Consultation on the codes of practice for wholesale cash distribution market oversight

How to respond to this consultation

1. By responding to this consultation, you are providing personal data to the Bank of England (the Bank). This may include your name, contact details (including, if provided, details of the organisation you work for), and opinions or details offered in the response itself.
2. The Bank reserves the right to share the full version of responses to the consultation with HM Treasury (HMT) and other regulatory authorities involved in future of cash related workstreams.
3. The responses received will be assessed to inform the Bank’s work as a regulator of wholesale cash distribution (WCD) firms and central bank of the United Kingdom. We may use your details to contact you to clarify any aspects of your response.
4. The Bank considers this consultation is primarily relevant to firms with an active role in the wholesale distribution market, including cash centre operators and financial institutions. Responses should reflect the organisation’s view, as a whole, and should be produced in accordance with each organisation’s appropriate governance processes.
5. We will retain all responses for an appropriate period that is relevant to supporting ongoing WCD law and policy developments and review. To find out more about how we deal with your personal data, your rights or to get in touch please visit Privacy and the Bank of England.
6. Information provided in response to this consultation, including personal information, may be subject to publication or disclosure to other parties in accordance with access to information regimes, including under the Freedom of Information Act 2000 or data protection legislation, or as otherwise required by law or in discharge of the Bank’s functions.
7. Please indicate if you regard all, or some of, the information you provide as confidential. If the Bank receives a request for disclosure of this information, we will take your indication(s) into account, but cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system on emails will not, of itself, be regarded as binding on the Bank.
8. Responses to the consultation should be provided in writing to the Bank by 31 January 2024, with all communications to: Wholesalecashsupervision@bankofengland.co.uk. Alternatively, please address any comments or enquiries to: Notes Wholesale Distribution Team, TS-G B-D, Bank of England, Threadneedle Street, London, EC2R 8AH.

Executive summary

An increasing number of individuals and businesses are benefiting from the convenience, security and speed of digital payments. Conversely, the transactional use of cash has declined, a trend that has been exacerbated by the Covid-19 pandemic. In spite of that, cash remains vital for many in society, and plays an important contingency role for everyone when other forms of payment are unavailable or interrupted. However, declining cash volumes have caused inefficiencies that are putting the UK cash infrastructure under pressure.

The Government recognised the importance of maintaining access to cash for those who need it in its March 2020 Budget. The Government committed to giving the Bank of England the powers it needs to ensure that the wholesale cash distribution (WCD) infrastructure, which includes the arrangements by which cash is made available for retail cash distribution remains effective, resilient and sustainable as cash usage further declines. These new powers are included in a new Part 5A of the Banking Act 2009, alongside complementary legislation in the Financial Services and Markets Act 2000 on retail cash access services for which the Financial Conduct Authority (FCA) has been granted powers to ensure the reasonable provision of cash access services. Together they are intended to safeguard access to cash across the UK into the future.

The legislation provides that the Bank must consult on codes of practice (CoPs) that it wishes to publish under the wholesale cash distribution oversight regime. The Bank consulted on its statement of policy and the principles in the Consultation on the Bank of England’s supervisory approach to wholesale cash distribution published in December 2022. The Bank is now consulting on the detailed CoPs for the market oversight regime.

Section 3 outlines the Bank’s proposed codes of practice for market oversight, and is the focus of this consultation. The codes are outcome-based and are intended to enable an effective, resilient and sustainable wholesale cash infrastructure. Section 4 contains proposed guidance to the CoPs, which is intended to support recognised firms in meeting the requirements set out in the CoPs.

The Bank may develop further codes and additional guidance in the future to set out requirements and expectations in other areas. These will again be subject to consultation.

We invite interested parties to respond to the following questions, by 31 January 2024:

1. Do you agree with, or have any feedback or comments on, the proposed CoP on Information Gathering?
2. Do you agree with, or have any feedback or comments on, the proposed CoP on Third Party Arrangements?
3. Do you agree with, or have any feedback or comments on, the proposed CoP on Cash Centre Closure and Market Exit?
4. Do you agree with, or have any feedback or comments on, the guidance for the CoPs?
5. Do you agree with, or have any feedback or comments on, the draft WCD Data Catalogue?

The Bank has published the Statement of policy on the Bank’s supervisory approach to market oversight for wholesale cash distribution.

Following this consultation, the Bank intends to publish the final CoPs and CoP guidance for the market oversight regime prior to the recognition by HMT of firms having ‘market significance’ in respect of their wholesale cash distribution functions and activities, under wholesale cash oversight orders provided for in the new regime.

Scope and purpose of this consultation

This Consultation Paper (CP) sets out proposals for the market oversight codes of practice (CoPs), which provide transparency on the minimum standards of conduct and practice that recognised firms must meet. The CP also includes the detailed guidance for the CoPs, which accompanies the CoPs and helps recognised firms comply with the requirements. The CP also includes the draft WCD Data Catalogue which forms part of Code of Practice – Information gathering and helps recognised firms comply with the requirements.

The Bank’s power to publish CoPs is part of the amendments to the Banking Act 2009 (the Banking Act) made by section 52 of and Schedule 9^{footnote [1]} to the Financial Services and Markets Act 2023.

This consultation should be read alongside the relevant sections. Statutory references hereon are to Part 5A of the Banking Act 2009 (the Act).

This CP provides background on the UK cash landscape, industry work and legislative reforms. It sets out, for consultation: (a) the Bank’s proposed CoPs for recognised firms that have market significance in respect of relevant functions^{footnote [2]} in relation to wholesale cash distribution activities^{footnote [3]}; (b) the accompanying guidance to the CoPs; and (c) the draft WCD Data Catalogue (which forms part of the Code of Practice – Information gathering).

The legislative framework draws a distinction between a ‘market oversight’ regime and a prudential supervisory regime for firms that are systemically significant in respect of their wholesale cash distribution activities. Under the market oversight regime the powers will be applied by the Bank to manage risks to the effectiveness, resilience and sustainability of WCD in the UK. Under the prudential supervisory regime the powers will be applied by the Bank to manage risks to financial stability and maintain confidence in the UK financial system.

The proposed CoPs contained in this CP relate only to the market oversight regime. With respect to the WCD prudential supervision powers, the Bank considers that the existing prudential framework for systemic payment systems will be suitable for supervision in the event of any wholesale cash entity being deemed to have systemic significance in the future, using the new powers contained in the Act. The Bank considers that the substantive requirements of the CoPs applicable to systemic payment system operators under Part 5 of the Act will be relevant for systemic entities recognised under Part 5A of the Act. The Bank will consider whether any changes will be necessary to reflect the particular risks posed by these entities.

The proposed CoPs for market oversight are complementary to, and not a replacement of, the existing Note Circulation Scheme (NCS), which covers the operational oversight and financial arrangements that underpin the distribution of Bank of England banknotes in the UK.

The consultation does not cover related areas of policy development currently being considered by the Bank and other relevant authorities, including:

• the NCS contractual arrangements;
• a statement of principles on the imposition of penalties under the regime, which is required to be published and which will be consulted on in 2024.

1: Background

1.1: UK cash landscape

The wholesale cash distribution (WCD) system includes the network of cash centres integral to the sorting, storing and distributing notes and coin. The Bank, and commercial issuers in Scotland and Northern Ireland issue banknotes and the Royal Mint issue coins on behalf of HM Treasury. Those new notes and coins are sent, via the WCD system to individual bank branches, ATMs and retailers. The Bank, the Royal Mint and Scottish & Northern Irish (S&NI) banknote issuers are responsible for issuing notes and coin, and withdrawing them at the end of their life; but the cash management functions related to the wholesale recirculation and redistribution of notes and coins to the private and public sector occurs in the wholesale cash supply chain within the private sector. The wholesale system includes:

• taking delivery of new notes from the Bank, commercial issuers in S&NI and coin from the Royal Mint;
• wholesale sorting, storing and circulation of these notes and coins, including the movement between cash centres; and
• withdrawing notes and coin that are no longer fit for circulation from the system, to be destroyed.

The current WCD system was designed for a world with higher cash usage. Cash processing volumes in the UK have fallen almost 50% since 2016. Should this trend continue there is a risk that the current cash infrastructure could increase the costs of cash management, creating risks of disruption to consumers and businesses who need access to cash.

1.2: Industry work

In December 2021, the Wholesale Cash Distribution (WCD) market participants, including UK Banks that fund or participate in the wholesale infrastructure and the UK WCD operators, agreed industry wide-commitments would help ensure that the wholesale cash infrastructure continues to provide services to customers and supports the effective retail provision of cash. These commitments cover three key areas: effectiveness, resilience and sustainability. These are supplemented by individual firms’ statements of commitment to take the necessary steps to deliver these industry-wide commitments.^{footnote [4]}

As HM Treasury made clear in its Policy Statement on wholesale cash in April 2022^{footnote [5]}, it expects the WCD industry to transition to a smaller footprint over the coming years. It is important that the risks arising from any future restructuring of the wholesale cash infrastructure can be effectively managed, and it is the Bank’s and HM Treasury’s view that it is not possible to do that through voluntary arrangements alone.

1.3: Legislative reforms

In July 2022, HM Government introduced new legislative measures to protect access to cash within the Financial Services and Markets Bill. The Bill received royal asset on 29 June 2023 and became the Financial Services and Markets Act 2023 (FSMA 2023). On retail cash access services, FSMA 2023 amended the Financial Services and Markets Act 2000 to provide the Financial Conduct Authority (FCA) with responsibility and powers for seeking to ensure the reasonable provision of cash access services in the United Kingdom, or a part of the United Kingdom. Separately, industry is also taking action, with banks and building societies working together to assess the cash needs of local communities, where relevant, and to deploy shared solutions in communities that require additional access to cash.

FSMA 2023 also established a new statutory oversight regime for wholesale cash distribution by inserting a new Part 5A into the Banking Act 2009 (the Act).^{footnote [6]} The regime established two forms of oversight: the ‘market oversight regime’ and the ‘prudential supervision regime’. The main objective of the market oversight regime is to manage risks to the effectiveness, resilience and sustainability in the WCD market.^{footnote [7]} It extends to firms which are recognised as playing a significant role in the market, as set out in the Act. The main objective of the prudential supervision regime is to manage risks to financial stability and maintain confidence in the UK financial system.^{footnote [8]} It extends to firms that are recognised as playing a systemic role in the WCD market. The Bank’s statement on how it will use its new WCD powers are set out in the Statement of Policy on the Bank of England’s supervisory approach to wholesale cash distribution published in August 2023.

2: Wholesale cash distribution legislation

2.1: Scope of the legislation

Under the new Part 5A of the Act, HM Treasury will be able to make recognition orders in respect of firms which carry out relevant functions^{footnote [9]} in relation to Wholesale Cash Distribution (WCD) activities^{footnote [10]}, if such firms meet the criteria set out in the legislation. These recognition orders will bring entities within scope of either market oversight only, or both the market oversight and prudential supervisory regimes. The criteria form the basis for decisions by HM Treasury to make recognition orders. In making a determination, HM Treasury will (amongst other matters) consult with the Bank, notify the relevant firms, and consider representations made.

Entities that provide services in relation to WCD activities can also be brought into scope.^{footnote [11]} However, the Bank’s current expectation is that there is no intention for HMT to recognise any service providers to the industry initially. This includes cash-in-transit (CiT) firms. This will be kept under regular review, and if changes to the wholesale cash infrastructure occur in the future, it may become necessary to bring CiT firms or other service providers within scope of the regulatory oversight regime.

The majority of Scottish issuers of banknotes fall within banking groups we anticipate are likely to fall in scope of this regime. The picture is different in Northern Ireland, where the issuers and market are more distinct and there are different operational processes for note distribution governed by the Northern Ireland Sorting, Storage and Issuance arrangements. The Bank’s current expectation is that there is no need for HMT to bring the Northern Ireland issuers of banknotes within scope initially. This will be kept under review as the market evolves.

2.2: The Bank’s powers

As part of the new WCD powers, the Bank may publish CoPs. Further details on the Bank’s new powers can be found in the Statement of Policy on the Bank of England’s supervisory approach to wholesale cash distribution published in August 2023.

Market oversight

The Act requires recognised firms to have regard to principles published by the Bank^{footnote [12]} and to comply with Codes of Practice (CoPs) published by the Bank^{footnote [13]} when performing relevant functions specified in a wholesale cash distribution order made by HMT. The Act also gives the Bank power to give directions to recognised firms.^{footnote [14]} It is intended that the power of direction will enable the Bank, for example, to put additional safeguards around material changes to recognised firms’ business models (e.g. cash centre closures or market exit).

In addition, the Act provides the Bank various powers to help it gather information and assess the WCD market. These comprise: the power to require the provision of information,^{footnote [15]} the power to enter premises to inspect information;^{footnote [16]} and, the power to require independent reports.^{footnote [17]}

Failure to comply with certain requirements may lead to formal sanctions under the Act, such as public censure, financial penalties, closure (in relation to the performance of relevant functions by firms recognised as having systemic significance only) and management disqualification.^{footnote [18]} The Act requires the Bank to give warning notices if it proposes to impose such sanctions in most cases^{footnote [19]}, which can give rise to a right of appeal.^{footnote [20]} It is expected that such powers will be used only when the Bank cannot achieve its desired outcomes through its regular supervisory engagement with firms.

The powers will enable the Bank to assess the market-wide impact of any commercial solution, restructuring or exit, and to ensure that measures are taken to mitigate any risks that may arise. This will enable the Bank to manage any developments in an orderly way that does not jeopardise the stability of the wider wholesale cash infrastructure.

Prudential supervision

The Bank’s powers under the prudential supervision regime apply to firms recognised by HMT as having systemic significance. The powers are the same as for the market oversight regime, with the addition of a power of closure in respect of the compliance failures by systemic firms. However, whereas under the market oversight regime the powers will be applied by the Bank to manage risks to the effectiveness, resilience and sustainability of WCD in the UK, under the prudential regime the powers will be applied by the Bank to manage risks to financial stability and maintain confidence in the UK financial system.

The Act also applies an amended Financial Market Infrastructure Special Administration Regime^{footnote [21]} to ensure the continuation of WCD activities in the event of a systemic firm’s insolvency, and the ability to order a firm to stop operating in the event that it posed a threat to financial stability.

2.3: The Bank’s obligations under the legislation

The legislation requires the Bank to consult on any CoPs it intends to issue for recognised firms. This is the purpose of this consultation. Further information on the Bank’s obligations under the legislation can be found in the Statement of Policy on the Bank of England’s supervisory approach to wholesale cash distribution published in August 2023.

3: For consultation – draft CoPs for market oversight of wholesale cash distribution

Information Gathering

Subject to this consultation, this CoP will require recognised firms to provide information about the performance by the firms of their relevant functions and activities as specified in a wholesale cash oversight order. Further details on the Bank’s requirements for information to be reported to it, is set out in the draft WCD Data Catalogue accompanying this consultation.

The information required to be provided by recognised firms pursuant to the CoP – Information-gathering is in addition to information that may, by notice, be required to be provided pursuant to the exercise by the Bank of its statutory information-gathering power in section 206Z3 of the Act.

The draft CoP requires recognised firms to report a range of information and data on a regular basis. This includes (but is not limited to) information on cash centres, service level agreements, business plans and business continuity plans. The WCD Data Catalogue and reporting form contain instructions for the information required, including information relating to cash centre closure and market exit, and material third party arrangements required by the CoPs on Third Party Arrangements and Cash Centre and Market Exit.

Under the draft CoP, firms will be required to produce a business continuity plan and a business plan, and provide those to the Bank annually. In addition, firms must carry out a self-assessment in respect of the extent to which the firm has complied with the principles^{footnote [22]} and the codes of practice over the course of each calendar year. Firms must also attest annually to the accuracy and completeness of information provided to the Bank under the codes of practice. The proposed CoP on Information gathering also requires firms to put in place certain monitoring arrangements relating to service level agreements and sustainability targets. The Bank also requires that firms should have an appropriate data governance framework to support the accuracy and reliability of information reported to the Bank under the CoP.

The proposed CoP stipulates that recognised firms must deal with the Bank in an open and cooperative way, and take reasonable steps to ensure that all information it gives to the Bank is: factually accurate or, in the case of estimates and judgments, fairly and properly based after appropriate enquiries have been made by the recognised person; and up to date and complete.

The Bank will reserve the right to request further evidence in relation to any of the principles, if required. There may be circumstances in which the Bank requires information from firms on an ad-hoc basis, in addition to the information regularly submitted to the Bank and the Bank may use its statutory information gathering power and further statutory powers in this regard.

Third-party Arrangements

This CoP will set out requirements for firms to carry out a materiality assessment in respect of all current and proposed arrangements with third party providers of products/goods or services relating to the firm’s relevant wholesale cash distribution functions and activities. For arrangements that are considered ‘material’ to a firm’s relevant functions, the firm must carry out due diligence in respect of the provider and a risk assessment in relation to the risk of failure or disruption in supply by the supplier. The CoP also sets out what the Bank expects firms to consider when they negotiate and execute contracts with material wholesale cash suppliers, bearing in mind that they must have regard to the effectiveness, resilience, and sustainability of the market.

Cash Centre Closure and Market Exit

This CoP will require recognised firms to engage with the Bank at as early a stage as possible in the firm’s strategic planning of a material change, such as the closure of a cash centre or market exit, and prior to a final decision being made. This is to enable us to assess the wider impact on the wholesale cash infrastructure and ensure that it is manageable. The CoP is also intended to require firms to give customers and suppliers timely notice of their plans to aid an orderly transition of business activity. In both cases (cash centre closures and market exit) it is intended that the recognised firm must provide the Bank with information relating to its proposals for closure/exit, an impact assessment and strategy for reducing the impact of the closure/exit on the wider market, as well as a cost benefit analysis of the proposal, the timeframe for the proposal, a description of the firm’s engagement with stakeholders (employees, contracting parties etc.), and a description of the governance for the proposal. Such information must be provided six months in advance of the intended date of closure and twelve months in advance of the intended date of exit. Firms will be subject to ongoing notification requirements where there are material changes in the information provided to the Bank. This may result in iterative supervisory dialogue with the Bank and the Bank may use its powers to require the firm to amend its transition plan in certain circumstances. Firms will not be permitted to take irrevocable steps towards the cash centre closure or exit until the end of a relevant ‘review’ period for the Bank, or until the Bank confirms it has no objection to the proposal.

• For consultation – draft CoPs for market oversight of wholesale cash distribution

4: For consultation: draft Data Catalogue

• For consultation – draft Data Catalogue

5: For consultation – draft guidance for the CoPs for market oversight

• For consultation – draft guidance for the CoPs for market oversight

6: Consultation Paper questions

1. Do you agree with, or have any feedback or comments on, the proposed CoP on Information Gathering?
2. Do you agree with, or have any feedback or comments on, the proposed CoP on Third Party Arrangements?
3. Do you agree with, or have any feedback or comments on, the proposed CoP on Cash Centre Closure and Market Exit?
4. Do you agree with, or have any feedback or comments on, the guidance for the CoPs?
5. Do you agree with, or have any feedback or comments on, the WCD Data Catalogue?

7: Timetable and next steps

The consultation period will run for two months to 31 January 2024. The Bank invites feedback on the proposals for the CoPs and guidance set out in this CP.

Once feedback has been received from this consultation, the Bank will assess the responses and decide how to respond to the feedback.

When making the proposals in this CP, the Bank must have due regard to the public sector equality duty and consider the impact of the proposals on those who share protected characteristics. Please indicate in your response if you believe any of the proposals in this CP are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

The Bank expects to consult on and publish its approach to enforcement in 2024.

HM Treasury expects to recognise relevant firms via the statutory recognition process in 2024.