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

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 have gone through 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 10 February 2023, with all communications to: Wholesalecashdistribution@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 give the Bank of England the powers it needs to ensure that the wholesale cash infrastructure is effective, resilient and sustainable as cash usage further declines. These new powers are included in the Financial Services and Markets Bill, which is currently before Parliament, alongside complementary legislation on cash access services. Together they are intended to safeguard access to cash across the UK into the future.

The statutory WCD regime will have two core parts: market oversight and prudential supervision. The main objective of the market oversight regime is to manage risks to the effectiveness, resilience and sustainability of WCD in the UK. The main objective of the prudential supervision regime is to manage risks that a) threaten the stability of, or confidence in, the UK financial system, or b) have serious consequences for business or other interests throughout the UK, or any part of the UK. The Bank’s new prudential supervisory powers are similar to those we already have over systemic payment systems under Part 5 of the Banking Act 2009, and we intend to use them in a similarly proportionate and risk-based way. Section 2 further sets out the scope and purpose of this consultation with respect to both the market oversight and prudential supervision parts of the WCD regime.

HMT will bring firms within scope of the statutory WCD regime by recognition orders. For market oversight, this will capture firms that play a significant role in the WCD market, and also enables HMT to bring firms within the scope of the regime who provide a critical service to these markets, if deemed appropriate and necessary to manage risks to the system. For prudential supervision, it will, for example, capture any firm that could pose a systemic risk to wider financial stability. At present, HMT and the Bank consider there is no such firm, but one could form via industry rationalisation or consolidation, for example. Recognised firms from the outset would be subject to the market oversight regime. If recognised through the regime as systemic, an entity would be subject to both the market oversight regime and the prudential supervision regime.

The legislation requires the Bank to consult on its supervisory approach before its new powers may be exercised, as well as on any principles and codes of practice (CoPs) it wishes to impose as part of its regime.

Section 3 outlines the Bank’s proposed supervisory approach to market oversight, and is the focus of our consultation. A set of principles are at its foundation, to which recognised firms must have regard. These reflect the public industry-wide commitments to an effective, resilient and sustainable wholesale cash infrastructure which market participants agreed to at the end of 2021. Section 3 also outlines, at a high level, the Bank’s proposed approach to the CoPs for the market oversight regime, for consultation. These will help guide the day to day actions of firms. The CoPs will be consulted on in detail next year.

A cornerstone of the market oversight regime will be the Bank’s new information gathering powers, which will build on, and put on a statutory footing, WCD firms’ current voluntary reporting against their commitments to supporting the wholesale cash infrastructure. The information gathering powers will allow us to monitor the state of the market, including identifying risks. Firms will also be required to notify us of any significant changes in strategy, structure or involvement in WCD that could affect the effectiveness, resilience and/or sustainability of the market.

The legislation also gives the Bank powers of direction, as well as powers of enforcement and sanction. Powers of direction allow the Bank to take action to bring a specific recognised firm into compliance with the regime. Enforcement and sanctions will only be used in the event that the ongoing supervisory dialogue does not achieve an outcome in line with the regime’s purpose. Any sanctions must be reasonable and proportionate, and are subject to a notice period and appeal.

Section 4 outlines for consultation the supervisory fees proposed to levy from firms that fall within the scope of the market oversight regime. The Bank considers that the approach to the allocation of fees is proportionate and reflects the resourcing requirements for supervising different types of firms. Firms who perform a greater number of relevant WCD functions, as defined in the legislation, will require more supervisory activity. The fee therefore reflects the resource required for the supervision of each type of firm, which increases in line with the number of functions performed. The supervisory fee schedule must be approved by HMT.

If a systemic wholesale cash entity were to emerge and be recognised as systemic, the Bank proposes that it would be subject to prudential supervision in a similar manner as that set out in the Bank’s Supervision of Financial Market Infrastructures approach document which sets out the regime’s objectives, explains what we would expect of Financial Market Infrastructures (FMIs), and explains how we would assess them against the Bank’s expectations. The Bank’s proposed approach to applying this to systemic entities is discussed further in Section 5, for consultation.

We invite interested parties to respond to the following questions, by 10 February 2023:

1. Do you agree with the proposed approach to the Bank’s oversight of the WCD market?
2. Do you agree with the proposed principles for the WCD market oversight regime?
3. Do you have any initial comments on the early high-level proposals for CoPs for recognised WCD market firms?
4. Do you agree with the proposed approach to the allocation of supervisory fees for the WCD market oversight regime?
5. Do you agree with the proposal for prudential supervision of any systemic entity that may form in the future?

Following this consultation and the consultation on the detailed CoPs for the market oversight regime, the Bank intends to publish a final supervisory approach document, principles, CoPs and the fee schedule for market oversight regime prior to the new powers coming into force.

Scope and purpose of this consultation

This Consultation Paper (CP) sets out proposals for how the Bank proposes to implement its new powers in respect of the WCD infrastructure in the UK, also known as the wholesale cash supply chain. These powers are part of the amendments to the Banking Act 2009 (the Act) made by clause 52 and Schedule 9 to the Financial Services and Markets Bill (the Bill), as amended in the Commons and introduced to the Lords on 8 December 2022.

This consultation should be read alongside the relevant clauses in the Bill which are subject to parliamentary approval.

The CP provides background on the UK cash landscape, industry work and legislative reforms. It sets 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 who 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 the proposed codes of practice, and (d) the approach to the allocation of fees.

The Bank’s market oversight and prudential supervision powers are new, but the Bank considers that the already existing prudential framework which it applies in respect of FMIs will be suitable to be applied, using the new powers contained in the Bill, to the supervision of any future systemic wholesale cash entity.

The proposed approach for market oversight is 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;
• the draft codes of practice, which will be consulted on separately in 2023; and
• a penalty statement regarding the Bank’s approach to imposing financial penalties and their amount, which will be consulted on in 2023.

1: Background

1.1: UK cash landscape

While transactional use of cash has fallen in recent years, it remains vital for many in society, and can play an important contingency role for everyone when other forms of payment are unavailable or interrupted. It is therefore critical that access to cash keeps pace with the changing payments landscape. Action is being taken to ensure access to cash withdrawal and deposit services continue to meet the needs of households and businesses. Actions to support retail provision of cash must be supported by changes to the wholesale provision of cash if the overall cash system is to be economically viable, sustainable and resilient.

The WCD system sits between the Bank and commercial issuers issuing new banknotes and the Royal Mint issuing coins on behalf of HMT, and those notes and coins being sent 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 May 2019, the Bank convened relevant stakeholders under the Wholesale Distribution Steering Group (WDSG) to ensure that the WCD model for the UK is effective, resilient and sustainable in an environment of declining cash volumes. WDSG published success criteria for a revised wholesale distribution model and explored adopting a utility model, ie forming a single consolidated entity, funded by a number of financial institutions who wish to provide wholesale cash services to their customers.

In December 2021, the WDSG agreed that instead of a utility model, 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. As such, UK banks that fund or participate in the wholesale infrastructure and the UK WCD operators have already made industry-wide commitments covering 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. This decision was detailed in a public update published by WDSG.^{footnote [3]}

As HMT made clear in its Policy Statement on wholesale cash^{footnote [4]}, it expects the industry is likely to transition to a smaller overall network in 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 HMT’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). On retail cash access services, the Bill provides 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.

The Bill also establishes a new statutory oversight regime for WCD by inserting a new Part 5A into the Banking Act 2009.^{footnote [5]} The regime establishes 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 effectiveness, resilience and sustainability in the WCD market.^{footnote [6]} It extends to firms who are recognised as playing a significant role in the market, as set out in the Bill. The main objective of the prudential supervision regime is to manage risks to financial stability and maintain confidence in the UK financial system.^{footnote [7]} It extends to firms that are recognised as playing a systemic role in the WCD market. These proposals are discussed further in the next sections.

2: Wholesale cash legislation

2.1: Scope of the legislation

Under the new Part 5A of the Banking Act 2009 (as set out in the Financial Services and Markets Bill), HMT will be able to make recognition orders in respect of firms who carry out relevant functions^{footnote [8]} in relation to WCD activities^{footnote [9]} if such firms meet the criteria set out in the draft legislation.^{footnote [10]} These recognition orders will bring entities within scope of either market oversight only, or both market oversight and prudential regulation by the Bank. The criteria form the basis for decisions by HMT to make recognition orders. In making a determination, HMT will consult with the Bank and notify the relevant firms.

Entities that provide services in relation to WCD activities can also be brought into scope. However, the Bank’s current expectation is that there is no requirement 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 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 Irish issuers of banknotes within scope initially. This will be kept under review as the market evolves.

2.2: The Bank’s powers

Table A: The Bank’s powers

Market oversight

The Bill includes requirements for recognised firms to have regard to principles published by the Bank^{footnote [11]} and to comply with CoPs published by the Bank.^{footnote [12]} The Bill also gives the Bank a general power to give directions to recognised firms.^{footnote [13]} It is intended that the power of direction will enable, for example, the Bank to put safeguards around material changes to recognised firms’ business models (eg cash centre closures or market exit).

In addition, the Bill proposes that the Bank is given various powers to help it gather information and assess the WCD market. It is intended that this will build on the Bank’s successful bilateral engagement with firms since the beginning of 2022. These comprise: the power to require the provision of information,^{footnote [14]} the power to enter premises to inspect information;^{footnote [15]} and, the power to require independent reports.^{footnote [16]}

Failure to comply with certain requirements may lead to formal sanctions under the Bill 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 [17]} The Bill requires the Bank to give warning notices if it proposes to impose such sanctions in most cases^{footnote [18]} and for appeals.^{footnote [19]} It is expected that such powers will be used when the Bank cannot achieve its desired outcomes through its regular supervisory dialogue 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 Bill also applies an amended Financial Market Infrastructure SAR^{footnote [20]} 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, and publish, a policy statement with respect to its new powers under the regime before exercising those powers. This is the purpose of this consultation. Section 3.3 explains what this means in practice.

Similarly, the Bank must consult on any principles for the market oversight regime and the prudential supervision regime, and they must be approved by HMT. The Bank also must consult on any CoPs it intends to issue for recognised firms. The principles are included as part of this consultation, and a consultation on the CoPs will follow.

The Bank must, at least annually, report to HMT on the discharge of its functions under the regime as well as on such other matters as HMT may from time to time direct.^{footnote [21]} The report must include the extent to which, in the Bank’s opinion, the risks to the effectiveness, resilience and sustainability of the WCD network have been managed. In circumstances where a firm has been recognised as having systemic significance, the report must also include the extent to which, in the Bank’s opinion, the risks to financial stability have been managed. The report will also consider the Bank’s areas of supervisory and policy focus over the reporting period and its future priorities.

3: For consultation – draft statement of policy on the Bank’s supervisory approach to market oversight for wholesale cash distribution

Section 3.1–3.3 below is the draft statement of policy on the Bank’s supervisory approach to market oversight for WCD. References to CoPs therein are to the CoPs that will be consulted on in 2023.

In particular, Section 3.3 and the accompanying box (Box B) specifically outlines, at a high level, the Bank’s intended approach to CoPs for the WCD market oversight regime. These will be consulted upon in detail in 2023. The final published version of the CoPs will be accompanied by a supporting supervisory statement, as proposed below.

3.1: Bank’s proposed approach to WCD market oversight

Under new Section 206D of the Banking Act 2009 (the Act), as introduced through the Financial Services and Markets Bill, the Bank must publish a statement of policy with respect to its powers under the new Part 5A of the Act before it is able to exercise any of its powers under the regime. As such, this statement of policy sets out the Bank’s supervisory approach for market oversight in relation to the WCD market and how it intends to exercise its powers under the new Part 5A.

The aim of the Bank’s market oversight regime is to ensure the wholesale cash infrastructure meets the needs of consumers and the wider economy for cash over the long term and thereby supports the Bank’s mission of promoting the good of the people of the United Kingdom by maintaining monetary and financial stability through promoting confidence in the currency.

The Bank’s supervisory approach is based on the Principles of WCD for market oversight (see Section 3.2), which further describe the regime’s purpose at a high level. The principles lay the foundation for the Bank’s analysis of the main risks presented to the effectiveness, resilience and sustainability of the market. The Bank then assesses firms’ compliance with the regime to ensure that these risks are mitigated. In doing so, the Bank will be risk-based and proportionate.

To assist with this monitoring and analysis, firms recognised by HMT under the new Part 5A^{footnote [22]} (recognised firms) will be expected to share information with the Bank at regular intervals, as well as on an ad-hoc basis (see Section 3.3). The Bank will also make a request for information in relation to the recognition of firms in order to aid the recognition process.

The CoPs for the market oversight regime further detail information requirements, but the Bank expects to build upon the current voluntary reporting by firms. As part of this process, the Bank will engage in supervisory dialogue, including bilateral meetings, with recognised firms at regular intervals.

The Bank will also conduct horizon scanning in order to achieve an overall view of the market, including wider market information gathering and dialogue with other relevant market participants and authorities. The information gained from reporting and meetings will be used to inform the Bank’s risk assessment and will be regularly reviewed, including a full review at least annually, as part of the Bank’s annual supervisory cycle. This assessment will be undertaken by the Bank, along with other such interim examinations and assessments as the Bank judges necessary. Following the completion of these reviews the Bank will set expectations for any mitigating actions it deems necessary by the recognised firms.

In the event of consolidation, significant changes in strategy, or material changes within the market, the Bank expects to require further information from relevant parties, in order to perform a market-wide assessment of the changes. In such a scenario, the Bank may also seek views from other market participants so that it can better assess the impact on the effectiveness, resilience and sustainability of the wider market.

The Bank will engage in supervisory dialogue directly with relevant firms, and assess any materials provided in relation to the change. The Bank will endeavour, via this engagement, to work with the relevant firms to ensure the proposed solution does not negatively impact the effectiveness, resilience or sustainability of the market.

Where we identify issues that may negatively impact the effectiveness, resilience, or sustainability of the market, the Bank will work with the relevant firms to find a suitable solution. Where a suitable compromise cannot be found, the Bank may direct the firm to take specific actions, such as amending their plan so that it appropriately reflects the Principles and, where appropriate, the CoPs. The Bank will not seek to stop commercial solutions to the challenges faced by the industry, and does not seek to bind firms into the WCD market, but endeavours to ensure structural changes can be managed in an orderly way that does not jeopardise the stability of the wider wholesale cash infrastructure.

The new Part 5A also provides the Bank with a range of other powers, in addition to information gathering. These are expected to be used only when the regular supervisory dialogue with the firm does not yield the desired outcome or in the event of a compliance failure. The Bank’s approach to the use of powers is covered in more detail in the Section 3.3 on the Bank’s powers and enforcement below.

The Bank’s internal processes are designed to ensure that supervisory team experts have the advice and guidance of senior Bank officials, including from other areas of the Bank. The Bank expects its supervisory expectations to be shared with the board, senior individuals within the firm and/or the wider group as appropriate, and to engage directly with firms to assess progress against these expectations. Within the framework of applicable Principles, CoPs and legal requirements, recognised firms have scope and discretion to influence how risk is managed.

3.2: Principles

Under the new Part 5A, the Bank may publish ‘principles’ to which recognised firms must have regard^{footnote [23]} (the Principles). These Principles are intended to guide firms when mitigating risks to the effectiveness, resilience and sustainability of the WCD market. Firms have full and primary responsibility for taking action in regard to the high-level outcomes identified in the Principles.

The Bank expects recognised firms to complete their own self-assessments of the actions they have taken in regard to the high-level outcomes identified in the Principles, and to their compliance with the CoPs, and provide these to the Bank. Firms are expected to review their self-assessment at least annually, and alert the Bank to any material changes that occur between such reviews. A firm’s self-assessment does not replace the Bank’s own judgement, but is one input to the Bank’s assessment of firm’s overall compliance with the regime.

Principles of WCD market oversight

The new Part 5A requires the Bank to exercise its wholesale cash oversight powers for the purpose of managing risks to the effectiveness, resilience and sustainability of the WCD market.^{footnote [24]} We therefore set high-level principles against each of these elements (see Box A).

These will be familiar to wholesale cash market participants, as they build on and formalise the structure of the public industry-wide commitments that were made by members of the WDSG last year.^{footnote [25]} The Bank will comment on the industry’s collective progress on these Principles in its annual report document.

3.3: Use of the Bank’s powers

The Bank’s powers can be divided broadly into four categories: information-gathering powers; powers imposing principles and codes of practice; powers of direction; and enforcement powers. The Bank will follow a fair, reasonable and transparent process in the exercise of its powers.

Information gathering

Under the new Part 5A, the Bank has powers to require information that it needs for the purpose of advising HMT about recognition. The Bank additionally has the power to require information in connection with the exercise of its powers in pursuance of ensuring the effectiveness, resilience or sustainability of the WCD network, or in pursuance of the Bank’s financial stability objective. The new Part 5A allows the Bank to require recognised firms to notify it when particular events occur. This includes, but is not limited to, if a firm receives notification of termination of a significant client contract, or where rationalisation plans are under consideration by a firm. Information gathered under this power may be disclosed to certain other authorities and may also be published, subject to regulations made by HMT. The Bank will make clear when an information request is made under its powers. A requirement will be in writing and will normally state how long the relevant firm has to respond.

The Bank also has powers^{footnote [26]} to appoint an inspector to enter premises on, or from which, any part of a relevant function is performed by a recognised firm. The power will generally only be used where the Bank has been unable to obtain information from a recognised firm or where it thinks the information received may not be correct.

The new Part 5A allows the Bank to require a recognised firm to commission an independent report from an expert in a particular field to report on the performance of a relevant function.^{footnote [27]} The new Part 5A allows the Bank to impose requirements about the nature of the expert to be appointed, the timing and scope of the report, and the subsequent treatment of the report in terms of disclosure or publication. The Bank will need to be satisfied that the selected expert is sufficiently competent and independent. This power would normally be used in connection with the Principles and CoPs but could be used in connection with the performance of any of its functions set out in the new Part 5A.

Imposing requirements

As discussed above, the new Part 5A enables the Bank to publish principles (see Section 3.2) to which recognised firms must have regard in performing their relevant function in relation to WCD activities.

Under the new Part 5A, the Bank may also publish CoPs about recognised firms’ performance of relevant functions in relation to WCD activities. The CoPs are binding on firms and designed to capture specific risks.

The Bank has identified three initial areas where there is a need to issue binding requirements. Box B below outlines, at a high level, the Bank’s intended approach to wholesale market oversight CoPs. The Bank will consult on the CoPs in 2023, with a final published version expected before the Bank’s new powers come into force.^{footnote [28]}

In future, the Bank may identify other areas where CoPs are necessary and appropriate, or amend existing ones. Under the new Part 5A, failure to comply with a CoP and/or accompanying guidance, is sufficient grounds for the Bank to impose sanctions.^{footnote [29]}

Powers of direction

The power of direction^{footnote [30]} enables the Bank to address emerging issues (relating to one of more recognised firm(s)) that might not be covered in the CoPs, or where, for example, the Bank considers that a recognised firm is not acting in accordance with the Principles or complying with the CoPs. In such circumstances, the Bank may direct the firm to take actions that bring it back into compliance, or direct a firm to take, or refrain from taking, other specified action. The Bank would take such action for the purpose of managing risks to the effectiveness, resilience and sustainability of the WCD infrastructure. Where a direction is given for the purpose of resolving or reducing a threat to financial stability, a recognised firm (including its officers and staff) will have immunity from liability in damages in respect of the action or inaction in accordance with the direction.

Enforcement – sanctions, warning notices and appeals

The Bank, where practicable, seeks to supervise with the support of recognised firms, having clearly explained the risk rationale for its supervisory priorities and actions. However, should a recognised firm fail to comply with a CoP, to act in accordance with a direction, or to comply with a requirement (such as in relation to independent reports),^{footnote [31]} sanctions may be applied.

In the event of a compliance failure,^{footnote [32]} and in certain other circumstances, the Bank may choose to impose one or more of the sanctions set out in the new Part 5A.^{footnote [33]} Where there has been any such a compliance failure, the Bank may require the recognised person to pay a financial penalty. The Bank also has the power to prohibit a specified person from holding an office or position involving responsibility for taking decisions about the management of a recognised person (a ‘management disqualification’). Where there has been a compliance failure, or where the Bank has issued a management disqualification, the Bank may publish details of that failure or the sanction imposed (a public censure).

If the Bank is satisfied that it is necessary to issue a management disqualification without notice to the affected firm/person, it can use its powers to impose such sanctions immediately.^{footnote [34]}

In all other cases, the Bank will give prior written notice, warning of its intention to impose a sanction and setting out why it is minded to take this step. The Bank will state a period for the recipient of the warning notice to make representations to the Bank, which will be at least 21 calendar days from the date of the notice.^{footnote [35]} The Bank will consider any timely representations received before notice deciding whether or not to impose the sanction. Where the Bank decides to impose a sanction, the affected firm or person may appeal against the decision to the Upper Tribunal.

The Bank may apply to the court for an injunction if there is either a reasonable likelihood that there will be compliance failure, or a compliance failure has occurred and there is a reasonable likelihood that it will continue or be repeated.^{footnote [36]} If, following the Bank’s application, the court is satisfied that either of those cases is made out, the court may (among other things) make an order restraining the conduct constituting the compliance failure, or make directions requiring the recognised person, or other persons knowingly concerned in the failure, to take steps to remedy it.

The new Part 5A requires the Bank to publish a statement about its approach to imposing financial penalties and their amount and send a copy to HMT. This statement will be consulted on in 2023. 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 the impact or potential impact on the wholesale cash infrastructure, of the breach, the previous disciplinary and/or supervisory record of the recognised firm, as well as their conduct and co-operation with the Bank after the breach was identified.

Table B contains non-exhaustive and illustrative examples of scenarios in which the Bank might seek to exercise its powers.

Table B: Illustrative examples of how the Bank might use its market oversight tools ^(a)

4: For consultation – fees for market oversight

4.1: Market oversight

This section sets out proposals on recognised firm fee rates to meet the Bank’s funding requirement for its wholesale market oversight activity and the policy activity that supports this, as permitted by the Bank’s fee-levying powers.

Firms that are recognised under the new Part 5A are subject to the Bank’s fees regime. The Bank can impose fees on recognised firms within a scale approved by HMT by regulations. The Bank expects that the WCD operators and financial institutions currently involved in the NCS will become recognised firms from the outset of the regime. The Bank’s current expectation is that HMT will not seek to recognise CiT firms initially, and they will therefore not become subject to the Bank’s market oversight fees regime from the outset. This will be kept under regular review, and if changes to the wholesale infrastructure occur in future, it may become necessary to bring CiT firms within scope of the regime.

The following are relevant functions in relation to a WCD activity under the new Part 5A – (a) undertaking the activity; (b) managing the activity; (c) providing a service in relation to the activity; and (d) providing financial assistance in relation to the activity.

Based on the Bank’s analysis of various options for apportioning supervisory fees between the to be recognised wholesale firms, we propose a charging scale approach linked to supervisory effort and risk for the wholesale oversight supervisory fee schedule. This results in each recognised firm paying a fee proportionate to the time spent on supervisory activities for that firm. Under the approach, supervision of operators is judged to involve more effort than financial institutions because they perform a greater number of relevant functions in relation to WCD activity.

When reviewing the options for allocating fees the Bank considered a fee scale linked explicitly to market share. The resulting fees from this approach were not proportionate to the time that the Bank is likely to spend supervising each firm. For example, there was disparity in the fee payable by different operators, which was not commensurate to differences in supervisory effort or risk. Supervisory resource is expected to be broadly even across firms which perform the same functions, and the market share approach is not therefore proportionate to the required level of supervision. The market share option is not currently deemed appropriate. Nonetheless, the Bank will consider the evolution of market shares, alongside changes in supervisory effort and risk, in its annual review of fees.

Within the fee scale set by HMT, the Bank reserves the right to vary the fee on a risk basis if, for example, parts of the wholesale distribution market became more concentrated but no one systemic entity were yet to emerge, or if one of the operators faced specific operational challenges. The decision on the level of fees will reflect the supervisory work required and the resources allocated to the supervision of each type of firm.

The Bank’s annual supervisory fee includes the costs of supervision staff together with relevant legal resource, policy support, specialist resources, corporate services and other costs associated with the work of the supervisory team. The Bank has ensured the supervisory function is proportionate to the risk and complexity of the market. The total cost of market oversight supervision is expected to be around £1.2 million per annum. The fee for each participant represents a low percentage of firm revenue, less than 0.18% of a firm’s revenue in all cases.^{footnote [39]}

The indicative fee for market oversight supervision for an operator is £175,000, for an operator-financial institution (FI) is £230,000, and for a FI is £115,000 per year. This compares to FMI supervisory fees for payment systems, proposed at £680,000 per year for Category 1 payment systems and £460,000 for Category 2 in the 2022/23 fees year.^{footnote [40]} The lower cost for the overall wholesale cash supervisory effort reflects the lower level of supervisory complexity, compared to FMIs.

Table C: Indicative cost of market oversight supervision by firm type ^(a)

The proposals in this CP have been prepared under a number of resource assumptions, based on costs for the current financial year. There may therefore be variation in the final fee rates for the initial fee year. Invoices will be issued annually for the forthcoming year, and any variances will be addressed at the conclusion of the initial fee year through either a rebate or a request for additional fees.

The fee schedule is subject to annual review and consultation. The proposal is based on Bank’s engagement with in-scope firms to date, but may well change in future as the market evolves.

5: For consultation – approach to prudential supervision

5.1: Overall approach

HMT may recognise a firm as having systemic significance where it is satisfied that significant deficiency in, or disruption to, the performance of that firm’s relevant function in relation to WCD would be likely to:

• Threaten the stability or confidence in the UK financial system, or
• Have serious consequences for business or other interests throughout the United Kingdom.

As such, because such a systemic entity will have a central role in ensuring that cash is processed and distributed effectively across the economy and between key market participants, they represent a potential single point of failure for the WCD market with implications for financial stability. In this sense, because a systemic entity performs a vital role in respect of the wholesale cash market, they are considered to be much like the FMIs supervised by the Bank. Therefore, a broadly consistent approach to their supervision, using the powers set out in the new Part 5A, is appropriate.

Given this, where a systemic entity emerges it would be subject to ‘prudential’ supervision in the manner set out in the Bank’s Supervision of Financial Market Infrastructures approach document^{footnote [41]} (the ‘FMI Approach Document’) which sets out the regime’s objectives, explains what we would expect of an FMI, and explains how we would assess them against the Bank’s expectations.

More specifically, the Bank considers that the supervisory framework currently applicable to the operators of payment systems recognised under Part 5 of the Banking Act will be appropriate to apply, with suitable adaptations where necessary, to systemic entities. The existing Part 5 regime is very similar in terms of powers to the new Part 5A and the supervisory approach developed in respect of recognised payment systems has proven to be flexible and robust to accommodate a variety of regulated entities and systems operating in very different ways. Where a recognised systemic entity is already subject to prudential requirements, we will take account of those in our wholesale cash prudential supervisory assessment.

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 under the new Part 5A.

5.2: Principles of prudential supervision

For the prudential supervision of any systemic WCD entity or entities that may form (eg through consolidation, mergers or other means) and are recognised as having ‘systemic significance’, we propose to apply the CP MI-IOSCO Principles for Financial Market Infrastructures,^{footnote [42]} as relevant. The Bank’s prudential supervision will particularly focus on (though will not be restricted to) governance, operational and financial resilience, and comprehensive risk management.

5.3: Codes of practice – prudential supervision

In light of the above, the Bank considers that the substantive requirements of the CoPs currently applicable to systemic payment system operators under Part 5 of the Banking Act will be relevant for systemic entities recognised under Part 5A of the Banking Act. The Bank will consider whether any changes need to be made to reflect the particular risks posed by these entities.

These include the CoPs on operational resilience,^{footnote [43]} governance^{footnote [44]} and outsourcing and third party risk management^{footnote [45]} (which, in the case of the latter, the Bank is currently consulting on).

5.4: Fees – prudential supervision

In the event of the emergence of a systemic entity, the costs for its prudential supervision will be considered in the Bank’s annual fees consultation for FMIs.^{footnote [46]}

The Bank’s current expectation is that a systemic entity for WCD, that may form in future, will not be a Category 1 entity.^{footnote [47]} However any changes in the market will be assessed on a case-by-case basis and the categorisation of a systemic entity will depend on the extent to which market consolidation occurs.

A systemic entity will remain subject to the market oversight fees regime. While there is co-ordination between the market oversight and prudential supervision regimes, the objectives and supervisory activities of the regimes are different, hence both fee schedules would apply.

For both fee regimes, the decision on the level of fees will reflect the supervisory work required and the resources allocated to the supervision of each type of firm.

6: Consultation Paper questions

1. Do you agree with the proposed approach to the Bank’s oversight of the WCD market?
2. Do you agree with the proposed Principles for the WCD market oversight regime?
3. Do you have any initial comments on the early high-level proposals for CoPs for recognised WCD market firms?
4. Do you agree with the proposed approach to the allocation of supervisory fees for the WCD market oversight regime?
5. Do you agree with the proposal for prudential supervision of any systemic entity that may form in the future, as set out in Section 5 of the consultation?

7: Timetable and next steps

The consultation period will run for two months to 10 February 2023. The Bank invites feedback on the proposals 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 the CoPs in 2023.

The statutory regime for WCD is currently progressing through the Parliamentary process as part of the Financial Services and Markets Bill.

Following Royal Assent, HMT will be able to recognise relevant firms via the statutory recognition process.