Introduction

The Building Societies Association represents mutual lenders and deposit takers in the UK including all 45 UK building societies.  Building societies have total assets of nearly £330 billion and, together with their subsidiaries, hold residential mortgages of over £230 billion, 18% of the total outstanding in the UK.  They hold over £230 billion of retail deposits, accounting for 19% of all such deposits in the UK.  Building societies account for about 28% of all cash ISA balances.  They employ approximately 39,000 full and part-time staff and operate through approximately 1,600 branches.

Building society law forbids societies to take risk positions in commodities, currencies or derivatives. 

The sole bank levy payer among building societies, Nationwide, has submitted its own detailed response.  We support the points it has made and do not repeat them in detail here.  Our response focuses therefore on high level concerns.

Background

HM Treasury has published plans for a new five-band system for the bank levy.  Under the proposals, banks (term also includes building societies) would pay a fixed charge, based on balance sheet bands and capped at £375 million.  Banks would pay the pre-set charge for that band.  The largest and riskiest banks would be in bands that pay higher charges.  HMT has also stated that the status quo remains an option.

The move is intended to make the tax more predictable and sustainable and to be revenue neutral.  HMT continues to view the original policy aims of the levy as appropriate.  If implemented, the changes will take effect for chargeable periods beginning on or after 1 January 2015.

We note in this consultation that the twin aims of the levy - to ensure banks make "a fair contribution" to the potential risks they pose to the financial system and to provide an incentive for them to move away from riskier funding profiles – remain unchanged.  We also note the government’s intention to leave the underlying tax base untouched.  This is crucial.   Any extension of the levy paying population to smaller, low risk institutions such as mutuals would be wholly inappropriate and run counter to the aims of the levy, and therefore government policy. 

Discussion

We do not support a banding approach.  It fails to meet the policy objectives of the bank levy or to address current weaknesses.  For banding to work, there would have to be a very small number of very wide bands.  This could lead to more inbuilt weaknesses and imbalances creating some significant winners and losers among current levy payers.   Specifically, this could lead to the financial burden shifting to smaller levy payers.   We believe that any changes should ensure that the burden is spread over the whole levy paying population with no one institution picking up the cost.  Otherwise the tax could end up being less fair.

To deliver the fixed yield there would inevitably be changes required in the future to the banding approach. These would be complicated as changes to the band width and band charge would need to be considered. This could result in two changes rather than one with the rate approach. 

An area of HMT concern is predictability; since its introduction in 2011, it has been raised seven times.  But banding does not produce predictability.  To implement it, the banding charge and band width would have to be changed as balance sheets change to ensure the target is achieved.  As Nationwide has pointed out, this is only likely to be improved if the rules are changed so that the current year liability is based on the previous year’s audited balance sheet.

Another concern is apparent inequity of the levy basis.  Chargeable equity and liabilities apply on a global basis for UK resident payers but on a UK basis only for foreign banks.  This has the potential to create an unlevel playing field.  Those UK resident levy payers that are not in a position to shift operations from the UK in a bid to cut their bank levy should not be made to make up the shortfall in receipts by those that are in such a position.

Banding will not stop this sort of behaviour.  Instead, the cliff edge effect will create further opportunities to behave in a way the government is trying to stop.

Finally, we support the government’s intention to use UK bank levy receipts in meeting the ex-ante fund requirements under Bank Recovery and Resolution Directive and the Deposit Guarantee Schemes Directive.  This avoids the need for additional levies on the sector (which must be imposed in any member state that does not have a suitable bank levy).

Members and associates will find more information in our policy brief.