Key takeaways

• The FCA's consultation paper proposes new rules to maintain reasonable access to cash for personal and business customers across the UK.
• The BoE is consulting on three Codes of Practice (CoPs) for wholesale cash distribution market oversight.

What do firms need to be thinking about?

• Banks and other entities that may be designated under the new FCA cash access rules when in force should be aware that in the meantime the FCA expects them to bear in mind the implications of the new framework when planning closures of cash access facilities or significant changes in provision of cash access services. Consumer Duty considerations should also be front and centre when banks are looking at branch closures or ATM conversions.

What's next?

• The FCA's consultation closes on 8 February 2024. ​The FCA expects to finalise the rules and publish them alongside a policy statement in Q3 2024. It is proposing a transitional period to give designated entities (ie designated firms and any designated independent coordination body acting on their behalf) additional time to carry out cash access assessments for the first 3 months after the rules come into force.
• The BoE's consultation closes on 31 January 2024, following which it intends to publish the final CoPs and CoP guidance for the market oversight regime. This year the BoE also expects to consult on and publish its approach to enforcement, and HM Treasury expects to recognise firms which carry out relevant functions in relation to wholesale cash distribution activities via the statutory recognition process.

Read on for a more detailed look at the background to and content of the FCA and BoE consultations.

Background: Cash access and financial inclusion

FSMA 2023 contains provisions aimed at ensuring continued cash access and long-term sustainability of the UK's cash infrastructure. Even before the Act, this area had been on the regulatory radar for some time, with the government carrying out an Access to Cash Review in 2018. The final report on the Review was published in March 2019, and among other things it called for a guarantee that consumers could get cash wherever they live or work. There was a government call for evidence on access to cash in 2020, which led on to an Access to Cash consultation (July 2021) and consultation response (May 2022) on the government’s planned approach to legislating for access to cash in the Financial Services and Markets Bill (now FSMA 2023).

Also coming out of the Access to Cash Review has been work by banks and building societies to assess the cash needs of local communities, where relevant, and to deploy shared solutions – such as shared banking hubs - in communities that require additional access to cash (see the Cash Access UK website for more information).

On wholesale cash distribution (WCD), HM Treasury's (HMT) April 2022 policy statement on wholesale cash made it clear that it expects the WCD industry to transition to a smaller footprint over the coming years. However, there has also been recognition of the importance of ensuring the risks arising from any future restructuring of the wholesale cash infrastructure can be effectively managed.

Also of note is the overlap with financial inclusion and vulnerable customers, which is another related focus area for the regulators. When FSMA 2023 was introduced to Parliament, the Government stated that financial inclusion was one of its five core aims. During the passage of FSMA 2023 through Parliament, there was an attempt to give the FCA a cross-cutting “must have regard” to financial inclusion duty, with an amendment on this during the Bill’s Commons stages.

The changes introduced by FSMA 2023 therefore brought together a number of on-going work areas.

Cash access services

FSMA 2023 amendments to FSMA 2000

FSMA 2023 recognises that, despite the increasing use of digital payments, cash continues to play a vital role. It therefore puts in place a framework to protect the ability of people and businesses across the UK to access cash withdrawal and deposit facilities for the first time in law and to ensure free access to cash for individuals from free-to-use cash access points.

Through the insertion of a new Part 8B into the Financial Services and Markets Act 2000 (FSMA 2000), FSMA 2023 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, supporting the regulator’s wider duty of seeking to ensure reasonable access to cash. It also requires the government to publish a statement of its policies on access to cash, including its policy on free cash access services for current accounts of personal customers which the regulator must have regard to when determining reasonable access. HMT published this policy statement in August 2023. The FCA must have regard to the policy statement when carrying out its functions under Part 8B. Regarding what is meant by 'reasonable access', the statement provides:

• With respect to personal current accounts, the government’s view is that “reasonable provision of cash access services” (as to be determined by the FCA) means free cash access services. Although this does not preclude the provision of pay-to-use services, the government does not consider it appropriate for pay-to-use services to contribute towards “reasonable provision” in relation to such accounts.
• In determining what constitutes “reasonable provision”, the legislation requires the FCA to have regard, in particular, to local deficiencies that have significant impacts. In doing so, the government’s view is that consideration should be taken of the degree to which services meet local needs in relation to both business and personal use. This may include the following factors as appropriate in the circumstances:
  • types of cash services and nearest alternatives available
  • hours of availability
  • travel and geographic factors
  • demographic factors in a local area, such as age, and characteristics of vulnerability that may reflect a greater need for cash access
  • potential for reliance on assistance with accessing cash that is provided in-person

Under FSMA 2000 (as amended), HMT is permitted to designate any "relevant current account provider" to be subject to FCA oversight for the purpose of ensuring reasonable provision of cash access services. "Relevant current account provider" is defined as a person that satisfies the following conditions:

• It has a permission under Part 4A of FSMA 2000 to accept deposits.
• It provides current accounts in reliance on a Part 4A permission (relevant current accounts). A "current account" is an account by means of which one more named persons are able to place cash, withdraw cash and execute and receive payment transactions to and from third parties.
• It is not a credit union or a friendly society.

This means that the FCA's cash access services powers will potentially apply to any UK bank or building society that provides current accounts.

HMT may also designate an operator of cash co-ordination arrangements, provided at least one of the participants in the arrangements is a relevant current account provider that is a designated person (ie, a bank or a building society).

HMT will consult with the FCA and notify the person in question before issuing a designation notice.

When considering whether to designate a bank or building society, HMT must have regard to:

• The distribution of cash access services operated by the firm.
• The distribution of persons holding current accounts provided by the firm.
• The firm's share of the current account market.
• The total value of the deposits held in current accounts provided by the firm.

For these purposes, HMT may consider the activities of the bank or building society across the UK as a whole or within Great Britain only or within Northern Ireland only.

Current consultation: New regulatory regime for access to cash

Under the proposals in the current consultation, the FCA proposes to require designated firms, acting alone or via a designated coordination body, to establish a cash access request process. According to the FCA, this will allow local communities to ask for significant gaps in local cash provision to be addressed, and should build on the benefits of the existing voluntary scheme run by industry - launched by LINK in October 2019 and allowing any member of the public to request an ATM in their community - and place it on a regulatory footing.

The FCA points out that the proposed new rules and guidance will go further than the existing voluntary scheme by requiring all designated firms, acting individually or (where permitted) through a coordination body, to:

• Develop a more comprehensive cash assessment process that is more responsive to a wider range of local needs (see in particular Chapter 5 of the consultation).
• Publish assessment outcomes and make processes transparent, including the requirement to establish, assess and periodically review the effectiveness of policies and procedures around assessments reflecting on feedback from stakeholders to improve quality and help compliance with the rules (see Chapter 6 of the consultation). Here, the FCA highlights that this is consistent with its general expectations of firms under the Consumer Duty which states that ‘firms should continuously learn from their growing focus and awareness of real customer outcomes'.
• Respond to a wider range of trigger events (including the closure of an existing cash access facility and cash access requests) to undertake a cash assessment in a local area (Chapter 4).
• Meet set timeframes for delivery of additional cash access services identified by cash access assessments. This will prevent unreasonable delays, reducing the cost burden on consumers and businesses that can arise from limited access to cash in their local area. Chapter 7 of the consultation looks at the proposed rules and guidance in more detail.
• Provide customers with clear information about where they can access cash services and how to raise concerns about a deficiency in cash access in their local area (see Chapter 8).

Chapter 9 of the consultation sets out how the FCA plans to supervise designated firms’ and coordination bodies’ compliance with its proposed rules, and the data it proposes to gather from designated entities and others to enable it to do so. Where its data or other insights suggest that provision of cash access may not be reasonable in a particular local area, the FCA proposes that it may itself request that designated firms undertake a cash access assessment for that area.

The proposed access to cash rules and guidance are set out in Appendix 1 to the consultation paper. The finalised rules will be published in the FCA Handbook in an ‘Access to Cash Sourcebook’. They will be supplemented by the FCA's existing guidance on branch and ATM closures or conversions (FG22/6). A diagram on page 6 of the consultation paper shows how the new cash access regime will work alongside the existing guidance.

The FCA strongly encourages designated firms to work through a single independent co-ordination body designated by the Government to meet their requirements around assessments under the proposed rules on cash access assessment triggers (Chapter 4 of the consultation) and a three-step cash access assessment (Chapter 5). Because of this, the proposed rules will apply to both designated firms and, where appropriate, any designated independent coordination body acting on their behalf.

The FCA proposes an outcome-based approach to setting expectations around local cash access assessments. The proposed rules will require designated entities to assess whether there are cash access deficiencies in a local area and robustly examine a range of factors (eg population demographics of an area, impacts on vulnerable customers) to determine if any identified deficiencies are likely to cause a significant impact in the local community. Chapter 2 of the consultation sets the factors out in more detail.

Wholesale cash distribution

FSMA 2023 amendments to Banking Act 2009

FSMA 2023 provides the BoE with the powers to oversee the wholesale cash industry. These new powers are included in a new Part 5A of the Banking Act 2009 (Act), alongside the complementary legislation introduced into the Financial Services and Markets Act 2000 on retail cash access services (see above). There are two levels to the BoE regime:

1. 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.
2. 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 Act, 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 criteria form the basis for decisions by HMT to make recognition orders. In making a determination, HMT will (amongst other matters) consult with the BoE, notify the relevant firms, and consider representations made. Entities that provide services in relation to WCD activities can also be brought into scope, although the BoE’s current expectation is that there is no intention for HMT to recognise any service providers to the industry initially. This will be kept under review.

The majority of Scottish issuers of banknotes fall within banking groups that the BoE anticipates are likely to fall in scope of the regime. However, differences in the current arrangements in Northern Ireland mean that the BoE’s current expectation is that there is no need for HMT to bring the Northern Ireland issuers of banknotes within scope initially. This will also be kept under review.

Current consultation: Codes of Practice for market oversight regime

The legislation provides that the BoE must consult on CoPs that it wishes to publish under the WCD oversight regime. It consulted on its statement of policy and the principles in the consultation on its supervisory approach to WCD published in December 2022. Following this, it published its Statement of policy on the Bank’s supervisory approach to market oversight for wholesale cash distribution in August 2023.

The BoE is therefore now consulting on proposals for:

• The BoE’s proposed CoPs for recognised firms that have market significance in respect of relevant functions in relation to WCD activities which are:
  • CoP – Information gathering: This CoP will require recognised firms to provide information about performance of their relevant functions and activities as specified in a wholesale cash oversight order. This includes (but is not limited to) information on cash centres, service level agreements, business plans and business continuity plans (the latter two having to be produced and provided to the BoE annually). Further details on the BoE’s requirements for information to be reported to it is set out in the draft WCD Data Catalogue (see below). Other requirements of the CoP include that firms should have an appropriate data governance framework to support the accuracy and reliability of information reported to the BoE under it.
  • CoP – Third-party arrangements: This CoP will set out requirements for firms to carry out a materiality assessment in respect of all current and proposed arrangements with third party providers of products/goods or services relating to the firm’s relevant WCD functions and activities. Where such arrangements are considered ‘material’ to a firm’s relevant functions, the firm must carry out due diligence and a risk assessment in relation to the provider. The CoP also sets out what the BoE expects firms to consider when negotiating and executing contracts with material wholesale cash suppliers, given the need to have regard to the effectiveness, resilience, and sustainability of the market.
  • CoP - Cash centre closure and market exit: This CoP will require recognised firms to engage with the BoE as early as possible in the firm’s strategic planning of a material change, such as the closure of a cash centre or market exit, and before a final decision is made. This is to enable the BoE to assess the wider impact on the wholesale cash infrastructure and ensure that it is manageable. The CoP is also intended to require firms to give customers and suppliers timely notice of their plans to aid an orderly transition of business activity. Relevant information must be provided to the BoE six months in advance of the intended date of closure and twelve months in advance of the intended date of exit. Firms will not be permitted to take irrevocable steps towards the cash centre closure or exit until the end of a relevant ‘review’ period for the BoE, or until the BoE confirms that it has no objection to the proposal.
• The accompanying guidance to the CoPs.
• The draft wholesale cash distribution (WCD) Data Catalogue (which forms part of the CoP – Information gathering – see above).

The proposed CoPs relate only to the market oversight regime. Regarding the WCD prudential supervision powers, the BoE considers that the existing prudential framework for systemic payment systems will be suitable for supervision in the event of any wholesale cash entity being deemed to have systemic significance in the future, using the new powers contained in the Act. The BoE considers that the substantive requirements of the CoPs applicable to systemic payment system operators under Part 5 of the Act will be relevant for systemic entities recognised under Part 5A of the Act. It will consider whether any changes will be necessary to reflect the particular risks posed by these entities.

The BoE makes the point that the proposed CoPs for market oversight are 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 BoE banknotes in the UK.

The consultation does not cover related areas of policy development currently being considered by the BoE and other relevant authorities, which include the NCS contractual arrangements, and a statement of principles on the imposition of penalties under the regime which is required to be published and which will be consulted on in 2024.

Next steps

FCA consultation on new regulatory regime for access to cash

The FCA's consultation closes on 8 February 2024. ​The FCA expects to finalise the rules and publish them alongside a policy statement in Q3 2024.

In recognition that there may be a high volume of cash access requests in the initial period after the rules come into force the FCA is proposing a transitional period which would give designated entities (ie designated firms and any designated independent coordination body acting on their behalf) additional time to carry out cash access assessments for the first 3 months after the rules come into force.

BoE consultation on CoPs for market oversight regime

The BoE's consultation closes on 31 January 2024, following which it intends to publish the final CoPs and CoP guidance for the market oversight regime before the recognition by HMT of firms having ‘market significance’ in respect of their WCD functions and activities, under wholesale cash oversight orders provided for in the new regime.

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 BoE may develop further codes and additional guidance in the future to set out requirements and expectations in other areas, which will also be subject to consultation.

If you would like to discuss any aspect of the BoE and FCA's consultations, please get in touch with one of the people listed above or your usual Hogan Lovells contact.

Authored by Virginia Montgomery.