Public Accounts Committee urges Bank of England to investigate “missing” £50 billion of sterling notes

In a report published today, Friday 4^th December 2020, the Public Accounts Committee says oversight of the production and distribution of notes and coins is “unclear” and “fragmented” across responsible authorities, who have been “behind the curve” in ensuring access to cash for consumers and businesses, and are failing to understand or act on the clear dangers of hardship if the UK continues its “precipitous” move towards a cashless society.

The reduction in the number of facilities from which to obtain cash, and in the number of businesses that will accept cash, can have a negative impact on the lives of many people, including those in some rural areas, vulnerable and digitally excluded people. Responsibilities are spread across HM Treasury, the Financial Conduct Authority, the Payment Systems Regulator and the Bank of England but no one body is in overall charge of making sure that people and businesses have access to cash.

Conversely, demand for sterling notes has steadily increased, but the Bank of England does not “appear to have a convincing reason for why the demand for notes keeps increasing” or any real understanding of where approximately £50 billion of issued sterling notes are, or being used for: only that this increasing demand for cash notes in the face of their declining use is “a trend being seen with other major currencies”.

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 that 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 of England doesn’t know. 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.

Meg Hillier MP, Chair of the Public Accounts Committee, said: “Our run up to Christmas and Christmas shopping is obviously very different this year, but it highlights how increasingly difficult it has become to, for example, choose to support a small local business by paying it in cash - generally the cheapest form of payment to accept.

“In many areas where you can use cash you’d be hard pressed to find it, at least without paying an ATM fee that may be a substantial percentage of a small withdrawal - yet making frequent, small withdrawals can be a key budgeting tool for those on low incomes, and least able to afford those fees.

“Conversely, £50 billion of sterling notes - or about three quarters of this precious and dwindling supply - is stashed somewhere but the Bank of England doesn’t know where, who by or what for – and doesn’t seem very curious. It needs to be more concerned about where the missing £50 billion is. Depending where it is and what it’s being used for, that amount of money could have material implications for public policy and the public purse. The Bank needs to get a better handle on the national currency it controls.”

PAC report conclusions and recommendations

5 The public bodies with responsibilities for cash are not acting with sufficient urgency to protect more vulnerable groups and communities, particularly in rural areas, who most need to use cash. The pace of change in the cash system has been accelerating. In the two years to January 2020 the number of Automated Teller Machines (ATMs) fell by 12%, and increasing numbers of ATMs were converted to pay-to-use. Measures taken in response to the COVID-19 pandemic led to a further rapid decline in cash use. The public bodies with responsibilities for the cash system are behind the curve in responding to these changes. There seems to be a lot of effort by them to conduct research and gather views, but less evidence of comprehensive action to help consumers who need cash. It is unclear what the public bodies are aiming for, beyond a general statement of “access for those who need it”; whether they are seeking to maintain choice in local communities, seeking to maintain a minimal network, or just focusing on the needs of vulnerable groups. In October 2020 the Government published a consultation document seeking views on how maintain access to cash, including the possibility of changing regulations to enable cash back to be offered without making a purchase.

Recommendations: By January 2021, HM Treasury and the Payment Systems Regulator should write to the Committee to provide a detailed assessment of the prevalence across the UK of cash only being available via paid for cash machines, 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, HM 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 clear 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.

6 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. 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.

7 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.

8 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.

9 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.

10 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.