Statement of policy on the Bank’s supervisory approach to market oversight for wholesale cash distribution

1: Bank’s approach to wholesale cash distribution market oversight

Under new section 206D of the Banking Act 2009 (the Act), as introduced through the Financial Services and Markets Act 2023 Opens in a new window, the Bank of England (the Bank) must publish a statement of policy with respect to the exercise of its powers under the new Part 5A of the Act. This statement of policy sets out the Bank’s supervisory approach to the exercise of its powers in relation to the oversight of participants in the wholesale cash distribution (WCD) market.^{footnote [1]} The aim of the Bank’s market oversight regime is to ensure the United Kingdom’s wholesale cash market meets the needs of consumers and the wider economy for cash over the long term. It 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 approach is based on the Principles for WCD oversight (see Section 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 the Bank’s monitoring and analysis, firms recognised by His Majesty’s Treasury (HMT) under Part 5A^{footnote [2]} (recognised firms) are required to share information with the Bank at regular intervals, as well as on an event-driven basis (see Section 3.2). The Bank can also require information in relation to the recognition of firms in order to aid the recognition process.

The codes of practice for the market oversight regime further detail information requirements and build upon voluntary reporting commitments given by firms. In addition, the Bank engages in supervisory dialogue, including bilateral meetings, with recognised firms at regular intervals.

The Bank also conducts 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 is used to inform the Bank’s risk assessment and is regularly reviewed, including a full review at least annually, as part of the Bank’s annual supervisory cycle. These assessments are undertaken by the Bank, along with other such examinations and assessments as the Bank judges necessary. Following the completion of its annual review, the Bank will discuss with the recognised firms its expectations for any mitigating actions it deems necessary. The Bank is required to report to HMT on the WCD market at least annually.

In the event of proposed consolidation, significant changes in strategy, or material changes affecting a recognised firm’s activities within the market, the Bank expects to use its codes of practice, its powers under section 206Z3 of the Act and its supervisory dialogue to obtain information from relevant parties. This is to perform a market-wide assessment of the changes and their impacts. 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 undermine the effectiveness, resilience or sustainability of the WCD market.

Where the Bank identifies issues that, in the view of the Bank, would be likely to undermine 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 use its statutory power of direction in section 206M of the Act to direct the firm to take specific action, such as amending their plan so that it appropriately reflects the Principles and, where appropriate, the codes of practice. Under Part 5A, failure by a recognised firm to comply with a direction under section 206M may be a ‘compliance failure’, which would entitle the Bank to take enforcement action, as described further in Section 3.4. The Bank does not seek to stop commercial solutions to the challenges faced by the industry and does not seek to bind firms to the market, but endeavours to ensure structural changes can be managed in an orderly way that does not jeopardise the stability of the wider WCD market.

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 Section 3.4 on the Bank’s powers and enforcement.

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 to share its supervisory expectations with the firm’s board, senior individuals within the firm and/or the wider group, as appropriate, and will engage directly with firms to assess progress against these expectations. Within the framework of applicable principles, codes of practice and statutory requirements, recognised firms have scope and discretion to influence how risk is managed.

2: The Principles

Under Part 5A^{footnote [3]} the Bank may publish ‘principles’ to which recognised firms must have regard in the performance of their relevant functions in relation to WCD activities (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, having 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 Codes of Practice, and provide these to the Bank. Firms are expected to review their self-assessment at least annually, and promptly 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 a firm’s overall compliance with the oversight regime.

Part 5A^{footnote [4]} requires the Bank to exercise its oversight powers for the purpose of managing risks to the effectiveness, resilience and sustainability of the WCD market in the United Kingdom or any part of it. The Principles are therefore set against each of these elements (see Box A).

The Bank will comment on the industry’s collective progress on these Principles in its annual report on market oversight.

3: Use of the Bank’s powers

The Bank’s powers can be divided broadly into four categories: information-gathering powers; powers to publish principles and codes of practice; power of direction; and enforcement powers.

The Bank follows a fair, reasonable, proportionate and transparent process in the exercise of its powers.

3.1: The Codes of Practice

As discussed, Part 5A enables the Bank to publish principles (see Section 2) to which recognised firms must have regard in performing relevant functions in relation to WCD activities.

Under Part 5A,^{footnote [5]} the Bank may also publish codes of practice about recognised firms’ performance of relevant functions in relation to WCD activities, as set out in their wholesale cash oversight order. The Codes of Practice are binding on firms and designed to capture specific risks. The Principles are supported by the Codes of Practice. The Codes of Practice may be supported by guidance, also published by the Bank.

The Bank has identified three initial areas where the Bank intends to issue binding codes of practice. These are:

• Code of Practice – information gathering.^{footnote [6]}
• Code of Practice – third-party arrangements.^{footnote [7]}
• Code of Practice – cash centre closure and market exit.^{footnote [8]}

In future, the Bank may identify other areas where codes of practice are necessary and appropriate or amend existing Codes.

Under Part 5A,^{footnote [9]} failure by a recognised firm to comply with a code of practice is a ‘compliance failure’, which would entitle the Bank to take enforcement action, as described further in Section 3.4.

3.2: Information

Under Part 5A,^{footnote [10]} the Bank has powers to require, by notice in writing, information that it needs for the purpose of advising HMT about recognition. The Bank additionally has the power to require information, by notice in writing, 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.

In particular, under section 206Z3(1) of the Act, the Bank has the power to require any person to provide it with information which:

1. the Bank thinks will help HMT in determining whether to make a wholesale cash oversight order; or
2. the Bank otherwise requires in connection with its functions under Part 5A.

Additionally, under section 206Z3(2) the Bank has the power to require a recognised firm to provide any information which the Bank requires:

1. for the purpose of managing risks to the effectiveness, resilience and sustainability of WCD; or
2. in pursuance of the Bank’s financial stability objective (see section 2A of the Bank of England Act 1998).

Under these powers, the Bank can also require recognised firms to notify the Bank when particular events occur.

Failure to comply with an information requirement issued under section 206Z3 without reasonable excuse, or knowingly or recklessly giving false information in response to an information requirement, is an offence.^{footnote [11]}

The Bank will make clear when an information request is made under these powers. A requirement will be in writing and will normally state how long the relevant firm has to respond. Information gathered under these powers may be disclosed to HMT, the Financial Conduct Authority, the Prudential Regulation Authority and the Royal Mint. Subject to regulations made by HMT, information gathered under these powers may be disclosed to other persons and may also be published.

In addition to the above powers, the Bank has the power under section 206L to publish codes of practice about the performance by recognised firms of relevant functions in relation to WCD activities. The Bank may, for example, make codes of practice that require recognised firms to notify the Bank when particular events occur. This may include, 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.

The Bank also has the power under section 206O of the Act to appoint an inspector to inspect premises on, or from, which any part of a relevant function is performed by a recognised firm. The recognised firm must co-operate and grant the inspector access to the premises. However, where an inspector is refused entry, and in other specified conditions,^{footnote [12]} a warrant under section 206P of the Act may be obtained on application to a justice of the peace to enter and search the premises. Other conditions include where the Bank has been unable to obtain information from a recognised firm, or where it considers that if an information requirement were imposed the information would be destroyed or otherwise tampered with.

Part 5A^{footnote [13]} 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. Part 5A also 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 must be satisfied that the selected expert is sufficiently competent and independent. This power is normally used in connection with the Principles and Codes of Practice, but could be used in connection with the performance of any of its functions set out in Part 5A. Under Part 5A, failure by a recognised firm to ensure compliance with a requirement under section 206Q of the Act is a ‘compliance failure’, which would entitle the Bank to take enforcement action, as described.

3.3: Powers of direction

The power of direction^{footnote [14]} enables the Bank to address emerging issues (relating to one or more recognised firm(s)) that might not be covered in the Codes of Practice, or where, for example, the Bank considers that a recognised firm is not having due regard to the Principles or complying with the Codes of Practice. 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 market. 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.

3.4: 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 Code of Practice, to act in accordance with a direction, or to ensure compliance with a requirement,^{footnote [15]} sanctions may be applied.

In the event of a compliance failure,^{footnote [16]} and in certain other circumstances, the Bank may choose to impose one or more of the sanctions set out in Part 5A.^{footnote [17]} Where there has been 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 or give a closure order without notice to the affected firm/person, it can use its powers to impose such sanctions immediately.^{footnote [18]}

In all other cases, Part 5A requires the Bank to give prior written notice, warning of its intention to impose a sanction. Such a notice would set out why the Bank is minded to impose the proposed sanction. 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 [19]} The Bank will consider any timely representations received before 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 a compliance failure, or a compliance failure has occurred and there is a reasonable likelihood that it will continue or be repeated.^{footnote [20]} 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 give directions requiring the recognised firm to take steps to remedy it.

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.^{footnote [21]} Subject to consultation, the Bank anticipates incorporating this statement into the Bank’s approach to enforcement. 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.

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