Select committee inquiry
The production and distribution of cash
Closed
What the inquiry looked at
“Ten years ago, cash was used in six out of every ten transactions - but by last year this was down to less than three in 10. The outbreak of COVID-19 may have accelerated this trend, with market demand for notes and coins declining by 71% between early March and mid-April this year during the lockdown - although demand has since been recovering. Evidence shows older people and those on a low income are more likely to make cash transactions, but in just two years to December 2019, there was a 17% reduction in free-to-use ATMs. While there are still more free-to-use ATMs in more deprived areas, the proportion of free-to-use ATMs in those areas has declined faster. The government has a stated goal of safeguarding access to cash - but the commercial operators that make and distribute cash rely on high demand for it to stay profitable, with large fixed costs in maintaining bank branches and ATMs. A recent report by the NAO found that HM Treasury and the other public bodies involved in the cash system need to work better together to prevent vulnerable people who rely on cash for transactions from being excluded. It says that the Treasury should be clearer about the outcomes it wants the cash system to deliver for consumers and small businesses, and how this should be balanced against costs. Despite fewer people using cash for transactions, the demand for notes has continued to increase. In 2020, the number of notes in circulation reached a record high of 4.4 billion, with a value of £76.5 billion. In 2018, the Bank of England estimated that only 20%–24% of the value of notes in circulation were being used or held for cash transactions, with UK households holding a further 5% as savings in cash. Little is known about the remainder, which is worth approximately £50 billion. Possible explanations include holdings in cash overseas for transactions or savings; unreported cash savings in UK households; or for use in the shadow economy. The Bank and other government bodies have little reliable information to quantify how much is likely to be held where. Recent anti-counterfeiting work by both the Bank and the Mint is delivering improvements, however. Indications so far are that £5 and £10 polymer notes, with new security technology, have reduced the incidence of counterfeiting compared to equivalent paper notes. If you have evidence on the issues raised in this inquiry, please submit it here by Monday 12 October.”
The committee's words, from the inquiry page on parliament.uk ↗.
What it found
In the committee's words, from the summary of Thirtieth Report - The production and distribution of cash ↗
The long-term decline in the use of cash is putting at risk the facilities that people and communities use to access cash. This trend could be accelerated by the impact of the Covid-19 pandemic on cash use and the impact of businesses declining to accept cash.
The current oversight of the cash system by government is fragmented. HM Treasury, the Financial Conduct Authority, the Payment Systems Regulator and the Bank of England all currently play a role in oversight. We are concerned that responsibilities amongst the public bodies are currently unclear. There is a real risk that responsibility for taking urgent action falls between the cracks. It is also worrying that the public bodies appear to be unclear on what they are trying to deliver for consumers and businesses, and don’t appear to have grasped the full impact lack of access can have on communities, particularly in rural areas, or the real detriment caused to some groups and consumers. Unless the government acts quickly, there are clear dangers of hardship for some individuals and groups if we move precipitously towards a cashless society.
The continued reduction in coin use, possibly accelerated by the Covid-19 pandemic, is likely to put further pressure on the Royal Mint’s ability to deliver a profit on their operations. In sharp contrast, the demand for bank notes is continuing to rise. The Bank of England does not appear to have a convincing reason for why the demand for notes keeps increasing. The Bank needs to be much more curious about what is driving the increase and work with HMRC and other public agencies to shed light on this.
What the government said
The government responded on 25 March 2021.
Summary written by Accountability Index from the government's response.
The government agrees with most of the Committee's recommendations on cash access, oversight and production, but disagrees with committing to publish draft legislation to the Committee's timetable.
- On the plan for securing access to cash, the government "disagrees with the Committee's recommendation" and with committing to draft legislation by March 2021, saying legislation should not be "rushed". It is considering responses to its Call for Evidence and "will seek to set out its next steps in due course".
- On a single body responsible for the cash system, the government agrees with the recommendation, with a target of Spring 2021. It notes its Call for Evidence set out its view that the FCA "may be well positioned" to take on this function through legislation, and is considering responses.
- On cashback without a purchase, the government says it is "now able to legislate to remove barriers to the widespread adoption" of it following the end of the transition period.
- The Bank of England agrees with the recommendations on understanding who holds notes and recording its stock decisions (target December 2021). It does not agree that it lacks curiosity, and says it will conduct surveys "over the next year" and review its documentation of stock decisions.
Read the government's response ↗ Read the report ↗ Report an error
How the inquiry ran
Each dot is a dated item listed on this page, from the inquiry's opening on 22 September 2020 to 27 April 2021.
- Oral evidence 19 Oct 2020
- Report 4 Dec 2020
- Government response 25 Mar 2021
- Correspondence 4 letters
What it recommended 6 recommendations · 19 conclusions
2We are not convinced that the public bodies understand how declining access and acceptance of...
Recommended (the committee's words)
We are not convinced that the public bodies understand how declining access and acceptance of cash can adversely affect many people’s lives. Some consumers prefer to use or rely on cash—particularly the elderly and lower income groups; those in rural areas, where poor broadband and mobile coverage limits the viability of digital payments; and some community organisations, for example charities and churches. The public authorities do not seem to have a clear understanding of how difficulties in accessing cash or being able to use cash to pay for items affect people. For example, in some areas people in low income groups, who often prefer to use cash because it helps them with budgeting, may have little choice but to access cash through pay-to-use ATMs. These groups of people may well be left behind if the UK moves to a cashless society without intervention by public authorities. ATMs can be ‘protected’ in some areas, if there are no other ATMs or post offices within 1 kilometre, but this may not be a solution for all communities. The public authorities indicated to us that people could rely on post offices to access cash, but post offices will not always be open at times when people want to access cash, and we are aware of instances where local post offices have closed or are under threat of closure. 6 The production and distribution of cash Addressing the needs of people in different circumstances and geographic areas requires a well-informed and flexible approach. Recommendation: In undertaking their plan to secure continued access to cash, the government should set out how they propose to incorporate the concerns and requirements of different communities and groups to ensure that solutions actually meet local needs. The plan should set out what consumers, particularly those in vulnerable groups, can expect in terms of accessing and using cash in their locality.
3No one is in overall charge of making sure that people and businesses have access...
Recommended (the committee's words)
No one is in overall charge of making sure that people and businesses have access to cash. The responsibilities and accountabilities of the different bodies for the functioning of the cash system are not clear. Five public authorities have responsibilities relating to different aspects of how cash is produced and delivered to consumers and businesses. But it appears no one organisation is in charge of making the cash system work effectively. The Joint Authorities Cash Strategy Group co-ordinates activities between four of the public authorities but it is not a decision- making body. There are aspects of the cash system where no-one appears to be responsible, such as monitoring how well the cash system performs, or the extent to which businesses are continuing to accept cash. It is also unclear who is responsible for ensuring the financial and operational resilience of the cash system as a whole. In its call for views published just before our October 2020 evidence session, HM Treasury proposed that the FCA should take on overall responsibility for setting requirements to ensure that the retail distribution of cash meets the needs of consumers and businesses. Recommendation: HM Treasury needs to give overall responsibility for the cash system to a single body, with the other bodies having clearly defined roles to support this. It should address potential gaps in current oversight, for example in overseeing the end-to-end resilience of the cash system.
4The Bank of England seems to lack curiosity about the huge volume of notes not...
Recommended (the committee's words)
The Bank of England seems to lack curiosity about the huge volume of notes not used or held for day-to-day transactions. The Bank estimates that 20%-24% of issued notes are used or held for cash transactions. This leaves about £50 billion worth of issued bank notes whose whereabouts or use is unknown. These notes may be being used overseas for transactions or savings, or held in the UK as unreported household savings or for use in the shadow economy. The Bank does not have any real understanding of what these notes are being used for though says that it is a trend being seen with other major currencies. During the Covid-19 pandemic there was a significant increase in the value of notes in circulation, which the Bank thinks is probably explained by people being more inclined to hoard cash in case they need it. There are implications for public policy and the public purse if a material proportion of the large volume of banknotes whose whereabouts or use are unknown are being used for illegal purposes. Recommendation: The Bank, working with other public authorities such as HMRC, should take action to improve its understanding of the factors that are driving the increase in demand for notes, and also who is holding the approximately £50 billion worth of notes. The production and distribution of cash 7
5The Bank of England’s stock of notes seems high and it is not clear to...
Recommended (the committee's words)
The Bank of England’s stock of notes seems high and it is not clear to us how the Bank decides upon what is an appropriate stock level. The Bank holds stocks of notes well above its own policies for minimum levels of stocks. For example, at the end of July 2020, it held contingency stocks with a value of £30.4 billion, against its minimum guidance levels of £15.6 billion. We recognise that the Bank would not wish to risk running out of notes. However, we do not understand the Bank’s rationale for holding such high levels of stocks. The Bank does accept that it needs to improve the transparency with which it takes decisions on printing notes. Recommendation: The Bank should ensure that it properly records and evidences the judgements it makes about printing notes and its stock levels so that it can be properly held to account for the decisions it makes.
6The continued reduction of coin use, possibly accelerated by Covid, is likely to put further...
Recommended (the committee's words)
The continued reduction of coin use, possibly accelerated by Covid, is likely to put further pressure on the Royal Mint’s ability to deliver a profit on its UK coin manufacturing operations. Coin use has declined over recent years, and the Mint’s UK coin production has fallen by around 65% in the last 10 years. For the last three years, the Mint has made losses in its coin-making, including a loss of £3.9 million in 2019–20. In March 2020, the Mint had no plans to manufacture any 2p or £2 coins. Although there has been a recent increase in the demand for coins during the Covid pandemic, this is expected to be temporary and the Mint thinks that the long-term impact of the pandemic will be to exacerbate the decline in coin use. Recommendation: In the Treasury Minute response to this report, HM Treasury and the Royal Mint should set out how they are ensuring that the plans for manufacturing UK coins are sustainable and cost effective. 8 The production and distribution of cash 1 Access to cash
1On the basis of a report by the Comptroller and Auditor General, we took evidence...
Concluded (the committee's words)
On the basis of a report by the Comptroller and Auditor General, we took evidence from HM Treasury, the Bank of England, the Financial Conduct Authority, the Payment Systems Regulator and the Royal Mint, about the production and distribution of cash.1
7When asked who would pay for the increasing cost of maintaining the cash system the...
Concluded (the committee's words)
When asked who would pay for the increasing cost of maintaining the cash system the FCA acknowledged that the economics of the cash system is changing. It suggested that further thought will need to be given to how to support those consumers who might otherwise be digitally excluded.17 It believed that the issue of costs and how these are allocated would ultimately be a political question for government and Parliament. The FCA stressed that whatever objectives are set for the cash system they need to be flexible to enable the system to adapt in future.18 Meeting the cash needs of local communities
8The Treasury informed us that a lot of work had been commissioned, from both government...
Concluded (the committee's words)
The Treasury informed us that a lot of work had been commissioned, from both government and outside government, to understand how rapid changes in the cash system were impacting on those still reliant on cash. This work indicated that 2 million people are mostly using cash for their payment needs and that it is the elderly and disadvantaged who tend to be disproportionately reliant on cash.19 Research commissioned by the PSR suggested that around 30% of people have quite a strong preference to use cash, with 5 10 Q 65; C&AG’s Report, para 17 and Figure 4 11 Q 49; C&AG’s Report, para 15 12 Qq 48, 70; C&AG’s Report, Figure 4 13 Q 58 14 Financial Conduct Authority, Finalised Guidance: Branch and ATM closures or conversions, FG 20/3, September 2020 15 Qq 72 16 Qq 72,111; HM Treasury, Access to Cash: Call for Evidence, October 2020, para 5.3 17 Q 80 18 Q109 19 Qq 38–39 10 The production and distribution of cash to 10% at risk of being significantly disadvantaged if cash were to disappear.20 The FCA, however, has only recently commissioned research into the ability of SMEs to access bank deposit services, and SMEs’ acceptance of cash. The FCA told us that this work is not expected to be completed until early 2021.21
9The FCA and PSR are working with the University of Bristol to provide a map...
Concluded (the committee's words)
The FCA and PSR are working with the University of Bristol to provide a map of access to cash across the country and the different ways in which cash can be accessed, including bank branches, post offices, cash machines and cash back from shops.22 This is being used during the Covid-19 pandemic to identify areas where access to cash might be threatened, for example by the temporary closure of shops. The PSR told us this is teaching them the value of such data with the possibility, in the future, of linking it to measures of vulnerability, social deprivation and other factors.23 But this work cannot happen fast enough; the week before we took evidence the TSB announced large scale closures in its bank branch network, some in deprived urban areas.24
10We asked the witnesses what they are doing to meet differing needs for cash within...
Concluded (the committee's words)
We asked the witnesses what they are doing to meet differing needs for cash within rural areas, for example where people might want privacy when withdrawing money and where others, on a budget, might not wish to be tempted to make a purchase if having to visit a shop for cash.25 The PSR told us that its policy is to protect the coverage of free- to-use cash machines. Ultimately, we were told that communities, if they have a good case, are able to ask for help from Link, the cash machine network, if local needs are not being met.26 The recent government consultation on cash access has raised the possibility of changing the current regulations, set by the EU, to allow cashback in shops without making a purchase.27 The PSR also pointed to the importance of the post office network in maintaining access to cash and suggested that it was likely to play an even larger role.28 However, post offices will not always be open at times when people want to access cash, and we are aware of examples of local post offices being under threat of closure.29 We also asked about the impact of declining cash use on fundraising by community organisations, for example charities and churches, but were told by the witnesses that they are not looking at this as responsibility lies elsewhere in government.30
11The FCA and PSR acknowledged that there is not likely to be one solution to...
Concluded (the committee's words)
The FCA and PSR acknowledged that there is not likely to be one solution to meeting the cash access needs of local communities. Both organisations recognised that creative solutions will be needed that are community-based, reflecting the make-up of the local area.31 Responsibility for the cash system
12We challenged the Treasury on who is responsible for the performance of the cash system.
Concluded (the committee's words)
We challenged the Treasury on who is responsible for the performance of the cash system. It accepted that it was ultimately responsible for proposing legislation to 20 Qq 39–40 21 Q 40 22 Q 41 23 Q 43 24 Q 57 25 Q 64 26 Qq 63–64 27 HM Treasury, Access to Cash: Call for Evidence, October 2020, para 3.33 28 Q 48 29 Qq 48–49, 60 30 Q 50 31 Q 59 The production and distribution of cash 11 Parliament and therefore identifying gaps in legislation. It chairs the Joint Authorities Cash Strategy Group which helps coordinate the work of the FCA, PSR, Bank of England and the Treasury though the Group is not a decision-making body.32 Each body has its own governance and decision-making structures. The Treasury thinks it is inevitable that responsibilities will be divided across a number of public bodies. In its view, the priority is to ensure that the work of the various public bodies is coordinated and that information is shared.33 In its call for views published just before our October 2020 session, the Treasury proposed that the FCA should take on overall responsibility for setting requirements to ensure that the retail distribution of cash meets the needs of consumers and businesses.34
13There are gaps in the current distribution of powers and responsibilities.
Concluded (the committee's words)
There are gaps in the current distribution of powers and responsibilities. We asked, for example, who is responsible for monitoring the resilience of the cash machine network and for taking action should part of it fail. The PSR told us that it is responsible for the oversight of the LINK network, which accounts for the free-to-use network of cash machines. The Bank of England is responsible for ensuring the systemically important pieces of the infrastructure are both financially and technically resilient though this might not include every element of the network.35 The PSR told us that it and the Bank are comfortable with the current position of the network. The PSR told us, however, that a further move to a low cash use economy might raise questions about sustainability and that additional legislation and requirements might be needed.36 Similarly, when we asked the FCA what it is doing to monitor trends in the acceptance of cash it pointed out that the cash as used by supermarkets, retailers and so on went beyond its normal remit of financial services companies.37 For the cash system as a whole we could find no single organisation currently responsible for monitoring and reporting how well the system is continuing to meet the needs of consumers and businesses.38 32 Q 69; C&AG’s Report, para 7 & 10 33 Q 69 34 HM Treasury, Access to Cash: Call for Evidence, October 2020, paras 6.8, 6.9 35 Q 60 36 Q 61 37 Q 42 38 Q 76; C&AG’s Report, para 13 12 The production and distribution of cash 2 Cash production
14Coins are produced for the whole of the UK by The Royal Mint (the Mint)...
Concluded (the committee's words)
Coins are produced for the whole of the UK by The Royal Mint (the Mint) under a contract with the Treasury, which also acts as the Mint’s sole shareholder. The Bank of England (the Bank) is responsible for producing notes for use throughout the UK, and it sub-contracts the printing of notes to De La Rue plc. The Treasury, the Mint and the Bank work to ensure that there is a sufficient quantity of cash to meet the needs of the economy, and to maintain the public’s confidence in its use. In 2019–20, the Treasury incurred UK coin production expenses of £23.6 million, and the Bank incurred note production and distribution expenses of £119 million.39 Demand for notes
15The demand for notes has increased in each of the past 25 years.
Concluded (the committee's words)
The demand for notes has increased in each of the past 25 years. According to Bank figures, in July 2020 the number of notes in circulation reached a record high of 4.4 billion, with a monetary value of £76.5 billion.40 Notes are increasingly being used as a store of value and therefore the demand for notes has been less affected by the wider decline in the use of cash for transactions. This trend has been seen among other major currencies around the world. The Bank told us that an important reason for this could be the lowering of inflation and interest rates from the mid 1990’s, reducing the opportunity cost of holding cash as a store of wealth.41
16During the Covid-19 pandemic, between March and July 2020, there was a significant increase in...
Concluded (the committee's words)
During the Covid-19 pandemic, between March and July 2020, there was a significant increase in the value of notes in circulation.42 The Bank told us this is probably explained by people hoarding cash, and because less cash than usual was being deposited at banks for example by sole traders, window cleaners and gardeners.43
17The Bank estimates that 20%-24% of notes in circulation are used or held for day-to-...
Concluded (the committee's words)
The Bank estimates that 20%-24% of notes in circulation are used or held for day-to- day transactions. In 2018 it estimated that up to a further 5%, or between £1 billion and £3.5 billion, was held by UK households as savings. This leaves about £50 billion worth of issued bank notes whose whereabouts or use is unknown. These notes may be being used overseas for transactions or savings, or held in the UK as unreported household savings or for use in the shadow economy. The Bank does not have enough data even to make broad estimates of how much should be apportioned to each category.44 Stocks of notes
18Once printed, the Bank holds contingency stocks of all notes at its premises to avoid...
Concluded (the committee's words)
Once printed, the Bank holds contingency stocks of all notes at its premises to avoid shortages. The Bank sets its minimum contingency stock level by considering potential supply and demand shocks, and benchmarks itself against the practice of other major central banks.45 During 2020 the Bank’s stocks of notes have been nearly double its minimum contingency levels. At the end of March, it held contingency stocks with a value of £39 billion, against its minimum guidance levels of £20.5 billion, and at the end of July, 39 C&AG’s Report, para 4 40 C&AG’s Report, para 3.19 and Figure 12 41 Qq 52, 53; C&AG’s Report, para 3.21 42 Q 51; C&AG’s Report, Figure 12 43 Q 51 44 Qq 52, 53; C&AG’s Report, para 3.20 45 C&AG’s Report, para 3.29 The production and distribution of cash 13 contingency stocks were at £30.4 billion, against minimum levels of £15.6 billion. The cost of producing the stocks held at March 2020 above the minimum contingency levels was around £35 million, before taking account of any fixed costs, such as depreciation of machinery.46
19According to the Bank, it is not unusual for it to maintain high stocks.
Concluded (the committee's words)
According to the Bank, it is not unusual for it to maintain high stocks. It told us that it is more efficient to have long print runs of each note denomination—often lasting up to a year—as short print runs require machine down time, and costly changeovers of printing plates and inks. It can therefore be a long time between print runs of the same note denomination, and in order to maintain sufficient contingencies, large stocks of each note denomination need to be maintained.47
20The NAO found, however, that it was not clear from the documentation shown to them...
Recommended (the committee's words)
The NAO found, however, that it was not clear from the documentation shown to them what process the Bank operated to decide upon adequate stock levels, and how the cost implications of doing so were taken into account when building up stocks.48 When pressed by us, the Bank accepted that it needs to improve the transparency with which it takes note printing decisions.49 The Mint’s UK coin production
21The Mint’s UK coin production has reduced by 65% over the last ten years, from...
Concluded (the committee's words)
The Mint’s UK coin production has reduced by 65% over the last ten years, from about 1.1 billion coins made in 2010–11 to 383 million in 2019–20. This reflects the overall fall in production demand over the period, although production volumes increased in some years, for example between 2012 and 2016 with the issue of new 5p, 10p and £1 coins replacing stock already in circulation.50
22The decline in demand has been particularly rapid in recent years.
Concluded (the committee's words)
The decline in demand has been particularly rapid in recent years. This has been in part due to the emergence of contactless payment methods affecting small cash transactions in particular.51 But also, in 2017–18, a Mint-run exercise to recall the old £1 coin, as an increasing counterfeit risk, led to an unexpectedly huge return of coins of all denominations as households and businesses emptied their stocks of coins. This led to a large increase in coin stocks and a consequent reduction in the number of coins that needed to be produced.52
23Since 2017 coin stocks have continued to rise.
Concluded (the committee's words)
Since 2017 coin stocks have continued to rise. At the end of March 2020, they significantly exceeded the target buffer stocks, which the Treasury set for the Mint to avoid shortages and be prepared for any uncertainties, in all denominations. Holdings of £2 coins were 26 times the target, and 1p and 2p were six and eight times above target respectively. At the end of March 2020, the Mint believed that the reduced level of UK coin manufacture that it experienced in 2019–20 would remain for the foreseeable future, and it had no plans to produce 2ps or £2 coins for at least ten years.53
24Since March, the disruption caused by Covid-19 has, we were told, led to increases in...
Concluded (the committee's words)
Since March, the disruption caused by Covid-19 has, we were told, led to increases in demand, as many businesses and consumers hoarded coins in the early months of the 46 Qq 84, 85; C&AG’s Report, para 3.30 47 Q 88–90 48 C&AG’s Report, para 3.30 49 Qq 91, 99 50 C&AG’s Report, paras 3.3, 3.4 51 C&AG’s Report, para 3.3 52 Q 92; C&AG’s Report, paras 3.6, 3.9, 3.10, Figure 11 53 Q.92; C&AG’s Report, paras 3.4, 3.9, 3.10 14 The production and distribution of cash pandemic in the same way they hoarded notes. To meet this increased demand, from April the Mint pulled forward its manufacturing schedule for the 2020–21 financial year.54 It now expects the Treasury to ask it to manufacture new 2p coins in the next 6 months and more £2 coins within the next 3 years.55 Nevertheless, the Mint expects the increase in demand to be temporary, and that the long-term impact of the pandemic will be to exacerbate the decline in coin use.56
25This could bring further financial pressure to bear on the Mint’s UK coin operations.
Concluded (the committee's words)
This could bring further financial pressure to bear on the Mint’s UK coin operations. The Mint has worked hard in recent years to make coin-making more profitable. It has undertaken a series of actions to reduce costs and increase efficiency, including, for example, mothballing two of its six coin-making lines of machinery, and reducing the number of full-time equivalent staff it employs for coin-making from 452 in May 2018 to 351in March 2020. Despite its actions, it has made losses in coin-making in each of the last three years, including a loss of £3.9 million in 2019–20.57 54 Q 92; C&AG’s Report, para 3.10 55 Qq 92, 93 56 Q 95 57 C&AG’s Report, paras 3.12, 3.13 The production and distribution of cash 15
Evidence
Oral evidence sessions 1
- 19 Oct 2020Production and distribution of cash6 witnesses, listed belowparliament.uk ↗
Who gave evidence 6 witnesses
- Anne JessopCEO, Royal Mint
- Chris HemsleyManaging Director, Payment Systems Regulator
- Dr Ben BroadbentDeputy Governor, Bank of England
- Nikhil RathiChief Executive, Financial Conduct Authority
- Sarah JohnChief Cashier, Bank of England
- Sir Tom ScholarPermanent Secretary, HM Treasury
Correspondence 4 letters
- 27 Apr 2021Correspondence from Tom Scholar, Permanent Secretary, HM Treasury, re The production and distribution of cash cashback without purchase, dated 20 April 2021
- 20 Apr 2021Correspondence from Tom Scholar, Permanent Secretary, HM Treasury, re The production and distribution of cash, dated 9 April 2021
- 16 Apr 2021Correspondence from Public Accounts Committee Chair Meg Hillier, re The production and distribution of cash, dated 25 March 2021
- 1 Feb 2021Correspondence from Tom Scholar, Permanent Secretary, HM Treasury & Chris Hemsley, Managing Director, Payment Systems Regulator, re Thirtieth Report of Session 2019–21: ‘The production and distribution of cash’, dated 28 January 2021