Banks: UK's final legislation for bank levy increases rate from consultation amount

Mark Hoban, Financial Secretary to the Treasury, announced the legislation to implement the bank levy this morning:
"We have consulted on the design of the scheme so that it achieves two objectives: 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 will encourage the banks to make greater use of more stable sources of funding, such as long-term debt and equity, working with the grain of our wider reform programme."

Earlier today Hong Kong time, media carried a report that the Hong Kong Monetary Authority had said that it had not received any enquiries from banks to relocate there from London. And yesterday, the UK government produced figures to show that the City of London is seeing expansion in the financial sector with companies growing and new entrants to the market.

But that was then and this is now: a statement from HM Treasury said

"Following two periods of consultation since June, the final legislation contains changes to the rate of the levy. The rate for 2011 will be 0.05 per cent, rather than 0.04 percent, and it will rise to 0.075 per cent from 2012, instead of the 0.07 per cent announced in June.
"These changes, along with the introduction of an allowance, rather than a threshold, for those liabilities to which the levy applies, will generate around GBP2,500 million of annual revenues. This is in line with the Budget estimates."

In the great scheme of things, that's not much but for international banks head-quartered in the UK, especially those generating most of their revenue outside the UK, the tax seems particularly onerous. In effect, it's a tax on exports. It actually applies as a balance sheet tax - like a wealth tax - rather than a revenue tax but the end result is the same: money comes off the bottom line from which distributions are made.

Foreign banks operating in the UK are liable to the tax only on UK derived assets.

But it's not the only reason banks may be looking to consider their position: in a note to the bank levy notice, there was the following, chilling, notice:

"In addition to introducing a bank levy, the Government is taking action to tackle unacceptable bank bonuses. The Independent Commission on Banking will look at structural and non-structural measures to reform the banking system and promote competition. Working with international partners, the Government is exploring the costs and benefits of a Financial Activities Tax on profits and remuneration. Separately, the Financial Services Authority is currently revising its remuneration code and provisions will be in place by 1 January 2011 that will ensure bonuses for material risk-takers are deferred over a number of years and are linked to the performance of the employee and their firm. Significant portions of these bonuses will have to be paid in shares or other securities."