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U.K.: Wholesale Cash Distribution – Present and Future

Categories : Cash does not require a technology infrastructure, Cash ensures competition among payment instruments, Cash is a public good
May 11, 2023
Tags : Access to cash, Central Bank, Regulators, UK
The Financial Services and Markets Bill 2002 is expected to gain Royal Assent –and therefore become law- in early summer 2023. The Bill includes measures impacting the U.K.'s wholesale cash distribution.
Ron Delnevo

UK Cash Supply Alliance

This post is also available in: Spanish

A few weeks ago, we looked at the potential implications of the Financial Services and Markets Bill 2002 on the retail side of the cash cycle. This article focuses on wholesale cash distribution.

Before looking at this potentially crucial piece of legislation, it is sensible to look first at the current situation in the UK pre the new law enters the statute books.

Wholesale cash distribution is a vital part of protecting public access to cash. It supplies banknotes and coins to bank branches, ATMs and retailers and ensures that cash deposits are processed and recirculated into the public domain. The wholesale cash system, therefore, plays a vital role in enabling the public to use notes and coins as they choose.

Over £94 Billion of Cash in Circulation

As of 2022, there were Bank of England (BoE) banknotes to the value of £81.6 Billion in circulation, along with around £4.8 Billion n banknotes produced by Scottish and Northern Ireland banks. In the same year, the value of UK coins in circulation was over £8 Billion.

The BoE positions itself as committed to supporting cash as a viable means of payment, though the BoE has no role in producing, distributing or managing coins.

Concerning banknotes, the BoE appoints Note Circulation Scheme (NCS) members responsible for the UK’s wholesale banknote distribution infrastructure. The current NCS  members are:

The way wholesale cash distribution works is as follows:

Concerning coins, different arrangements are in place.

HM Treasury owns the Royal Mint (“Mint”), which produces all the UK’s coins at a plant in South Wales. The Mint is responsible for forecasting coin demand and agreeing to a 12-month profile of coin supply with HM Treasury. The Mint then decides on monthly coin orders with commercial cash centres.

 The Mint has a planned contingency stock of coins, over and above the 12-month profile of supply agreed with HM Treasury. However, in 2020, several coins in stock were almost six times the planned contingency level. The value of this excess stock was around £90 Million.

So that is how matters stand today, in 2023.

A Consolidated Utility Model

However, the BoE decided in early 2021 that the falling use of cash for payments meant the existing wholesale cash distribution structures needed to be reviewed. The BoE set up the Wholesale Distribution Steering Group (WDSG) to carry out this work. The WDSG was chaired by the Chief Cashier of the Bank, with the core voting membership being Barclays, HSBC, Lloyds Banking Group, Post Office, Natwest and Santander.

After taking advice from consultants,  the WDSG proposed a consolidated ‘utility’ model – a privately-owned legal entity with its governance structures as the single operator of the UK’s wholesale cash distribution infrastructure. The last six months of 2021 were taken up in producing a business case for the utility model.

However, in December 2021, the BoE reported that an agreement could be reached with one or more of the banks that were voting members of the WDSG, so the idea of creating a utility was abandoned.

Failure to agree on the utility model led the UK Government to include Wholesale Cash Distribution in the Financial Services and Markets Bill 2022. This Bill empowers the BoE to oversee certain persons involved in wholesale cash distribution, banknotes and coins.

The BoE must exercise its powers under this Bill to manage risks to wholesale cash distribution’s effectiveness, resilience and sustainability throughout the United Kingdom.

In the process of the BoE exercising its powers, the key is preparing a statement by the Bank of its policy.

In preparing the statement, the BoE must consult such persons as appear to the BoE to be representative of persons likely to be affected by the news. Crucially, the BoE cannot exercise any powers conferred on it by the act before HM Treasury has laid a copy of the statement before Parliament.

The Role of HM Treasury

In practice, HM Treasury has a right to veto the whole or any part of the statement.

This, in turn, means HM Treasury will be able to define what is reasonable regarding wholesale cash distribution, just as it has about access to cash in the UK. In short, the new legislation gives HM Treasury tremendous power over every aspect of UK fiat currency, which may concern those who feel this UK government department is too focused on Central Bank Digital Currency (CBDC) and Crypto.

In any event, the BoE should have obtained individual commitments and plans from each organisation which funds or participates in the wholesale infrastructure and from the UK wholesale cash operators.

The BoE will hold each commercial bank or wholesale cash operator accountable for delivering its commitment and plan, although penalties for non-performance have not been detailed.

HM Treasury may by order (a “wholesale cash oversight order”) specify a person [for a person, read industry funder or participant] as a recognised person for this section of the legislation. Such orders are only meant to be issued where the person can be reasonably judged to have market significance only or as also having systemic relevance.

The Treasury may recognise a person as having market significance only if satisfied that any significant deficiency in, or disruption to, the performance of the person’s relevant functions about wholesale cash distribution activities would be likely to undermine the effectiveness, resilience, or sustainability of wholesale cash distribution

(a) throughout the United Kingdom, or

(b) throughout any part of the United Kingdom.

The Treasury may recognise a person as having systemic significance only if satisfied that any significant deficiency in, or disruption to, the performance of the person’s relevant functions about wholesale cash distribution activities would be likely

(a) to threaten the stability of or confidence in, the UK financial system, or

(b) to have severe consequences for business or other interests throughout the United Kingdom or any part of the United Kingdom.

So the BoE has some powers. The Treasury has more powers BUT, crucially, until the agreed commitments and plans have been revealed, the UK public will be in the dark as to what the future is intended to be for wholesale cash distribution – and how those organisations who may fail to produce that future will be held to account and, ultimately, punished for any shortcomings in delivery.

This post is also available in: Spanish