Following a consultation by the Bank of England (BoE) in November 2023 (see our Engage article here), the three final Codes of Practice (CoPs) for wholesale cash distribution (WCD) market oversight were published on 24 April 2024 along with a consultation response. This follows on from provisions in the Financial Services and Markets Act 2023 (FSMA 2023) which introduce a new Part 5A of the Banking Act 2009 giving the BoE powers to oversee the wholesale cash industry with a view to ensuring the long-term sustainability of the UK’s cash infrastructure. The CoPs and Guidance will come into effect for any firms recognised by HM Treasury (HMT) as having ‘market significance’ under wholesale cash oversight orders provided for in the new regime (see further our previous Engage article on the November 2023 consultation, linked above).
The BoE has also published a final WCD data catalogue (setting out how information required by the BoE under the CoPs should be submitted) and Guidance to accompany the CoPs. This non-statutory Guidance aims to provide a non-exhaustive statement of steps that a recognised firm may take to comply with the CoPs.
Key takeaways
Some key points from the three CoPs, which came into force on 24 April 2024, are:
- Information gathering CoP
Recognised firms are expected to report to the BoE with their business continuity and business plans, as well as confirmations of compliance with the wholesale cash distribution oversight regime. Relevant businesses are required to notify the BoE immediately of certain trigger events, such as the breach of a CoP.
- Third-party arrangements CoP
Recognised firms must perform assessments in relation to third-party arrangements for the provision of wholesale cash distribution activities. Their senior management should approve the assessments. Recognised firms who enter into arrangements with third-party providers remain liable for compliance with their obligations under the WCD oversight regime.
- Cash centre closure and market exit CoP
Recognised firms must notify the BoE at least six months before undertaking any cash centre closures or at least twelve months before any market exits. Stakeholders, such as the landlord of the cash centre premises or employees, must be considered and informed during the implementation of any such measures. According to the Guidance, the definition of a cash centre closure or market exit is broad, covering temporary and permanent changes. A cash centre closure includes any reduction in the scope of the performance of a relevant activity. A market exit includes any reduction or winding down of a relevant function which is not caught by the definition of a cash centre closure. There is no materiality threshold to a market exit, and the Guidance makes it clear that the BoE would expect to be notified of all proposals to cease (or partially cease) performing a specified relevant function.
What do firms need to be thinking about?
Any firms that, in due course, are recognised under an HMT wholesale cash oversight order will need to monitor for any change in activity that may constitute a cash centre closure or market exit because if the change does fall under the broad definition then the requirement to notify the BoE at least six months in advance will be triggered. Firms that become subject to a recognition order should also be prepared to undertake assessments of relationships with third parties for the provision of wholesale cash distribution activities, while bearing in mind their continuing liability for compliance with their obligations under the regime. Additionally, any recognised firms must prepare the required business assessments and establish internal processes to facilitate the delivery of notifications to the BoE.
The CoPs operate in addition to the rules of the Bank of England Note Circulation Scheme (NCS). This means that where a recognised firm is also a member of the NCS, they should comply with their obligations under both the rules of the NCS (the NCS Rulebook) and the CoPs.
What’s next?
In its consultation response, the BoE confirmed that it will review its approach to the regime regularly and publish a further consultation on any substantive changes to the CoPs if required.
Read on for more on the BoE’s final CoPs on wholesale cash distribution.
Background to access to cash and the BoE’s final CoPs
The regulators and government have been concerned about the availability of access to cash in the wake of increasingly digitised payment solutions. Research such as this recently commissioned report for the FCA by London Economics , has found that decline in access to cash particularly disadvantages customers with vulnerable characteristics and SMEs, who are the largest users of cash.
As set out in our previous Engage article on this topic, FSMA 2023 contains provisions aimed at protecting:
- continued access to cash via a new Part 8B into the Financial Services and Markets Act 2000 (FSMA 2000) that requires the FCA, as the lead regulator for access to cash, to seek to ensure reasonable provision of free cash access services for current accounts of personal customers; and
- the long-term sustainability of the UK’s cash infrastructure via a new Part 5A of the Banking Act 2009 giving the BoE powers to oversee the wholesale cash industry.
When introducing the bill to Parliament, the government stated that financial inclusion was one of its core aims.
There are two levels to the BoE regime:
- Firstly, the BoE is enabled to regulate the market activities of the wholesale cash industry (the market oversight regime) to ensure it remains effective, resilient and sustainable.
- Secondly, the BoE will have the ability to prudentially regulate a systemic entity in the market, should one form in the future (the prudential regime).
Under the new Part 5A of the Banking Act 2009, HMT will be able to make recognition orders in respect of firms which carry out relevant functions in relation to WCD activities, if those firms meet the criteria set out in the legislation. These recognition orders will bring entities within scope of either market oversight only, or both the market oversight and prudential supervisory regimes.
The legislation provided that the BoE must consult on CoPs that it wishes to publish under the WCD oversight regime.
Codes of Practice and Guidance for market oversight regime
The CoPs will be for firms that have ‘market significance’ in respect of relevant functions in relation to WCD functions and activities and are therefore the subject of an HMT wholesale cash oversight recognition order. A firm will be recognised by HMT as having market significance only if HMT is satisfied that ‘any significant deficiency in, or disruption to, the performance of the firm’s relevant functions in relation to wholesale cash distribution activities would be likely to undermine the effectiveness, resilience, or sustainability of wholesale cash distribution’ throughout the UK or any part of it (section 206H of the Banking Act 2009, as amended by FSMA 2023).
The published document has three annexes which each set out a final CoP. Some key elements of each CoP are summarised below.
Annex A - Information Gathering CoP
The CoP on Information Gathering includes the following:
- The reporting requirements for recognised firms (who carry out operational activities such as storing and dispatching cash to wholesale customers).
- Each recognised firm must maintain a business continuity plan which identifies threats to the performance of its relevant functions relating to wholesale cash activities. The CoP sets out the contents of the plan, which include analysis and risk assessment and an incident response structure. The BoE’s guidance provides examples of severe but plausible risk scenarios that should be contemplated by the plan, such as utility supply interruption or damage to premises.
- Recognised firms must have a business plan which covers information such as the operating market and risks to the daily operations of the business. This plan should include a heat map and harm table.
- Recognised firms must collate information on the fees and charges that they impose on wholesale customers. The Guidance provides that this will entail the creation of a standard pricing tariffs document, which sets out the typical charges levied on wholesale customers.
- Recognised firms are required to notify the BoE immediately in a range of scenarios which include a breach of a CoP.
- The reporting format and associated deadlines.
- Recognised firms are required to complete an annual self-assessment setting out how they have considered the applicable principles in carrying out their functions, and how they have complied with the CoP. Following the November 2023 consultation, the BoE has amended the CoP to allow firms to make their own determination as to the form that their self-assessment document should take, as well as the level of detail to be included in the document.
- Recognised firms are required to complete a written attestation that the information that they have provided to the BoE under this CoP is complete, accurate and up to date. Following its consultation, the BoE has amended the CoP to state that firms may combine their annual attestation with their self-assessment document.
Annex B – Third-Party Arrangements CoP
The Guidance clarifies that an arrangement need not be in writing to fall within the scope of the CoP.
- A recognised firm must undertake an assessment of a prospective arrangement with a third-party for the performance of goods, products or services before the commencement of that arrangement. For example, an arrangement for the provision of cash processing equipment, such as machine sensors, is expected to fall under the CoP.
- Where the arrangement is material, such that any problems which arise in the performance of the arrangement would significantly undermine the recognised firm’s ability to carry out its functions, due diligence and risk assessments must be completed. Material arrangements should contemplate ways to mitigate the risk of disruption and ensure that the sharing of information with the BoE is not undermined by any confidentiality clause.
- Recognised firms must ensure that cash-in-transit arrangements include provisions such as the monitoring and audit of service level agreements and key performance indicators. The recognised firm and the cash-in-transit provider must create a cash-in-transit business continuity plan which identifies risks to the provider’s performance of activities.
- The board of directors or alternative management body of a recognised firm should approve the materiality assessments, due diligence and risk assessments required by this CoP, according to the Guidance. Recognised firms who enter into arrangements with third-party providers remain liable for compliance with their obligations under the WCD oversight regime.
Annex C – Cash Centre Closure and Market Exit CoP
- A recognised firm must notify the BoE at least six months before closing a cash centre from which it carries out relevant functions. A cash centre closure includes any temporary or permanent reduction in scope of the performance of a specified relevant function, such as a scale back of operations. The CoP provides for the contents of the notification.
- A recognised firm must notify the bank at least twelve months before it exits a market, i.e. ceases to perform, in whole or in part, a specified relevant function. An exit includes any reduction in, or winding down of, a specified relevant function where it does not constitute a cash centre closure. The Guidance states that as there is no materiality threshold in the definition of exit. The BoE would expect to be notified of all proposals to cease (or partially cease) performing a specified relevant function.
- The CoP requires stakeholders (eg the landlord of the cash centre premises or employees) to be informed of a cash centre closure or market exit during its implementation.
- A recognised firm must inform the BoE of anything relating to a cash centre closure or exit which the BoE would reasonably expect notice of.
What’s next?
In its consultation response, the BoE confirmed that it will review its approach to the regime regularly and publish a further consultation on any substantive changes to the CoPs if required.
The BoE expects to consult on and publish its approach to enforcement in 2024, and HMT expects to recognise relevant firms via the statutory recognition process in 2024.
The FCA’s consultation on access to cash closed in February 2024. The FCA is expected to finalise its rules in Q3 2024, when it will also publish a related policy statement.
If you would like to discuss any aspect of the BoE’s final CoPs or the FCA’s access to cash regulatory regime proposals, please get in touch with one of the people listed above or your usual Hogan Lovells contact.
Authored by Ada Nourell, Virginia Montgomery and Julie Patient.
