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The Treasury today published draft legislation for its planned tax on financial institutions, following the conclusion of consultation period launched in the June Budget.
The permanent, annual charge – to be known as the bank levy – is aimed at encouraging banks to take fewer risks in their funding, and it is designed to complement government ambitions to improve regulatory standards and enhance financial stability.
The levy is expected to generate around £2.5 billion of revenue per year by 2012/13. It will apply to:
- the global consolidated balance sheet of UK banking groups and building societies;
- the aggregated UK-group and UK subsidiary balance sheets, together with a proportion of the balance sheets of foreign banks operating in the UK through permanent establishments which are members of foreign banking groups;
- the balance sheets of UK banks and banking sub-groups in non-banking groups; and
- the balance sheets of UK banks that are not members of groups.
The levy will be based upon the total chargeable equity and liabilities as reported in the relevant balance sheets at the end of a chargeable period: the financial institution’s total capital.
It will not be charged on the first £20 billion; no rate has yet been announced, but the June consultation paper posited 0.07%, with a lower rate of 0.04% in the first year. Final legislation will be published before the end of 2010.
'We have consulted on the design of the scheme so that it achieves two objectives,' said the financial secretary to the Treasury, Mark Hoban. 'First, ensuring that banks make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy.
'Second, the final scheme design incentivises banks to make greater use of more stable financial sources, such as long term debt and equity, working with the grain of our wider reform programme.'
Mr Hoban’s department is also to scrutinise bankers’ bonuses. The Government plans to consult on a remuneration disclosure scheme and, working with international partners, will explore the costs and benefits of a financial activities tax on profits and remuneration.
In addition, the Financial Services Authority, as part of the forthcoming review of the body’s remuneration code, is to:
- look at placing more stringent requirements on the deferral and award of variable pay;
- examine mechanisms for strengthening the link between performance and remuneration to ensure that incentives are aligned with the long-term performance of the firm; and
- consider how to vary capital requirements to offset risk in remuneration practices.
