One of the concerns raised was about the level of banknote stocks held by the Bank of England. The Bank had explained to the committee the need for contingency stocks and the high level of demand during the early stage of the pandemic that was met from them. At the end of March 2020, the Bank’s stocks were £39 billion but by the end of July they had fallen to £30.4 billion.
The Bank considers likely shocks that might require stocks and sets a minimum contingency stock level. It benchmarks this against other major central banks. The level set at the end of March was £20.5 billion and its revised figure at the end of July £15.6 billion. The level of stocks held at the end of March was, therefore, significantly in excess of its target. The cost of producing that excess was around £35 million, excluding any fixed costs.
The National Audit Office has also looked at this, reporting that it was unclear how the Bank set the minimum contingency level and how it weighed up cost saving benefits of long production runs against the cost of creating and holding that stock.
The outcome is that the Bank needs to be transparent about how it decides what to print. The formal PAC recommendation was that the Bank keeps proper records about why they are holding so much stock and how they reached that decision.
PAC then turned its attention to The Royal Mint (TRM). Although coin production volumes have fluctuated, overall they have fallen 65% over the last 10 years. In 2019-20 only 383 million coins were minted. The report suggested that in part this was due to the rise in contactless payments, but noted the impact of the highly successful coin return scheme run in 2017-18 when the old £1 coins were replaced by the new series. Unexpectedly there was a huge return of coins of all denominations, meaning that the number of coins needed to be produced fell sharply.
Coin stocks have risen and now exceed the minimum contingency stock levels set by the Treasury. Before the pandemic, for two denominations, the £2 and the 2p coin, there were no plans to produce more for at least 10 years. At the start of the pandemic, the UK experienced a coin shortage similar to that in the US, although a coin task force was not needed.
It meant TRM pulled forward 2020-21 coin production to fill this gap. It now expects to have to produce new 2p coins in the next six months and £2 coins within three years. Overall, though, TRM told PAC that it expects the pandemic to hasten the decline in coin use.
TRM has made losses on its coin making operations in each of the last three years, including a loss of £3.9 million in 2019–20. This is despite taking actions to reduce costs and increase efficiency. It has reduced its head count by just over 100 people in the year up to March 2020, and mothballed two of its six coin production lines. As a result, PAC wants to see TRM’s plans for sustainable and cost-effective coin production.
The distribution concerns of PAC were more wide ranging. Firstly they found a lack of urgency about safeguarding access to cash across the responsible public bodies. Much research but little action and a tendency to bland statements about ‘access for those who need it’, but no definition of what that actually means.
PAC requires the Treasury and the Payment Systems Regulator (PSR) to provide 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 as to what the regulators are expected to achieve in terms of cash access for communities and vulnerable groups; definite steps to allow cashback without having to make a purchase; and clear evidence that regulators will have effective powers to take action should access to cash be threatened.
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 an answer other than the Treasury saying that this was a political decision for government and parliament. The action plan needs, therefore, to give clarity about the outcomes and address the outstanding questions.
As the National Audit Office had also noted in their report, the UK cash cycle is managed by multiple agencies independent of each other – the Treasury, TRM, the Bank of England, the PSR and the FCA. In May 2019, the Joint Authorities Cash Strategy (JACS) Group was set up to co-ordinate the work of these organisations across the cash cycle. However, JACS does not make decisions and PAC recommended that the Treasury makes one body responsible, with clear roles established for the rest.
The most reported finding of PAC was £50 billion of banknotes which it described as unaccounted for. 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. Despite this being the case for other central banks too, PAC wants the Bank to do more work on understanding what is driving cash demand and where the £50 billion is.
The next review of this topic is 4 February 2021. The findings will be interesting to hear.