Miscellaneous Bank of England Levy Rationale for replacing the CRD scheme Bank of England levy
The Act repeals the provisions in the Bank of England Act 1998 that provide for the CRD scheme and replace these with a new levy on eligible financial institutions. Replacing the CRD scheme with a levy is intended to ensure that the Bank receives income in line with its forecast policy expenditure and conserve its current capital position. In line with the intention of the existing CRD scheme, the levy will cover the costs of the Bank’s monetary policy and financial stability functions. It is also intended to give payers greater certainty over the size of their annual contribution as, unlike the CRD scheme, the levy will not change in line with gilt yields. The overall objective of financial institutions funding the Bank’s policy functions will not change, however the method by which this happens will.
	Under the new levy, the Bank will determine the total policy levy annually to match expected expenditure on policy functions. The Bank’s policy costs to be recovered through the levy will be approved by the Bank’s Court of Directors as part of the annual budget setting processes. This will be discussed with HM Treasury as part of the existing arrangements for engagement on the Bank’s annual budgets and financial performance as agreed in the Memorandum of Understanding on the Financial Relationship between HM Treasury and the Bank. Each year, before applying the levy, the Bank will notify industry on its plans for the levy. Financial gains or losses from policy operations – for example in relation to profits or losses from trading activities or counterparty losses – would not be covered by the scheme.
	In line with the existing CRD scheme, the levy will apply to eligible institutions, which are defined as deposit-takers whose eligible liabilities are above a defined threshold. It is intended that secondary legislation will provide that the Bank will allocate the expenditure total across the eligible firms, for each institution and proportionate to their eligible liability base. This will allow each firm’s contribution to be proportional to their exposure to liquidity risk. It is proposed that the levy would apply to all eligible firms with eligible liabilities of at least £600 million.
	HM Treasury will be able to set out how the Bank calculates the levy and allocates the charge to eligible institutions in secondary legislation, subject to the affirmative procedure. The intention is for the policy costs payable by an eligible institution to be proportional to an eligible institution’s liability base above a threshold.
	As happens with other cost recovery schemes, a mechanism would exist for adjusting subsequent years’ levies to take account of under or overspends, following the finalisation of accounts. The Bank would publish a detailed breakdown of its costs for the year, deviations from budget and income from the levy in its annual report and accounts and/or the annual notification.
	The government will continue to monitor the effectiveness of the funding model used to meet the Bank’s policy costs and will conduct a further formal review within at least five years of secondary legislation being introduced and publish a report in respect of that review. As part of HM Treasury’s five-yearly review of the levy, consideration of the Bank's approach to levying policy costs, including its approach to setting the annual aggregate costs will be included.