Select Committee on Delegated Powers and Deregulation Eleventh Report


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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