The UK Parliament’s Public Accounts Committee (PAC) reported on the production and distribution of cash at the end of November. PAC was concerned that the cash distribution infrastructure is at risk, there is a lack of urgency in the response of the public bodies responsible with little action, a lack of clarity about the end goal and no realistic plan. Banknote stocks appear unnecessarily high without a clear explanation of why, and coin production appears unsustainable and not cost effective in the light of falling demand.
It made six recommendations on areas of concern, requiring a written response as early as January 2021.
PAC had taken written and verbal evidence in order to make its report. Its six findings were:
1. There is a lack of urgency to safeguard access to cash across the responsible public bodies. Much research but little action. In addition, there are bland statements about ‘access for those who need it’ but no definition of what that actually means.
The report noted that the number of free to use ATMs has fallen by 17% over the last two years (6,700), offset by 4,200 pay to use ATMs being installed. Given that the costs of the cash cycle infrastructure are largely fixed, PAC was concerned that the commercial viability of cash distribution is at risk. PAC felt that there appeared to be an over reliance on the existence of the Post Office network, which is not evenly spread, which is not always open when people need money and which does not provide the privacy of a bank branch or ATM.
PAC noted that only now is work starting to look at how small and medium size enterprises can access cash, but that events are moving so fast that it is already becoming too late.
PAC required Her Majesty’s Treasury (the Treasury) and the Payment Systems Regulator (PSR) to report in writing in January a detailed assessment of where cash can only be obtained by paid for ATMs, or via Post Office counter withdrawals, and to set out the steps they have undertaken to ensure adequate access to free cash machines across the country.
By the end of March 2021 at the latest, the Treasury should publish a clear plan of action, including draft legislation, for securing access to cash across the UK. The plan should include clear commitments, including a statement of what the regulators are expected to achieve in terms of cash access for communities and vulnerable groups; definite steps to allow cash back without having to make a purchase; and clear evidence that regulators will have effective powers to take action should access to cash be threatened.
2. There is a lack of clarity about what the desired outcome is for access to cash and using cash. The report noted that the Financial Conduct Authority (FCA) does not regulate the charges banks make to businesses that use cash. It asked the question - who would pay the costs of maintaining the cash system? It did not receive and answer other than the Treasury saying that this was a political decision for government and parliament.
The plan needs to give clarity about the outcomes and address the outstanding questions.
3. The UK cash cycle is managed by the Treasury, which is responsible for implementing the government’s policy ‘to safeguard access to cash for those who need it, while supporting digital payments.’ The Royal Mint, on behalf of the Treasury, produces coins. The Bank of England is responsible for supplying and distributing banknotes, the PSR regulates the ATM network and the FCA regulates financial service providers who produce much of the distribution infrastructure. In May 2019, the Joint Authorities Cash Strategy (JACS) Group was set up to coordinate the work of these organisations across the cash cycle.
JACS does not make decisions and PAC recommended that the Treasury makes one body responsible, with clear roles established for the rest.
4. Banknote demand is increasing and has risen sharply this year. The value of cash in circulation is £76.5 billion. with only 20-24% of that used in transactions and based on 2018 analysis - up to 5% used as a store of value. This leaves banknotes worth £50 billion unaccounted for.
The report acknowledged that this is the case for other central banks. The Reserve Bank of Australia, for example, has also reported recently that they have about $70 billion of notes ‘missing’. The ECB has the same problem. This is a well-known question for which nobody has yet found a satisfactory answer.
PAC wants the Bank to do more work on understanding what is driving cash demand and where the £50 billion is. It is this recommendation that has been widely publicised in the UK’s media.
5. The Bank considers likely demand and supply shocks to the financial system and sets a contingency level which it benchmarks against other central banks. At the end of March it had stocks with a face value of £39 billion against a target of £20.5 billion. The production value of the ‘excess’ stocks was £35 million (the Bank spent £119 million on procuring banknotes in 2019/20). At the end of July, the Bank had stocks worth £30.4 billion against a target of £15.6 billion.
PAC recommended that the Bank keeps proper records about why they are holding so much stock and how they reached that decision.
6. Coin production has fallen from 1.1 billion pieces in 2010-11 to 383 million pieces in 2019-20, costing £23.6 million. The Royal Mint has lost money on coin production in each of the last three years, £3.9 million in 2019-20. This is despite mothballing two of its six production lines and reducing its head count from 452 to 351 staff between May 2018 and March 2020. Although the pandemic has raised demand this year, the Royal Mint has such a stock of £2 and 1 and 2p coins, that for the next few years production will remain low.
PAC wants to see the Royal Mint’s plans for sustainable and cost-effective coin production.
