons
9. Clause 23(2)
makes provision for the amendment or revocation of subordinate
legislation consequent upon the transfer of functions. (Amendments
of primary, and other principal, legislation consequential on
the transfer are dealt with by clause 23(1) and
Schedule 5). The amendments made under the power in clause
23(2) are likely to be of a routine nature, largely consisting
of substituting references to the Financial Services Authority
for references to the Bank. However, the number of such amendments
will be considerable. It is considered appropriate, therefore,
that this matter is addressed in secondary legislation rather
than in the Bill.
10. Paragraph 1(5)
of Schedule 4 enables specific provision to be made to
deal with any unforeseen consequences or anomalies which may arise
from the general provisions on continuity. It is a precautionary
measure which, by its nature, is appropriate to delegated legislation.
11. The powers conferred
by paragraph 1 of Schedule 6 may only be used
to prescribe such fees as will enable the Financial Services Authority
to meet the expenses incurred in carrying out the functions transferred
to it (or for any incidental purposes), and to make payments in
respect of any debt incurred to meet the costs of the transfer.
As the expenses which are to be funded by these fees are likely
to fluctuate over time, it is considered appropriate that the
Financial Services Authority should have the flexibility to make
alterations to its fees structure as circumstances demand.
C. Procedure
12. The Treasury's powers
to make orders conferred by clause 23(2) and paragraph 1(5)
of Schedule 4 are exercisable by statutory instrument
which is subject to annulment in pursuance of a resolution of
either House of Parliament. In view of the technical
nature of the subject matter of these powers, it is not considered
appropriate to require the use of the affirmative resolution procedure.
13. The Financial Services
Authority's power in paragraph 1 of Schedule 6
to make regulations prescribing banking supervision fees is exercisable
by instrument in writing. Before making any such regulations,
the Authority is required to publish the proposed regulations
in draft, and to afford an opportunity for the making of representations.
This power is not subject to any Parliamentary procedure, and
is modelled on the provisions of Schedule 9 to the Financial Services
Act 1986 governing the collection and use of fees by the Financial
Services Authority in its capacity as a designated agency under
that Act.
Group 3: cash ratio deposits
A. Summary
14. Clause 6 and
Schedule 2 make provision for eligible institutions to
maintain with the Bank interestfree cash ratio deposits,
to generate income to meet the financial needs of the Bank:
- Paragraph 1(2)
of Schedule 2 empowers the Treasury to amend the categories
of eligible institution (set out in paragraph 1(1)) which are
required to maintain such deposits.
- Paragraph 2(2)
enables the Treasury to define eligible liabilities for the purposes
of determining an eligible institution's liability base, and to
make provision about the calculation of any description of eligible
liability.
- Paragraph 5
makes provision for the Treasury to specify the value bands and
the ratios applicable to them which are to be applied against
each eligible institution's liability base for the purposes of
calculating its depositable amount.
- Paragraph 8
allows the Treasury to amend or replace paragraph 7, which
specifies the benchmark rate of interest which is to be used for
calculating the amount which an eligible institution must pay
in lieu of deposit, where there is a shortfall between the amount
it has on deposit with the Bank and its depositable amount.
B. Reasons
15. All the powers in this
group are required either to make detailed provision for the operation
of the statutory scheme for cash ratio deposits or to allow technical
modifications to be made to the legislation. They also provide
the necessary flexibility to meet changing circumstances. For
example, paragraph 2(2) allows the definition of eligible
liabilities to be changed in response to the changing structure
of financial markets and paragraph 8 enables the benchmark
rate of interest to be changed if the method of calculation specified
in paragraph 7 no longer reflects the way that interest rates
are set in the market.
C. Procedure
16. The powers in paragraphs 1(2)
and 5 are exercisable by statutory instrument and a draft
of the order must be approved by a resolution of each House of
Parliament. Because of the financial cost to those institutions
which are required to maintain cash ratio deposits with the Bank,
it is appropriate that any amendment to the list of institutions,
and the specification of the value bands and ratios, should be
subject to the affirmative resolution procedure.
17. The powers in paragraphs 2(2)
and 8 are exercisable by statutory instrument which is subject
to annulment in pursuance of a resolution of either House of Parliament.
As explained in paragraph 15 above, it is intended that
these powers will be used to make technical alterations to the
operation of the scheme, and not as a way to make a material change
in the amount of money raised by cash ratio deposits.
18. Before making any order
under Schedule 2 the Treasury is required to consult
the Bank and persons representative of those likely to be materially
affected by the order (paragraph 10). When exercising
the power conferred by paragraph 2(2) or 5, the Treasury
is required to have regard to the financial needs of the Bank
(paragraph 11).
Group 4: information
A. Summary of relevant provisions
19. This group of provisions
relates to the collection and disclosure by the Bank of information
required by the Bank for monetary policy purposes and for the
operation of the cash ratio deposits scheme:
- Clause 17(4)
enables the Treasury to specify which financial affairs
the Bank may require an undertaking to provide information about
for the purposes of its monetary policy functions.
- Clause 17(5)
allows the Treasury to amend the list of undertakings set
out in clause 17(3) from which the Bank can require such
information.
- Paragraph 3(2)
of Schedule 7 enables the Treasury to amend the Table
in paragraph 3(1) specifying the authorities to
whom the Bank may disclose information obtained by it by virtue
of clause 17(1) (monetary policy) or paragraph 9
of Schedule 2 (cash ratio deposits).
- Paragraph 3(3)
of Schedule 7 allows the Treasury to impose restrictions
or conditions on disclosures to those authorities.
B. Reasons for delegated
powers
20. The power in clause 17(4)
is required to make detailed provision for the operation of the
legislation. All the other powers in this group allow for technical
modifications to be made to the legislation. The flexibility
conferred by clause 17(4) and (5) means that the categories
of undertaking from which the Bank can require information, and
the nature of that information, can be altered to reflect developments
in financial markets. Similarly, paragraph 3(2) and (3)
of Schedule 7 allow changes to be made to the
provisions for disclosure in the light of changing circumstances
or experience (for example, changes of function).
C. Proposed procedure
21. The powers in clause 17(4)
and (5) are exercisable by statutory instrument made by
the Treasury, and a draft of the order must be approved by a resolution
of each House of Parliament. Complying with the Bank's
requirements for information for monetary policy purposes could
involve significant costs for those businesses affected, and it
is therefore considered appropriate that the affirmative resolution
procedure should apply. For the same reason, the Treasury is
required to consult various bodies before making any order under
these powers (clause 17(6)). The powers in paragraph 3(2)
and (3) of Schedule 7 are exercisable by statutory instrument
made by the Treasury and are subject to annulment pursuant to
a resolution of either House of Parliament, since they relate
to arrangements for the disclosure of information between bodies
carrying out statutory functions.
Group 5: closure of National
Savings Stock Register to gilts
A. Summary
22. Clause 33
gives the Treasury power by order to close the National Savings
Stock Register to the registration of gilts, and to provide for
the transfer to the books of the Bank of the entries relating
to gilts, as well as the transfer to the Bank of the associated
rights and liabilities of the Director of Savings. Such an order
may also make provision for the consequential amendment, repeal
or revocation of an enactment contained in primary or secondary
legislation.
B. Reasons
23. The power in clause 33
is required to make detailed provision for the transfer to the
Bank of the gilts registration function of the National Savings
Stock Register. It is considered that the detail of the implementation
of the transfer should be dealt with in delegated legislation,
because the power will be used to address technical matters, with
the sole intention of giving effect to the principle of the transfer
embodied in clause 33.
C. Procedure
24. The power is exercisable
by statutory instrument which is subject to annulment in pursuance
of a resolution of the House of Commons. Because the subject
matter relates to government funding, the instrument is considered
to be a matter for the House of Commons alone. The negative resolution
procedure is considered appropriate for the detail of the transfer,
as the principle of the transfer will already have been approved
by Parliament.
Group 6: commencement
A. Summary
25. Clause 45
provides for the Act to come into force on such day as the Treasury
may by order appoint. Similarly, a scheme under paragraph 3
of Schedule 4 for the transfer of property, rights and
liabilities consequent upon the transfer of supervisory functions
comes into force, by virtue of paragraph 3(7), on
such day as the Treasury may so appoint.
B. Reasons
26. The Treasury, the Bank
and the Financial Services Authority will need time to prepare
for the changes which the Bill will make. For example, the Bank
and the Authority will need to prepare a scheme of transfer and
submit it to the Treasury for their approval. Time will also be
required for the instruments covered in this Memorandum which
are needed to give effect to the Act, to complete the appropriate
Parliamentary procedures.
C. Procedure
27. Commencement orders under
these powers are made by the Treasury by statutory instrument.
They are not subject to any Parliamentary procedure.
30 January 1998
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