In this edition of Payments:Unpacked we take a look at the topics of Access to Cash and Wholesale Cash Distribution which feature within the Financial Services and Markets Bill which is currently at its Second Reading in the House of Commons.
Wherever you sit on the “cash spectrum” from cash being an important part of your payment mix to transitioning to less-cash or being completely cashless this email provides all you need to know about the Government’s work to protect access to and the distribution of cash across the UK.
Ensuring that people can access cash with ease
As the UK’s moves ever closer to a “less-cash” society the Government has recognised the importance of access to and the distribution of cash and is seeking to introduce measures that support financial inclusion by ensuring people across the UK can continue to access cash with ease.
According to the RCA 96% of people withdraw cash at some frequency:
A précis for the layperson
At almost 330 pages the Financial Services and Markets Bill makes heavy and, to the layman, confusing reading but helpfully the accompanying Explanatory Notes (234 pages) unwraps the detail of the Bill in a more manageable form.
For some delving into the 550+ pages will be a necessity but, for the rest of us, here is a précis of the aspects of the Bill relating to access to and the distribution of cash….
Financial Services and Markets Bill
The Financial Services and Markets Bill was introduced to Parliament on 20 July 2022.
The Chancellor’s speech at the Financial and Professional Services Dinner at Mansion House on 19 July 2022 set out the importance of the financial services sector to the UK economy, and the central role of the Financial Services and Markets Bill in delivering the government’s vision for an open, green, and technologically advanced financial services sector that is globally competitive.
The UK Government states that:
The Bill seizes the opportunities of EU Exit, tailoring financial services regulation to UK markets to bolster the competitiveness of the UK as a global financial centre and deliver better outcomes for consumers and businesses.
The Bill seeks to:
Implement the outcomes of the Future Regulatory Framework (FRF) Review
Maintain the UK’s position as an open and global financial hub
Harness the opportunities of innovative technologies in financial services
Bolster the competitiveness of UK markets and promote the effective use of capital
Support the levelling up agenda, promote financial inclusion and consumer protection.
At almost 330 pages the Financial Services and Markets Bill makes heavy and confusing reading but helpfully the accompanying Explanatory Notes (234 pages) unwraps the detail of the Bill in a more manageable form.
Access to cash
The publication of this draft Bill finally outlines the Government’s intended approach to protecting access to cash. Notwithstanding the wider scope of the Bill this newsletter seeks to focus on providing a précis of the ‘access to cash’ elements of the proposed Bill.
In respect of cash the Government states that:
…the Bill introduces measures that support financial inclusion by ensuring people across the UK can continue to access cash with ease; enabling credit unions to offer more products; introducing a regulatory gateway designed to improve the quality of financial promotions; and enhancing protection for victims of authorised push payment scams.
Government’s position on cash
The explanatory notes explain the government’s position on cash:
Access to cash remains important to the daily lives of many people across the UK.
An estimated 5.4 million adults (10%) report that they are reliant on cash to a very great or great extent in their day-to-day lives (FCA survey).
The use of alternatives, such as cards and digital payments, is not yet a realistic option in some situations or for many people who still rely on notes and coins.
The government wants to ensure that the provision of cash access facilities continues to provide appropriate coverage across the UK to meet the cash needs of consumers and businesses.
The decline in the use of cash has made it relatively more expensive for firms to maintain the existing infrastructure needed for current levels of access to cash to continue.
The government considers the decline in cash usage and the number of cash facilities to pose risks to the future provision of access to cash.
There is no existing substantive legislative framework relating to minimum or reasonable levels of access to cash, and no single authority has overall responsibility for overseeing the maintenance of a well-functioning UK cash system for the benefit of customers.
No regulator currently has express powers to ensure that a cash withdrawal or deposit facility is in place to support access to cash.
Timeline
The publication of this Bill is the latest step of a process that commenced with the 2020 budget:
Budget 2020: The government committed to introduce a legislative framework to protect access to cash for those who need it.
October 2020: The government issued a Call for Evidence on the key considerations associated with cash access, including deposit and withdrawal facilities, cash acceptance, and regulatory oversight of the cash system.
July 2021: The government published its response to the Call for Evidence alongside a consultation which sought views on legislative proposals to protect access to cash.
May 2022: The government published a summary of responses to the consultation confirming its approach to legislating. This set out the government’s intention to establish the Financial Conduct Authority (FCA) as the lead regulator for retail cash access and provide it with appropriate powers for ensuring that specified firms, i.e. banks and building societies as designated by HM Treasury, continue to ensure the reasonable provision of deposit and withdrawal facilities across the UK. The FCA’s powers will allow it to address cash access issues at both a national and local level.
Steps taken by the industry since the Government’s consultation have been recognised:
In December 2021, the financial services sector announced that it had developed a voluntary industry model for the provision of cash access facilities, including initiatives to provide shared services. Under the model, an industry coordination body assesses the cash needs of local communities with a view to ensuring appropriate cash services are in place. In light of these developments, and the significant role that such coordination bodies may play in the future of cash provision, the summary of responses to the consultation also set out the government’s intention to also enable HM Treasury to designate such bodies for FCA oversight. (Explanatory notes para 315).
It is this position that has informed the scope of the Bill.
Bill scope: Cash access services
The explanatory notes explain the government’s intended scope for the Bill:
The Bill is intended to protect access to cash by ensuring the continued provision of cash withdrawal and deposit facilities.
Appoints the FCA as the lead regulator for access to cash.
Enables HMT to designate firms to be subject to FCA oversight for the purpose of ensuring the continued provision of cash access (i.e., cash withdrawal and deposit) services across the UK, or parts of the UK. Designation decisions will consider factors such as a firm’s geographic coverage; distribution of customers and market share. This is likely to be larger banks, building societies and industry cash co-ordination bodies.
Grants the FCA monitoring, supervision and enforcement powers to regulate the provision of cash facilities by designated banks and building societies. Non designated organisations will only be subject to FCA powers relating to obtaining information.
The FCA’s powers will equip it with the ability to address cash access at both a national and local level. This might include requirements (via a rule or a direction) on one or multiple firm(s) or a designated co-ordination body “to require them to take such action as needed to ensure that there is reasonable provision of cash access services; this is in order to support the ongoing use of cash.”
The FCA is enables to take account of the impact on persons, even where there is no relationship between the designated firm and the person. For example, it does not make FCA activity dependent upon whether a designated firm has customers residing in any given area, in recognition of factors such as that customers may access cash as they travel or change provider.
The FCA will be able to require firms to refrain from the closure of a cash access service where there is no suitable alternative.
The Bill requires HM Treasury to prepare a policy statement on cash access services, and enables HM Treasury to structure its policy statement on the basis of baselines for withdrawal and deposit facilities, rural and urban areas, and for different types of current account (e.g. personal and non-personal customers).
The Bill will also allow the FCA to take other matters that it thinks appropriate into account. This could include, for example: the type of service, and associated factors such as hours of availability; where the services should be provided; and cost, both in terms of provision and charges to end users.
Deeper dive: Cash access services
For those wishing to take a deeper dive:
The Bill inserts new Part 8B, titled “Cash Access Services”, into the Financial Services Markets Act 2000 (FSMA 2000). Part 8B applies to credit institutions which are currently authorised under Part 4A. The FCA therefore already regulates the carrying on of regulated activities by these credit institutions.
In September 2020, the FCA issued guidance setting out considerations that these firms should take into account when planning the closure of a branch or ATM, or conversion of a free-to-use ATM to pay-to-use. This guidance was underpinned by Principles 6 and 7 of the FCA’s “Principles for Business.”
The new Part 8B of FSMA 2000 provides the FCA with a bespoke rule making and directions power to further advance the aim of protecting access to cash for UK customers, through seeking to ensure the continued reasonable provision of cash withdrawal and deposit facilities.
Government’s position: Wholesale cash distribution
Access to cash also requires a sustainable and resilient wholesale cash system and the Bill notes that the UK’s infrastructure, including a system of cash centres, is integral to the sorting, storing and distribution of coins and notes.
The industry purchases banknotes from the Bank of England and coins from the Royal Mint and face value and "Cash in Transit” provides move the cash to cash centres. These cash centres receive, store and prepare cash for circulation.
The explanatory notes explain the government’s position on wholesale cash distribution:
The wholesale cash network is split across a number of operators and the reduction in cash use has led to pressure on the business model supporting this process.
Although some operators have rationalised their operations utilisation of some cash centres across the UK is low and there is little ability to reduce the fixed costs associated with running cash centres on an individual basis.
None of the current operators within the wholesale cash industry are currently considered to be systemic, as others are able to step in, in the event of a failure of one of the networks.
The government expects the industry will transition to a smaller overall network in the coming years - through rationalisation of the existing networks, or consolidation of the number of networks and operators. There is concern that if this restructuring happens in a disorderly way it could pose a potentially significant risk to the wholesale cash infrastructure’s effectiveness and sustainability, and consequently its ability to supply cash as and when required to the retail network across the UK. These risks need to be managed and it is the government’s view that it is not possible to do that through voluntary arrangements alone.
Government’s policy aim: Wholesale cash distribution
HMT’s principal policy aim for wholesale cash distribution is to:
Support access to cash through ensuring that the wholesale cash infrastructure is effective, resilient, and sustainable in the long-term. In this respect sustainability means viability of the system over time. Furthermore, this policy also seeks to ensure that risks to financial stability and/or confidence in the UK financial system that would arise through the creation of a systemic entity in the event of a failure or wider disruption in the wholesale cash network are effectively managed. The government has also designed the regime so that it can accommodate commercial solutions to the challenges faced by the industry, as these emerge over time, whilst protecting the effectiveness, resilience, and sustainability of the wholesale cash distribution system.
Bill scope: Wholesale cash distribution
The explanatory notes explain the government’s intended scope for the Bill:
The Bill provides the Bank with the powers to oversee the wholesale cash industry:
the Bank will be enabled to regulate the market activities of the wholesale cash industry (the market oversight regime) to ensure it remains effective, resilient and sustainable.
the Bank will have the ability to prudentially regulate a systemic entity in the market, should one form in the future (the prudential regime).
Following consultation with the Bank and the industry, HM Treasury would designate entities as within scope of either or both parts of the regime - along with similar powers to un-designate entities if required. HM Treasury would only be able to recognise an entity as having systemic significance, and therefore being in scope of the prudential regime, if they are satisfied that a deficiency or disruption to their wholesale cash distribution activities would threaten the stability of or confidence in the UK financial system.
All entities which provide wholesale cash activities or provide financial support in relation to these activities, could be brought under the market oversight regime. HM Treasury will also have the power to designate a service provider to the industry under the regime, if required.
The Bank will be given the power to:
require the provision of information - for the purpose of allowing the Bank to form an aggregate picture of the overall health of the industry and identify emerging risks.
give directions to designated firms - this would be to require or prohibit taking of actions or to set standards firms must meet.
to enable them to publish principles and codes of practice industry must follow.
conduct inspections
enforce the regime
levy fees for the operation of the scheme and to levy penalties for non-compliance. The fees must relate to a scale of fees approved by HM Treasury and Parliament and the industry will be consulted on the development of this fee scale.
In relation to prudential regulation, the Bank would exercise the same powers used in the market oversight regime (but towards the objective of managing risks to financial stability) and to maintain confidence in the UK financial system. The failure of a systemic entity could threaten the stability or confidence in the financial system through a loss or severe reduction of access to cash as a means of payment for consumers as well as a potential loss of confidence in cash as a payment method. Therefore, the Bank would have the power to mitigate such a failure by applying an appropriate Special Administrative Regime (SAR) to the entity in the event of its failure or impending failure.
The Bill includes the power for HM Treasury to either not apply or apply with modifications any of the regulatory and enforcement provisions in relation to companies wholly owned by the Crown. Wholly owned state entities would also not be in scope of the prudential regime.
The Bank will publish a statement on its regulatory approach before exercising its powers. This will set out how the Bank intends to use its powers. The Bank will consult with industry on the development of its regulatory approach and this statement.
Deeper dive: Wholesale cash distribution
For those wishing to take a deeper dive:
No statutory regime relating to the wholesale cash distribution network currently exists and the Bank has no statutory powers of oversight. The Bill establishes a new statutory oversight regime of wholesale cash distribution. In particular, it confers on the Bank a formal role of oversight over the wholesale cash distribution network.
Other areas covered
In addition to the subject of ‘access to cash’ the Bill also covers:
Updates to the UK’s regulatory framework for financial services.
Implements the outcomes of the Future Regulatory Framework (FRF) Review.
Updates the objectives of the financial services regulators to ensure a greater focus on long-term growth and international competitiveness.
Seeks to secure and enhance the UK’s position as an open and global financial hub.
Brings stablecoins, a type of cryptoasset, into the scope of regulation when used as a form of payment, paving their way for use in the UK as a recognised form of payment.
Allows financial market infrastructure (FMI) firms to explore new technologies in temporary pilot schemes and reduces the risk of an incident at a third-party provider which has a systemic impact on the UK financial services sector.
Seeks to maintain the UK’s position as a competitive marketplace with robust regulatory standards by reforming the UK’s wholesale capital markets regime.
Passage through the Commons and the Lords
This is a public bill presented to Parliament by the Government.
The Bill was introduced to the House of Commons and given its First Reading on 20 July - this stage is formal and takes place without any debate.
MPs will next consider the Bill at Second Reading on Wednesday 7 September 2022.
Government Sources
The most relevant Government sources of information are:
More on cash
Northey Point’s ATM Tracker.
From pounds to pennies - how the Post Office protects UK cash.
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