Responses to the consultation on the Bank of England’s supervisory approach to wholesale cash distribution

Overview

In December 2022 the Bank published a consultation on its supervisory approach to wholesale cash distribution (WCD).

The consultation paper provided background on the UK cash landscape, industry work and legislative reforms under Part 5A of the Banking Act 2009 (the Act). It set out for consultation: (a) the Bank’s approach to the use of the powers (including enforcement) over firms that have market significance in respect of relevant functions^{footnote [1]} in relation to WCD activities^{footnote [2]} (‘market oversight’) and entities that have systemic significance in respect of relevant functions in relation to WCD activities (‘prudential supervision’); (b) the Principles of supervision; (c) certain information in relation to initial proposals for codes of practice; and (d) the approach to the allocation of fees.

The consultation closed on 10 February 2023. We received 10 responses from a range of stakeholders, including the main direct market participants, as well as industry bodies with a broader cash market view.

Respondents were broadly supportive of the proposed supervisory approach to WCD, but provided some comments and feedback. Below we acknowledge and respond to the feedback received.

Consultation feedback and Bank’s response

Cash centre closures

1. A range of respondents raised concerns that the Bank's intention to consider recognised firms’ proposals for cash centre closures, and new powers to direct firms to take action (or not to take action), could lead to potential delay or make it more difficult to enact commercially necessary changes, or even make the recognised firms’ business unviable.

The purpose of the new market oversight regime under the Act is to manage risks to the effectiveness, resilience and sustainability of WCD throughout the United Kingdom (or any part of it). The Bank will therefore exercise its powers with a view to supporting proposed changes in market structure that deliver such effective, resilient and sustainable WCD. Under the new legislation, recognised firms are also required to have regard to the Bank’s published Principles in performing relevant functions in relation to WCD activities. As confirmed in the statement of policy, the Bank will take a proportionate and risk-based approach to the exercise of its powers. The commercial implications of delays or other conditions placed upon a firm are an important factor in this assessment. Typically, before exercising any formal powers (eg the power of direction), the Bank would expect to engage closely with a recognised firm on proposals for a cash centre closure with a view to finding a proportionate solution that recognises commercial concerns, while managing risks to the effectiveness, resilience and sustainability of WCD. The Bank intends to publicly consult on a draft code of practice and accompanying guidance on cash centre closure and market exit in Autumn 2023. Subject to consultation, the proposals for the code of practice will seek to facilitate this timely engagement and provide the Bank with the information required for this assessment.

Cash in transit

2. Four respondents highlighted the concentration of the cash in transit (CIT) market and their concern about the potential impact that one CIT supplier leaving the market could have on their ability to continue to supply customers with CIT services. Several respondents felt that CIT firms should be within scope of the Bank’s formal market oversight regime from the outset.

While decisions on making wholesale cash oversight orders in respect of individual firms are to be taken by His Majesty’s Treasury (HMT) under the Act, the Bank will be closely engaged in the process and will make recommendations to HMT. The Bank, working with HMT, will closely monitor risks in this market and the scope of the regime will remain under review. The Bank intends to continue to engage with industry to identify the key risks facing the sector, actions that could be taken were these to crystalise, as well as any mitigating actions that can be taken in advance, including in relation to CIT providers. In addition, the Bank intends to publicly consult on a draft code of practice and accompanying guidance on third party arrangements in the Autumn 2023. Subject to consultation, the code of practice will set out proposals for gathering information on CIT providers. Under Part 5A of the Act, the Bank has new information gathering powers to require any firm to provide information which the Bank thinks will help HMT in determining whether to make a wholesale cash oversight order, or which the Bank otherwise requires in connection with its oversight functions under the legislation. Further details on the Bank’s powers to require information are set out in the statement of policy.

Coin

3. Three respondents highlighted the current challenges and obstacles facing firms in relation to the management of the wholesale distribution of coin throughout the United Kingdom. They flagged that they would appreciate more detail on how wholesale coin distribution will continue to operate sustainably, effectively and resiliently within the proposed new market oversight regime. Two respondents suggested that consideration should be given to creating a scheme for wholesale distribution of coin similar to the current Note Circulation Scheme (NCS) that applies to banknote distribution.

We appreciate that firms are facing challenges in relation to the continued distribution of coin and we value the industry’s ongoing feedback in this respect. The Bank is working with The Royal Mint and HMT to assess the vulnerabilities in the coin market and further engagement with industry on these issues is anticipated. This is a developing area.

Powers

4. One respondent requested more clarity on the use of independent experts, including the competency and independence expected of them, and clarity on what would trigger the need for an independent report. The respondent suggested costs of these reports should be covered by supervisory fees and that firms should not bear any additional costs. Respondents were keen to understand the specific triggers for decisions and more clarity on descriptions of such situations.

Experts will vary depending on the issue, but will need to be of sufficient skill, experience, and independence. Under the Act, the Bank may require a recognised firm to appoint an expert to report on the performance of a function only if the Bank thinks:

1. the recognised firm is not having sufficient regard to the Principles published by the Bank under section 206K;
2. the recognised firm is failing to comply with a code of practice under section 206L; or
3. such a report is likely, for any other reason, to assist the Bank in the performance of its functions under the legislation.

By way of example, purposes for which the Bank anticipates appointing an expert include (but are not limited to):

1. diagnostic purposes – to identify, address and measure risks;
2. monitoring purposes – to track the development of identified risks, wherever these arise; 
3. preventative purposes – to limit or reduce identified risks and so seek to prevent them from crystallising or increasing; and
4. remedial action – to allow the Bank to respond to risks when they have crystallised.

In line with other frameworks, such as the Prudential Regulation Authority’s (PRA’s) use of section 166 reports under the Financial Services and Markets Act 2000, the cost of the appointment would be borne by the firm making the appointment.

Codes of practice

5. Respondents recognised the freedom and ability to make necessary commercial decisions within the indicative proposals for the codes of practice but were keen to understand specific details.

The Bank intends to publicly consult on its proposals for codes of practice (and accompanying guidance) on: (1) information; (2) third-party arrangements; and (3) cash centre closure and market exit in Autumn 2023.

6. Respondents sought further detail on of the concept of a ‘significant client contract’.

The Bank intends to publicly consult on its proposals for codes of practice (and accompanying guidance) on information and third-party arrangements in Autumn 2023. Subject to consultation, the proposals will provide further details on relevant concepts.

7. One respondent queried when the new codes of practice would apply, and whether they would be retrospective or forward looking. Another respondent, in the context of the Bank’s high-level proposal to consult on a code of practice on contractual arrangements, highlighted the difficulty of making changes mid-contract.

The Bank intends to publicly consult on its proposals for codes of practice (and accompanying guidance) on: (1) information; (2) third-party arrangements; and (3) cash centre closure and market exit in Autumn 2023. It is intended that any new code of practice would come into force following the conclusion of the consultation process – and a firm would become subject to the requirements of the regime from the point of recognition under Part 5A of the Act. As set out in the statement of policy, the Bank intends to take a risk-based and proportionate approach to the exercise of its powers. This may, for example, involve providing for a reasonable transition or grace periods in respect of third-party contractual arrangements.

8. Two respondents queried the scope of the proposed code of practice on contractual arrangements, and whether there will be a significance threshold for contractual arrangements.

As set out in the statement of policy, the Bank intends to take a risk-based and proportionate approach to the exercise of its powers. The proposed draft codes of practice and accompanying guidance will provide further information on the Bank’s proposals regarding significance of third-party services arrangements.

Principles

9. Three respondents expressed the view that the Principles should remain high level, and allow firms flexibility to set their own objectives under the Principles. One respondent expressed the view that a highly prescriptive approach could stifle innovation and choice in the market.

The WCD regime is intended to be an outcomes-based regime, and – as set out in the statement of policy – the Principles are intended to be high level, and to allow firms flexibility in how they have regard to each principle. The Bank recognises the need for innovation within the industry and is deliberately not prescriptive in this regard.

The Bank intends that the proposed codes of practice and associated guidance should be developed to work in harmony with the Principles. It is intended that they will set out specific requirements and guidance about the performance by recognised firms of relevant functions in relation to specified WCD activities, for the purpose of managing risks to the effectiveness, resilience and sustainability of WCD across the United Kingdom.

10. One respondent noted they understood the need for supervision of resilience and sustainability, but expressed the belief that the market is the best ultimate determinant of effectiveness. Another respondent noted that those firms underperforming in terms of effectiveness will likely lose business to other firms, and therefore supervision under the proposed Effectiveness Principle should provide an early warning of potential structural changes to the market, to ensure resilience and sustainability are not jeopardised.

Under the Act, the Bank must exercise its powers for the purpose of managing risks to the effectiveness, resilience and sustainability of WCD throughout the United Kingdom. The concepts of effectiveness, resilience and sustainability (as further articulated in the Principles) have been developed in tandem with industry and are generally well-understood by industry participants. Effectiveness is a key element of the proposed oversight regime, and interacts with sustainability and resilience.

11. One respondent welcomed further clarity on the draft Principles, and requested that firms be allowed to consider and respond to any further amendments to the Principles. One respondent noted that there should be clarity that nothing in the framework or the Principles should restrict a firm from exiting or materially changing its cash services.

If, in future, changes are proposed to the Bank’s statement of policy or the Principles, the Bank will consult on these changes, in accordance with its obligations under the Act.

Subject to consultation, codes of practice (and accompanying guidance) will provide more detail on the Bank’s proposals regarding, among other things, the management of risks to the effectiveness, resilience and sustainability of WCD associated with plans for cash centre closure and market exit.

Fees

12. Several respondents provided views on the total cost of the Bank’s supervision and the impact of fees on costs within the market. Two respondents expressed the view that increased costs would be passed down the line to customers.

The Bank considers that the market oversight regime is essential to ensure that the wholesale cash infrastructure is effective, resilient and sustainable as cash usage further declines. Fees have been considered in detail and the proposals are proportionate to the expected costs of market supervision. Fees will be reviewed annually for the year ahead and consulted upon. Simultaneously, supervision costs for the previous year will be reviewed against fees paid and, where there are discrepancies, firms will be invoiced for further payments or reimbursed. The proposed calculation and apportionment of fees also take into consideration the revenues of potential recognised firms. The Bank considers calculating total fees on the basis of supervisory effort and risk to be a fair and proportionate approach.

The Bank’s proposed fee scale must relate to a scale approved by HMT (by regulations). HMT and the Bank will engage with industry further on the fee scale later in 2023, before any regulations are made and laid before Parliament (subject to annulment by resolution of either House).

13. Several respondents provided views on the approach to allocation of fees and the assumptions underlying this. A number of respondents disagreed with the proposed approach to the allocation of fees, including aligning fee allocation with functions performed by the firm. One respondent further disagreed with assumptions that supervision is more efficient for some combinations of firms than individual firms.

The level of fees proposed was designed to reflect the supervisory work required, and the resources allocated to the supervision of each type of firm. When considering options for allocating fees, the Bank considered a fee scale linked to market share. However, the resulting fees from this approach were not proportionate to the time the Bank is likely to spend supervising each firm. This is because supervision of operators is judged to involve more effort than supervision of financial institutions, as operators perform a greater number of relevant functions in relation to WCD activity. The Bank will, however, consider the evolution of market shares, alongside changes in supervisory effort and risk, in its annual review of fees.

14. One respondent noted they were not clear why the cost of the oversight regime should be borne solely by wholesale cash providers, and suggested the Bank should consider looking into other means of raising fees.

In line with other supervisory regimes, we consider it is appropriate to directly recover costs from the regulated industry. This is in line with other supervisory regimes overseen by other areas of the Bank, such as the PRA and Financial Market Infrastructure (FMI). The Bank’s power to require recognised firms to pay fees in respect of the Bank’s activities under Part 5A of the Act is set out by Parliament under section 206Z of the Act, and the scale of fees is subject to approval by HMT by regulations to be made by statutory instrument.

15. One respondent advised that fees should be kept under review. Another respondent requested the Bank be mindful of other regulatory oversight that is already in place, and that it should seek to guard against disproportionate annual increases.

The fee schedule is subject to annual review and consultation, allowing firms an opportunity to provide feedback. The Bank has outlined the steps it has taken with a view to ensuring that the calculation and apportionment of fees is fair and proportionate, and will remain proportionate in its approach if proposing fee adjustments in future.

As outlined in the consultation paper, if, in future, a firm is recognised by HMT as having both market significance and systemic significance, that recognised firm will become subject to both the market oversight regime and the prudential supervision regime. While there is co-ordination between the two regimes, the objectives and supervisory activities of the regimes are different, hence both fee schedules would be applicable.

For both fee regimes, the Bank will seek to maintain proportionate fee levels that reflects the supervisory work required and the resources allocated to the supervision of each type of firm.

Directions

16. One respondent highlighted that steps should be built into any use of the Bank’s power of direction to ensure that firms are given sufficient time to respond to a direction. The respondent suggested that this should incorporate a formal process of staggered steps and the ability for a firm to make representations throughout, with clear expectations and communication of the rationale of the direction; and queried whether directions will be private, public or at the Bank's discretion.

As set out in the statement of policy, the Bank will take a risk-based and proportionate approach to the exercise of its powers. Procedurally, the Bank will exercise its powers (including the power of direction) in accordance with the requirements of the Act.

The Bank’s approach may vary depending on the prevailing facts and circumstances at the relevant time, and the Bank’s assessment of what is reasonable and proportionate in the circumstances. However, as outlined in the statement of policy, the Bank would usually seek to engage with a recognised firm at an early stage and identify a mutually agreeable solution that manages risks to the effectiveness, resilience and sustainability of the WCD market. The statement of policy sets out some illustrative examples outlining, at a high level, how the Bank expects it may use its power of direction in circumstances where, after engagement with the recognised firm, either no such solution can be found or the recognised firm is not complying with the agreed solution.

Directions will be clear as to the required action or inaction. The Bank will also be clear on the timeframe in which it expects a firm to implement a direction. The appropriate timeframe will be considered on a case-by-case basis and will be proportionate to the direction given. Publication is at the Bank’s discretion.

Information gathering and sharing

17. One respondent noted they would welcome information on the level, materiality, nature and timing of information that needs to be provided to the Bank.

The Bank intends to consult on a code of practice on information, including accompanying draft guidance and reporting templates, which will set out the Bank’s detailed proposals for information gathering and timing of data collections. The Bank expects the proposed requirements to build upon the current voluntary reporting by firms. The Bank intends to publicly consult on the draft code of practice in Autumn 2023.

18. A number of respondents asked how the Bank will interact with other regulators and third parties, such as the Financial Conduct Authority (FCA) and the Competition and Market Authority (CMA) on information gathering and sharing, both to ensure there is no duplication of effort in relation to metrics, information gathering or auditing, and to ensure the confidentiality of commercially sensitive information. Some queried the need to provide highly sensitive information, such as contract profitability.

The Bank works internally with supervisory colleagues across the PRA and FMI teams to ensure a cohesive approach to information gathering and review. The Bank is also actively engaged with other authorities, such as HMT, the FCA and the Payment Systems Regulator (PSR), in relation to oversight of the UK cash infrastructure, through its Joint Authorities Cash Strategy group (JACS). The Bank shall engage with the CMA where the Bank considers it reasonable and proportionate to do so, subject to any confidentiality considerations. While the Bank does not currently have a formal published Memorandum of Understanding with the CMA in place, the Bank actively seeks to enhance information gathering and sharing arrangements where it advances and fulfils its statutory objectives.

The Bank understands that certain information provided to it under the new regime will be highly sensitive. Contract profitability, along with other data, can help the Bank to understand the health and evolution of the market, and any emerging risks.

Where the Bank requires a firm to provide it with information pursuant to a code of practice, the Bank will be subject to an obligation of confidentiality which generally restricts the disclosure of the confidential information provided to it. As outlined in the statement of policy, in addition to its power to make codes of practice, the Bank has a statutory information-gathering power under section 206Z3 of the Act whereby it may require certain information by notice in writing. Where the Bank exercises this power to require information from a person, it also has a statutory permission or ‘gateway’ to share that information with HMT, the FCA, the PRA, and The Royal Mint (section 206Z4(1)). Failure to comply with an information requirement issued under section 206Z3 of the Act without reasonable excuse, or knowingly or recklessly giving false information in response to an information requirement, may be an offence.

19. One respondent noted that some elements of the proposals for the codes of practice, including a supplier notifying when it is in financial distress, will be challenging to define and implement.

The draft codes of practice will provide further detail on the Bank’s proposals in response to this point. The Bank intends to publicly consult on draft codes of practice in Autumn 2023.

20. Some respondents requested more details on the information to be reported, and flagged there could be a considerable cost increase if the reporting requirements were significantly above and beyond current voluntary reporting.

As confirmed in the statement of policy, the Bank will take a proportionate and risk-based approach to the exercise of its powers.

The Bank intends to consult on a code of practice on information, including accompanying draft guidance and reporting templates, which will set out the Bank’s detailed proposals for information gathering and timing of data collections. The Bank expects the proposed requirements to build upon the current voluntary reporting by firms. The Bank intends to publicly consult on draft codes of practice in Autumn 2023.

21. One respondent suggested information gathering should include the turnover of notes/coin and forecast information within the industry for the next three to five years, as forecasts of denomination changes will help drive decisions on potential issues regarding storage/capacity.

The Bank intends to consult on a code of practice on information, including accompanying draft guidance and reporting templates, which will set out the Bank’s detailed proposals for information gathering and timing of data collections. The Bank expects the proposed requirements to build upon the current voluntary reporting by firms. The Bank intends to publicly consult on draft codes of practice in Autumn 2023.

Penalties

22. One respondent requested clarity on how any financial penalties will be calculated and levied.

The Bank intends to consult on a draft penalty statement, clarifying details on this, in due course.

23. One respondent queried what limits on sanctions there will be, and at what level within an organisation they will be applied. The respondent also indicated that they thought there should be further details on use of powers, including independent reports, inspectors, and power of direction.

While there are no limits on sanctions within the legislation, the Bank will apply a proportionate and risk-based approach to sanctions. Furthermore, subject to consultation, the Bank anticipates that a penalty statement setting out the Bank’s approach to sanctions under this regime will be incorporated into a statement on the Bank’s approach to enforcement.

Further information on the use of independent reports and the power of direction has been included in paragraph 4 and 16, respectively. The Bank may appoint an inspector where a requirement to provide information has not been complied with, or to validate data a firm has provided to the Bank.

Proportionality

24. One respondent felt that there was a lack of reference to appropriateness or proportionality of the regime's objectives.

Part 5A of the Act provides that the Bank must exercise its powers for the purpose of managing risks to the effectiveness, resilience and sustainability of WCD throughout the United Kingdom. In the statement of policy the Bank sets out its approach to the exercise of its powers under the regime, and confirms that the Bank will exercise its powers in a proportionate and risk-based way. It also confirms that the Bank’s approach may vary depending on the prevailing facts and circumstances at the time, and the Bank’s assessment of what is reasonable and proportionate in the circumstances.

The statutory framework is designed to be proportionate by providing for two components of the regime: market oversight (applicable to firms recognised as having ‘market significance’ only) and prudential supervision (applicable to firms recognised as having both ‘market significance’ and ‘systemic significance’). For HMT to recognise a firm as systemic, it must be satisfied that any significant disruption to the performance of the firm’s WCD activities would likely threaten the stability of, or confidence in, the UK financial system.

In relation to sanctions applied under the regime, the statement of policy also confirms that, when considering whether to impose a financial penalty, and in deciding the amount of the penalty, the Bank will act in line with its public law duties, and consider the facts and circumstances of each case. This includes consideration of the impact, or potential impact, on the WCD market of the compliance failure, the previous disciplinary and/or supervisory record of the recognised firm, as well as their conduct and co-operation with the Bank after the compliance failure was identified. Furthermore, subject to consultation, the Bank anticipates that a policy statement setting out the Bank’s approach to sanctions under this regime will be incorporated into a statement in the Bank’s approach to enforcement.

Wider industry participants

25. One respondent requested more detail on how the regime will apply to wider industry participants, such as smaller banks and building societies.

Only recognised firms will be subject to day-to-day oversight under the regime. However, in some limited circumstances, under section 206Z3 of the Act, the Bank may, by notice in writing, require any firm to provide information (a) which the Bank thinks will help HMT in determining whether to make a wholesale cash oversight order; or (b) which the Bank otherwise requires in connection with its wholesale cash oversight functions. Further details are set out in the statement of policy. For those firms who are also members of the NCS, NCS rules will continue to apply.

Scotland and Northern Ireland

26. Two respondents highlighted that there is some overlap with requirements around some elements of commercial banknote issuance in Scotland and Northern Ireland. One respondent requested more details regarding changes that would see Scottish and Northern Irish commercial banknote issuers brought into scope.

As noted above, decisions on making wholesale cash oversight orders in respect of individual firms are to be taken by HMT under the Act, though the Bank will be closely engaged in the process and make recommendations to HMT. The Bank, working with HMT, will closely monitor risks in this market and the scope of the regime will remain under review.

The majority of Scottish issuers of banknotes fall within banking groups which, subject to HMT’s assessment and discretion, appears likely to fall within the scope of the WCD regime. The Bank’s current expectation is that HMT is unlikely to bring Northern Irish issuers of banknotes within scope initially, based on the level of risk they pose to the effectiveness, resilience, or sustainability of WCD. However, HMT, in consultation with the Bank, will keep the assessment under review and any future changes to the market will be considered on a case-by-case basis.

27. One respondent queried if other costs or audits, such as the NCS or the regulation of commercial banknote issuers in Scotland and Northern Ireland will be reduced or removed to simplify the oversight structure.

The NCS and the regulation of commercial banknote issuers in Scotland and Northern Ireland are separate contractual and regulatory regimes with different objectives. The proposed fees for market oversight are calculated considering market oversight requirements only.

Consolidation and market exit

28. One respondent noted they were keen to understand the level of detail required regarding consolidation and exit notifications, and whether this is operator focused, or if it will involve financial institution input.

The Bank intends to publicly consult on a draft code of practice and accompanying guidance on cash centre closure and market exit in Autumn 2023. Subject to consultation, the proposals for the code of practice will provide further information on the notification obligations and the level of detail required.

Prudential supervision

29. Respondents agreed that a prudential regime for wholesale cash entities deemed systemic was needed, but sought further clarity on the criteria that may be used to determine whether a firm is systemic.

The Bank notes that HMT is the authority in charge of recognising firms as systemic, using the criteria set out in Part 5A of the Act. At this stage, the Bank considers that the firms present today are unlikely to be deemed systemic, and so we do not expect any current players, in their current form, to be made subject to prudential regulation in the immediate term. However, with rationalisation and consolidation we consider that a systemic entity or entities could emerge.

If rationalisation or consolidation occurs, HMT and the Bank will consider the shape and structure of such an entity and the wider market, engage with industry and consider any representations made. The Bank would also engage other regulators when making its recommendation.

The process for recognition of a systemic entity aligns with that of a wholesale cash oversight order. The Bank could make a recommendation to HMT, who would ultimately make a decision on whether to recognise an entity. The recognition decision would be focused on the risk to financial stability in the United Kingdom, which would be assessed taking into account a variety of factors. The Bank contributes to HMT’s assessment, but this is ultimately dependent on HMT’s decision to recognise a firm in order for the Bank to be able to regulate it directly against the whole set of its powers and its supervisory framework.

Prior to recognition, HMT must notify (and take account of representations made by) the firm that it is proposed to be recognised as systemic. HMT must also consult the Bank on its decision, as well as the FCA, PRA and/or PSR where/if the recognition affects an entity within their regulatory remit.

30. Respondents sought further clarity on the practical requirements and rules that would apply to firms recognised as systemic, and how existing codes of practice applicable to recognised payment systems and service providers may need to be adjusted. They also requested further detail on what principles within the international standards for financial market infrastructures, the CPMI-IOSCO Principles for financial market infrastructures, would apply to entities recognised as systemic. Finally, some respondents asked for detailed aspects of the Bank’s prudential regime, including how a Special Administration Regime may apply to a systemic wholesale cash.

The Bank will consider this feedback carefully in its policy development in relation to firms recognised by HMT as having systemic significance. As noted in the consultation paper, the Bank intends to consult on further details of its regime for the prudential supervision of systemic entities in due course and, in any event prior, to the recognition of the first such firm by HMT.

Next steps

The Bank intends to publicly consult on its proposals for codes of practice (and accompanying guidance) on: (1) information; (2) third-party arrangements; and (3) cash centre closure and market exit in Autumn 2023.

The Bank intends to publicly consult on its proposals for the statement of penalty policy in Autumn 2023.

HMT and the Bank will engage with industry further on the fee scale later in 2023, before any regulations are made and laid before Parliament (subject to annulment by resolution of either House).