New UK Government Announces Bank Levy and Likely New Measures on Bank Remuneration Policies
By: Philip J. Morgan and Neil Nick Robson
On 22 June 2010, the UK's new Chancellor of the Exchequer, George Osborne, delivered the new Government's “emergency” budget. Amongst a package of other measures, he announced a bank levy from 1 January 2011, and plans to carry out further work to tackle unacceptable bank bonuses, including a consideration of the costs and benefits of a “Financial Activities Tax” on bank profits and remuneration.
BANK LEVY
The UK Government announced that it will introduce a bank levy based on banks’ balance sheets from 1 January 2011. The levy is intended to encourage banks to move to less risky funding profiles. The Government believes that banks should make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy. HM Treasury has stated that “systemic risks must always be assessed in light of the circumstances at the time. The regulatory reforms underway are aimed at ensuring that no firm is too big to fail and that all firms are resolvable. The levy is a contribution reflective of economic risk; it is not an insurance against failure or a fund for future resolution.”
To whom will it apply?
The levy will apply to:
- the consolidated balance sheet of UK banking groups and building societies;
- the aggregated subsidiary and branch balance sheets of foreign banks and banking groups operating in the UK; and
- the balance sheets of UK banks in non-banking groups.
These institutions and groups will only be liable for the levy where their relevant aggregate liabilities, as set out below, amount to £20 billion or more. In calculating branch liabilities and Tier 1 capital (i.e. the most permanent form of capital), the Government proposes to use the principles applied to the capital attribution methodology used for UK Corporation Tax purposes.
What will the levy be calculated on?
The levy will be based on total liabilities (i.e. both short- and long-term liabilities) excluding:
- Tier 1 capital;
- insured retail deposits;
- repos secured on sovereign debt; and
- policyholder liabilities of retail insurance businesses within banking groups.
The Government proposes that only net derivative liabilities will be taken into account, but will consider the technical details of this and other aspects of the levy design in consultation with industry over this Summer.
How will the levy be calculated?
It is proposed that the levy, which will be administered by HM Revenue & Customs, will be set at 0.07%. It is expected to raise over £2 billion annually. However, the Government has proposed a lower rate of 0.04% for 2011. There will also be a reduced rate for longer-maturity wholesale funding (i.e. greater than one year remaining to maturity) to be set at 0.02% rising to 0.035%, half the main rate.
The levy will not be deductible for Corporation Tax.
Timing
The Government will consult over the Summer. Final details of the levy will be published later this year, following this consultation.
International consensus
The UK, French and German governments have confirmed in a joint statement their commitment to introducing bank levies based on banks’ balance sheets ahead of the current Toronto G20 summit (which started on 24 June 2010). The joint press release states that in light of agreement in the G20 that the financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions to repair the banking system or fund resolution in a financial crisis, and the valuable work undertaken by the International Monetary Fund (“IMF”) in response to this (and the conclusions of the European Council on 17th June), the governments of France, the United Kingdom and Germany propose to introduce bank levies based on banks’ balance sheets.
BANK REMUNERATION
The Government states in the main budget paper that underpinning its approach is a commitment to fairness. It goes on to state that it “will ensure that every part of society makes a contribution to deficit reduction while supporting the most vulnerable, including children and pensioners. The Government will also seek to build over the long term a fair tax and benefit system that rewards work and promotes economic competitiveness [and] the Budget sets out a vision for a refocusing of the tax and benefit framework. It announces measures to encourage people to take personal responsibility for their actions by rewarding those who work hard and save responsibly for the future.” One element of fairness that the Government proposes to deal with is what it perceives as “unacceptable bank bonuses” with measures including:
- commissioning an Independent Commission on Banking to look at structural and non-structural measures to reform the banking system and promote competition.
- working with international partners to explore the costs and benefits of a financial activities tax (FAT) on profits and remuneration. The IMF is expected to deliver its final report on a FAT at the current G20 Toronto summit.
- consulting on a remuneration disclosure scheme.
- requesting that the FSA, as part of its anticipated review of its Remuneration Code, should:
● consider whether to impose 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.
Thank you for this helpful information.