UK to protect wholesale cash supply system through Bank of England oversight regime

In a move designed to protect continued access to cash, the new oversight regime outlined in an HM Treasury policy statement (13 page / 378KB PDF) will also give the Bank of England the ability to regulate the wholesale cash industry, extending and codifying existing practices as many industry participants already work closely with the Bank of England.

The government is also proposing that the Bank of England will have the ability to prudentially regulate a systemic entity in the market, should one form in the future, to manage risks to financial stability and maintain confidence in the UK financial system.

The policy statement follows previous work on protecting access to cash, including a 2021 consultation on proposals for new laws to make sure people only need to travel a reasonable distance to pay in or take out cash. The government is currently considering the responses it received to that consultation, with the next steps expected in due course.

The government said it was important to have a sustainable and resilient wholesale cash system – in other words, the infrastructure and networks which are integral to the sorting and storing of cash, and distribution of cash and notes to cash access points - to support its aims for ongoing cash use and cash access in day-to-day life.

The policy statement noted that the declining use of cash had put pressure on the business models for wholesale cash networks, and a transition to a smaller network is expected in the coming years. However, this transition could happen in a number of ways.  The government warned a disorderly restructuring could pose a potential and significant risk to the sustainability and effectiveness of the wholesale cash infrastructure supporting cash supply to the UK’s retail network.

While all entities providing wholesale cash activities or financial support for those activities could be brought into the scope of an oversight regime, the prudential regime would only apply to a systemic entity not already subject to appropriate prudential regulation whose failure would threaten financial stability.

The Treasury said no current market participants met this threshold, and future changes or entrants to the market would be considered on a case-by-case basis.

Financial regulation expert Andrew Barber of Pinsent Masons said: “While the wholesale cash industry has been working to design an effective, efficient, sustainable, and resilient new model for wholesale distribution of cash in the UK, the government has clearly recognised the risks if those plans are not effectively implemented.”

“The proposed dual focus that the Bank of England will have on the wholesale cash industry makes complete sense in view of declining cash use and the knock-on effect of this on the existing business model for wholesale cash supply. HM Treasury’s proposals include developing principles and codes of practice that together with information flow and enforcement tools will allow effective oversight of the industry as it undertakes its transition,” Barber said.

“It is interesting, however, to see that the second limb of the proposed Bank of England powers, those related to prudential regulation of key industry players, will not be used, at least initially. HM Treasury’s policy statement clearly has an eye on the future and the possibility that a single dominant player in wholesale cash distribution may emerge as a result of this industry restructuring itself. So the government is future-proofing against the potential for systemic risk that could result,” Barber said.

The government will legislate for the new regime when parliamentary time allows as part of a new Financial Services and Markets Bill, announced at the state opening of parliament on 10 May.