Governance

The framework for governance and accountability is set by the 1998 Bank of England Act. In some respects the framework was modified by the 2009 Banking Act.

The Court of Directors

The Court of Directors is responsible for managing the affairs of the Bank, other than the formulation of monetary policy. Court's responsibilities under the Bank of England Act 1998 ('the 1998 Act') include determining the Bank's objectives and strategy, and ensuring the effective discharge of the Bank's functions and the most efficient use of its resources. Since the 2009 Banking Act ('the 2009 Act'), the Bank has had a statutory objective to 'contribute to protecting and enhancing the stability of the financial systems of the United Kingdom' and the Court, consulting HMTreasury and on advice from the Financial Stability Committee (see below), determines the Bank's strategy in relation to that objective.

The members of Court are appointed by the Crown. The nine Directors are all non-executive. One of them is designated by the Chancellor of the Exchequer to chair Court.

The Governors are appointed by the Crown for periods of five years, and the Directors for three years.

Court delegates the day-to-day management of the Bank to the Governor and through him to other members of the executive. But it reserves to itself the right to agree:

• The Bank's strategy and objectives.
• The Bank's expenditure budget.
• Major capital projects.
• The Bank's financial framework.
• The Bank's risk management policies.
• Approval of the accounts and the appointment of auditors.
• The remit for management of the Bank's balance sheet.
• The Bank's facilities in the money market.
• Senior appointments within the Bank.
• Changes in remuneration and pension arrangements.
• The Bank's succession plan.
• The establishment of sub-committees of Court, their terms of reference and membership.

And Court is consulted about financial support for institutions through the Financial Stability Committee.

Court keeps its procedures under close review and each year an annual Effectiveness Review is conducted on which a report is made to Court.

Members of Court have been indemnified by the Bank against personal civil liability arising out of the carrying out or purported carrying out of their functions, provided they have acted honestly and in good faith and have not acted recklessly. These indemnities were granted in 2000 and approved by HMTreasury in accordance with the practice of the Government in relation to board members of Non-Departmental Public Bodies.

NedCo

The Chairman of Court is also chairman of a Committee of Court (NedCo) consisting of all the Non-executive Directors. NedCo has responsibilities for reviewing the Bank's performance in relation to its objectives and strategy, monitoring the extent to which its financial management objectives are met, reviewing the procedures of the MPC (see below), reviewing the Bank's internal controls, and for determining the pay and terms of employment of the Governors, Executive Directors and external MPC members. The Remuneration Committee (see below) advises NedCo on this last responsibility. To a large extent NedCo's work is done through Court, and references in this report to 'Court/NedCo' indicate work carried out in this way. However the Committee meets separately from Court to agree its Annual Report. NedCo also meets separately to review the Governor's performance against the personal objectives set by the Committee and to endorse the objectives for the coming year as agreed with the Governor by the Chairman of Court.

Financial Stability Committee (FSC)

The FSC was created by the Banking Act 2009. It consists of the Governors, the four members of Court nominated by the Chairman of Court, and a Treasury observer (who may not vote). The Committee may co-opt further members.

Under the 2009 Act the Committee has the following functions:

• To make recommendations to the Court of Directors, which they shall consider, about the nature and implementation of the Bank's strategy in relation to the financial stability objective.
• To give advice about whether and how the Bank should act in respect of an institution, where the issue appears to the Committee to be relevant to the financial stability objective.
• In particular, to give advice about whether and how the Bank should use stabilisation powers under Part 1 of the Banking Act 2009 in particular cases.
• To monitor the Bank's use of the stabilisation powers.
• To monitor the Bank's exercise of its functions under Part 5 of the Banking Act 2009 (interbank payment systems).

Court has delegated to the Committee the following additional functions:

• To monitor the Bank's exercise of its functions under Part 6 of the 2009 Banking Act (Scottish and Northern Ireland banknotes).
• To advise the Governor about any loan, commitment or other transaction which it is proposed that the Bank should make or enter into for the purpose of pursuing the financial stability objective.

Until the creation of the interim Financial Policy Committee (FPC) in February 2011, Court had also delegated to the Committee the final approval of the Bank's Financial Stability Reportprior to publication. The interim FPC has now become the main conduit for the Bank's risk assessment and market intelligence, although the FSC remains concerned with the process by which the Bank's intelligence is gathered and the assessment developed.

Financial Policy Committee

The interim FPC was announced in February 2011 in anticipation of legislation to create a Financial Policy Committee (FPC), as outlined in the Government's consultation document 'A new approach to financial regulation: building a stronger system' which was published on 17 February 2011. The FPC is a committee of Court, and will carry out preparatory work and analysis in advance of the creation of the permanent FPC; monitor developments affecting financial stability in the United Kingdom and internationally, give advice to the FSA and other bodies it feels appropriate about emerging risks in the financial system and recommend possible means of mitigating these risks; consider making recommendations to the Treasury about the regulatory perimeter and review and approve the Bank's Financial Stability Reportwhich will set out its assessment and any recommendations that the Committee may have made. The Committee will meet at least four times a year and will publish a record of its discussions.

The members of the Committee are the Governor (Chairman), the two Deputy Governors, Hector Sants (in his capacity as future Deputy Governor of the Bank of England for Prudential Regulation and Chief Executive of the Prudential Regulation Authority), the Chairman of the Financial Services Authority, Executive Directors of the Bank for Financial Stability and Markets, and four external members nominated by the Treasury. There will also be two non-voting members, the Chief Executive designate of the Financial Conduct Authority and a representative of the Treasury.

Remuneration Committee

The Remuneration Committee advises NedCo on the remuneration of the Bank's most senior executives, including the Governors, the Executive Directors (who are not members of Court), the Advisers to the Governors and the members of the Monetary Policy Committee appointed by the Chancellor of the Exchequer (the external MPC members).

Audit and Risk Committee

The functions of the Audit and Risk Committee are to assist Court in meeting its responsibilities for an effective system of financial reporting, internal control and risk management; and to assist NedCo in discharging its responsibilities under the Bank of England Act 1998 for 'keeping under review the internal financial controls of the Bank with a view to securing the proper conduct of its financial affairs'. The Committee is responsible for providing independent assurance to Court that the Bank's risk and control procedures are adequate. The Committee, which meets regularly, has detailed terms of reference that include: receiving reports from, and reviewing the work of, the internal and external auditors; reviewing the annual financial statements prior to their submission to Court; considering the appropriateness of the accounting policies and procedures adopted; making recommendations on the appointment of the external auditors, their independence and their fees; and reviewing the Bank's risk matrix and specific business controls.

Nominations Committee

In 2010 a Nominations Committee was formed, inter alia, to make recommendations to Court on the appointment of Executive Directors, the Secretary, and the Internal Auditor of the Bank, appointments to sub-Committees (other than the interim FPC), as to whether likely conflicts of interest are sufficiently severe to prevent a Member of Court continuing to serve as such and to review succession plans with particular regard to those appointments for which Court's approval is required.