House of Commons - Treasury

Select Committee on Treasury Fifth Report

3 Transparency

The principle of transparency in notification of charges

67. A lack of transparency surrounding cash machine charges can harm consumers in a number of ways. Consumers might unwittingly pay charges when they could have used a free machine near by. A lack of clear information also means that it takes longer for consumers to shop around to determine which machines are free and which charge. A lack of transparency will also hinder competition in the market for charging machines. In some areas there are several charging machines within a very short distance. At present, for the consumer to find out which is cheapest they would have to insert their card into each machine, enter their PIN and select the amount of withdrawal before cancelling the transaction and after testing each machine would then have to go to the cheapest.

68. Which? noted that "the charging machine industry had claimed that the ATM growth is driven by a clear demand from consumers who are prepared to pay the charge. In order for this to be truly the case, consumers would have to be aware that: the machine charges a fee, before they committed to investing time in the machine (queuing for example); the fee charged can be £1.50 to £1.75, amounting to upwards of 17% of the transaction if they are withdrawing £10; and that they have the option of using a bank or building society machine that levies no surcharge, but they have nevertheless chosen to use a surcharging machine."[91] In areas where there is sufficient access to free cash withdrawals, it is fundamentally a matter of choice whether a consumer uses a charging cash machine. The industry has a duty to provide consumers with sufficient information to enable them to make an informed choice. Poor standards of transparency surrounding ATM charges are detrimental to consumers, in that they result in charges being incurred unnecessarily and make the practice of shopping around to find the cheapest cash machine difficult. They also hinder competition in the cash machine industry. The importance of transparency becomes all the greater as the number of charging machines increases.

69. The way the LINK interchange arrangements work affects the incentives on charging machine operators to display their charges clearly. Although charging cash machine operators do not receive the interchange fee for a completed cash withdrawal, they do receive an interchange fee of around 18 pence for each balance enquiry and rejected transaction. This may mean that charging operators have an incentive to delay making charges clear to the consumer until just before the transaction is about to be completed. For example, if a consumer approaches a cash machine, but sees a clear warning that charges will be made for cash withdrawals and walks away, then the operator will receive no revenue. If warnings displayed on the machine are unclear and this consumer inserts their card and makes a balance enquiry and then selects a withdrawal but when they find out the charge cancels the transaction, the charging operator will receive a total of 36 pence from the consumer's bank. We asked LINK if this system meant that it was in the interests of cash machine operators to delay notification of the charge until the end of the transaction. Mr Aiken told us that "You could construe that" but that the recent changes to the LINK rules would require them to give up-front notice.[92]

70. LINK have indicated that for each 100 cash withdrawals made at charging machines there is an average of 17.5 cancelled transactions. This means that around one in every seven people using a charging cash machine cancel the transaction before completing it. The figure for free cash machines is that around one in every twenty transactions are cancelled. The way interchange fees are paid by a customer's bank to the charging machine operator gives the charging machine operator an incentive to delay notification of charges until the last minute. This is clearly against the consumer's interest. This increases the importance of clear and enforceable rules being applied by LINK to ensure that charging machines display clear and prominent warnings concerning the charge before the card is inserted, as we discuss below.

The current requirements since April 2004

71. Charging machines have always been subject to a requirement that they give the customer an option to pull out of the transaction before completing it. Additional requirements covering the transparency of charges were introduced in April 2004. LINK told us that "to ensure that customers would know whether they would be charged before they insert their card into a cash machine an additional rule was introduced that requires…that all cash machines that charge must also carry a sign (either on-screen or external) that is 'clearly visible to cardholders before a card is inserted".[93] This sign states that

"This machine may charge you for LINK cash withdrawals".

The Building Societies Association told us that they believed the current LINK requirement was "vague", "bland" and "non-specific".[94] Citizens Advice believed that the warning was "entirely ambiguous and unclear".

72. Which? told us that "some operators appear to be either disregarding or flouting the LINK guidelines by displaying warnings in a way that makes it difficult for [consumers] to spot".[95] The National Consumer Council noted that external labelling on charging ATMs was not always positioned where the service user is most likely to see it.[96] Nationwide believed that "Some operators appear to be flouting the spirit of the agreement by displaying warnings in a way that makes them difficult to spot. For example, notices displayed in extremely small print, considerably smaller than any other print used in signage on the machine; warning stickers or signs that are of the same colour as the machines background; notices are 'hidden' on the side of the machine or low down below eye level."[97] From our own observations of how charging operators were implementing the current requirements for transparency, we noted that some charging cash machines operated by Cardpoint displayed the warning at knee height, although Mr Mills noted that this was "compliant with the [current] LINK rules".[98] Other operators, including Bank Machine and Moneybox, displayed the warning in tiny letters, sometimes on difficult to read backgrounds. To provide information about charges at knee height or in hard to read small print is totally unacceptable. That such practices have been allowed to persist reflects badly on LINK and on the industry.

73. There is also an issue about the wording of the message, which indicates only that the machine 'may' charge for the transaction. LINK told us that this was because "not all cards attract a charge from the cash machine operator".[99] Since LINK rules forbid the cash machine to apply a charge, if a cardholder's bank is also levying a charge for the transaction, then if a consumer uses a credit card at a charging cash machine they will only be charged by the credit card issuer, not the charging cash machine. In practice however fewer than 2% of cash withdrawals are made on credit cards, and the vast majority of these charge a cash advance fee of 1.5%, with a minimum of £1.50. In the overwhelming majority of cases the consumer will be charged as a result of using a machine, whether that charge is levied by the machine or the card-issuer. The notice that the machine "may" charge is disingenuous and does little to inform consumers.

74. Major high street banks agreed that there was room for improvement. Barclays told us they believed that "charging ATMs could be made more transparent" and that they would "support further changes to the LINK rules" to achieve this.[100] HSBC considered that "some [charging machine operators] do not make the fact that they charge sufficiently clear to the customers as the stickers indicating that machines charge are not always prominent and a warning screen is not necessarily shown at the start of the transaction. [HSBC] would therefore welcome any action by LINK to improve clarity".[101]

75. Ms Perchard, for Citizens Advice, noted that the cash machines "are quite large bits of equipment standing on their own, and it ought to be possible to have [a warning of charges] very clearly on the outside of the machine, in very large, clear letters or numbers."[102] Nationwide believed that "improved transparency is in the interests both of consumers and of the industry. Consumers would clearly benefit from improved transparency and clearer information on charging machines, enabling them to make an informed decision about whether or not to use a charging machine. The industry would also benefit from giving consumers better information: it does the reputation of the financial services industry no good at all to be unclear about charges and fees."[103] They put forward a code of practice for charging cash machines which would build on the LINK agreement on early warnings" and would "help ensure consumer awareness and transparency and would promote fair practice among cash machine providers".[104] Mr Bernau believed that the consumer should have "absolute clarity in relation to the fact they are going to be charged…it is really a question of getting transparency so that the consumer can make a clear, informed choice."[105] There was a broad consensus amongst consumer groups and the high street banks and building societies that the requirements currently applicable to LINK members for notification of charges were inadequate and that standards needed to improve.

New requirements from July 2005

76. Steps have already been taken by the industry to achieve this since (and possibly because of) the beginning of our inquiry. At our evidence session on 21 December 2004, Mr Hardy announced that the LINK Network Members Council had met on the 14December and agreed a new code of conduct in respect of transparency. They told us that with effect from 1 July 2005, all cash machines that charge will:

Have an initial on-screen message that shows the amount of the charge. This will be carried on all screens in the 'idle' sequence before a card is inserted, stating that "This machine will charge you up to £xx.xx for LINK cash withdrawals'.

Have external signage on the cash machine itself that says "This machine will charge you for LINK cash withdrawals". The sign must be within the normal eye line close to the ATM screen, and use a font size that is consistent with that used for similar information and of at least font size 14, and of contrasting colour to the background.

Where there is signage away from a surcharging ATM that directs towards its presence and/or any other signage of A3 size or greater, the sign must include the words 'This machine will charge you for LINK cash withdrawals'. The font size used and the colour and the background must be such that the message is clearly visible to anyone reading the sign.

77. Not all of the LINK members supported the new transparency requirements. LINK told us that at the meeting on 14 December 2004, when the new requirements were passed, "five members voted against, presumably on the grounds that they thought the proposals were unnecessary and unduly onerous". They were not able to supply us with the names of the members as "proceedings at LINK Network Members Council are confidential".[106] We asked witnesses whether they voted for or against the new transparency requirements. Mr Dean told us that TRM voted for the proposals as they "are very happy for things to be transparent and were keen, therefore to do and to support anything that allows us to move on from this issue".[107] Mr McNamara told us that Moneybox voted against the proposals. He told us that "all the Independent ATM deployers [despite] having nearly half the ATMs have a total voting power [in LINK] that does not amount to 1%, and, frankly, LINK, owned largely by the banks, is extraordinarily good at imposing transparency on other organisations and not on themselves…I do not believe that the LINK organisation, as presently operating, acts necessarily in the interests of consumers nor of effective competition in the industry".[108] Mr Mills told us that Cardpoint voted against "on the basis that they did not seem particularly workable".[109] Mr Delnevo of Bank Machine told us that they voted against as "LINK was simply rushing to react to [the Treasury Select Committee] rather than spending time properly examining all the issues".[110]

78. We welcome the new improvements to transparency agreed by LINK, which we believe show a welcome recognition by much of the industry of the need to improve standards. It is important, however, that the commitment to improved standards is held, and honoured, right across the industry. It was disappointing to learn that some of the independent charging cash machine operators voted against the limited new transparency requirements. We hope that this does not imply a lack of commitment on their part to the process of raising standards. Their degree of commitment to implementing the new arrangements will enable us to judge.

Further improvements needed

79. But there are questions about whether the new agreement goes far enough. We received evidence raising a number of areas in which further progress may be needed. Some of these deal with matters contained within the December 2004 agreement, and some raise other issues not covered in the agreement.

IMPROVING THE TERMS OF THE LINK AGREEMENT OF DECEMBER 2004

80. Mr Baxter of Which? told us that "labelling is a critical issue, not only on the screens themselves, but actually physically on the machines, so that consumers can see from a distance, before they start queuing".[111] There is a legitimate question about what size the warning needs to be and at what distance it is useful for consumers to be able to see the warning. Which? believed that the exact distance could be discussed, but they suggested "the vicinity of about 5-10 metres".[112] During our evidence session Mr Crosby of HBOS was unable to read the new warning using the 14 point minimum size, at a distance of a few metres across the Committee table. He told us that "we have all supported the transparency initiative with a view to it being effective, and after it is implemented in July it will be monitored and part of the test will be that it [is] actually getting across. So if it has to be bigger then it should be".[113] Mr Mills, of Cardpoint, initially claimed that he could read the sign in 14 point print, but was not able accurately to tell us what it said.[114] Mr McNamara, of Moneybox, was in favour of setting a minimum size for the on-screen message, telling us that "the message should be a clear size".[115] He noted that "it is also important to have something in the right place, because frankly, you can put a sign saying '£1.50' round the side or on the bottom of the machine, but it is critical that any signage is where the card is used".[116] Mr Higgins of RBS was committed to a font size of 36 point for Hanco machines.[117] There was not a positive response from all charging operators to our calls for the signs to be made bigger. Mr Delnevo, of Bank Machine, submitted a note after the session claiming that "The Independents did NOT agree to the need for larger signs with the prices on. … there is currently excellent transparency in terms of ATM charges: in fact the finest in the world".[118]

81. The charging operator TRM originally[119] told us: "There has been some suggestion that further clarity could be provided by also displaying the amount of the surcharge on the screen before the customer enters their card or displayed on the marketing materials that are present in the location, for example [Advertising] boards or window stickers. This would be problematic, as any changes to price would require expensive site visits and signage upgrades. Our view is that in a competitive market it is necessary to have minimal barriers to price change so that consumer benefits of reduced prices and innovation can develop. With fixed price display, competition between cash machine deployers in a particular locality could not readily result in reduced surcharge amounts, since the cost of performing these price changes would be prohibitive. Therefore the impact such requirements would in practice cause restriction on the competitive nature of the market".[120] However, it must be arguable whether competition between cash machine deployers in a locality could develop without giving the consumer clear information about the cost of the cash withdrawal.[121] Also, the costs of price changes would not necessarily be prohibitive, since many cash machine providers will regularly visit the retailer to replenish the cash in the machine and any price change could be made then. For other operators who rely on the retailer to replenish the machine, it would be possible to send the retailer the sticker through the post with instructions to attach it. Mr Dean told us that "the large sticker probably does not cost very much, but the visit of a skilled and trained engineer to go and attach it does".[122] He told us that he had been very enthusiastic about supporting the changes to transparency: "All I am trying to maintain is a position where we can alter prices quite quickly. I just thought as a basic principle in any market being able to alter prices quickly is a good thing".[123]

82. Which?, commenting on the new LINK proposals, concluded "While some of these proposals are helpful we are concerned that they do not come near the steps that are needed to address the disclosure and transparency issues…identified in the hearings on cash machine charges". They welcomed the inclusion of the amount of the surcharge in an initial on-screen message but concluded that this was "not sufficient unless accompanied by physical signage", and believed that "the amount of the surcharge should be clearly labelled on the machine itself and visible from a distance". We asked Nationwide to what extent the new LINK requirements met the objectives that they had put forward in their cash machine code of practice. Mr Bernau believed "The LINK agreement does go some way. It will strengthen the notices not just on the machine when you are doing the transaction, but it will make sure that the warnings about charging are at the right level. It is laying down a set size. We do not believe that [the] size [of the warning] is large enough."[124] The Minister told us that "people should know what charge they are going to incur by using a given machine and that they should know it soon enough to decide sensibly whether or not to use that machine…it needs to be up-front as it sensibly can be." He told us that "anything that can be done to make the [charging] information clearer and more legible I would very much welcome".[125]

83. The new improvements to transparency agreed by LINK do not go far enough to ensure that the amount of the charge is clearly visible to consumers before they begin to use the machine. We recommend that the amount of the surcharge should be clearly indicated on external signage and any signs that advertise the presence of the machine. A larger minimum font size should be set for these warnings so the sign is visible from a distance.

IMPROVEMENTS IN AREAS OUTSIDE THE DECEMBER 2004 AGREEMENT

84. If consumers are going to make an informed choice over whether to use a free or charging machine, then there may also be a need to improve the labelling of free machines. Some banks have already began to do this. Barclays submitted evidence indicating that their machines clearly indicated that "Barclays will not charge you for using this cash machine."[126] We welcome continuing moves by banks to indicate clearly that their cash machines do not impose a surcharge on consumers, and would encourage all ATM operators to do this for their non-charging machines.

85. Going further still, Which? proposed that a type of standardised labelling system that could be adopted by the industry. They told us that "All cash machines in the UK could be equipped with a universal symbol that can be clearly seen and instantly understood". They gave examples of how such labelling could look, suggesting a '£0' within a traffic sign-style green circle to denote no surcharge, with surcharging machines having a red triangle encompassing the amount of the charge itself (as either an amount or, should a sliding scale be adopted, a percentage).[127] We support the idea of standardised labelling for free (non-surcharging) and charging machines. We recommend that LINK and the consumer groups explore the feasibility of this idea, examining the costs and benefits.

86. Many charging machines prominently advertise the ability of consumers to check their balance free of charge. This is typically displayed on the screen or on the machine itself and on external signage and advertising boards outside the shop. Wording such as "free balance enquiries", "Obtain a free balance enquiry" or "Check your balance for free" are often used. It could be argued that these signs are sometimes displayed in an attempt to confuse consumers, for example by using larger lettering for the word free, or running phrases closely together (such as "Take your cash out here. Free balance enquiries"). We asked consumer groups whether they believed that the use of the word 'free' was deliberately misleading. Mr Baxter of Which? told us this was "most definitely" the case.[128] Mr Cullum of the National Consumer Council thought that displaying a sign saying 'You can check your balance for free' was a "slightly disingenuous way of putting it".[129] This view was also shared by several members of the public who responded to our inquiry. RBS agreed with the consumer groups, with Mr Higgins telling us that using the word 'free' "could be misleading". When asked if there was a case for banning the word 'free' from charging machines, Mr Higgins answered "absolutely".[130] Prominently advertising 'free' balance enquiries can be a deliberate attempt to confuse consumers. We believe the word 'free' should not be permitted on any cash machine that levies a surcharge to the consumer. The word 'free' should also not be permitted on any marketing or advertising material informing consumers of the presence of the charging cash machine.

87. The new version of the Banking Code requires banks to notify customers when they close the last bank branch within a one mile radius in an urban area and within a four mile radius in a rural area. We asked banks whether they would be in favour of bringing in similar requirements for notification when withdrawing the last free machine within a certain area, or changing the machine from free to charging. Mr Higgins told us that RBS "would be happy to go along with that".[131] We asked Mr Crosby if HBOS would be notifying customers living nearby if some of the 65 cash machines sold to Cardpoint that did not have another free cash machine within 2 miles were converted to charging. Mr Crosby told us that this should be included in the Code and they would be notifying customers if the machines were switched over to charging.[132] There remains the question as to what form the notification should take. Requiring banks to contact customers when closing branches involves writing to customers with accounts registered at that branch. For a free cash machine, banks would only have the details of their own customers that had used the machine; they would not have details of any other bank's customers that had used the machine. In many locations the majority of the customers using the machine would not be customers of the bank that owned the machine.

88. In their proposed code of practice for cash machines, Nationwide called for operators to display "a clear and prominent warning at least 30 days in advance" where a machine which was previously free is to become charging so that consumers would be aware that a change was about to take place.[133] This action was also supported by consumer groups. Giving such a notice period would enable consumers to locate the nearest free machine and to avoid incurring charges unnecessarily. HBOS wrote to us to tell us that they had listened to concerns that "insufficient notice is given to customers prior to bank owned machines changing hands and their new owners surcharging customers…[HBOS will be] placing notices on the machines that we transfer to Cardpoint. The notices will alert customers that cash withdrawals may no longer be free at that machine. From [18January] all the ATMs that are transferring to Cardpoint are being labelled; we are aiming to give thirty days notice to customers".[134]

89. When a machine is converted from free to charging it is important to give consumers advance notice of the change. We recommend that the LINK rules should be amended to require a clear and prominent warning at least 30 days in advance where a machine which was previously free is to be replaced by a charging machine. We welcome the move by HBOS to place such notices on the machines that it is transferring to Cardpoint. We believe that such a notice should be required under the LINK rules. We note the requirements in the Banking Code for banks to notify customers when closing the last branch within a specified distance. We believe that similar requirements should be introduced when removing the last free cash machine within a specified distance. We ask the BCSB to develop proposals for this before the end of 2005.

Enforcement

90. To be effective, it is important that compliance with voluntary regulation is adequately monitored and enforced. It became apparent that LINK did not have any systematic programme of monitoring and enforcement in place. LINK told us that they "ask our staff and members of LINK to report to us any cash machine that they see that is not properly signed. In total thirteen such instances have been reported to us (and in every case we have taken action to ensure that the situation is corrected)".[135] The BCSB noted that "There is not the same monitoring and enforcement regime governing LINK rules that exists under the Banking Code and the Business Banking Code."[136] We asked LINK whether they were confident that all of their members were compliant with the rule that had been introduced in April 2004. Mr Aiken told us that "I do not think they are, but we notice machines that are not properly labelled and we bring it to the attention of the member".[137] In a small survey conducted by Birmingham trading standards only 50% of the machines surveyed "actually had either a sticker or an initial on-screen warning that a charge would be made".[138] We are concerned that a small recent study suggested that amongst the charging machines surveyed there was only 50% compliance with the LINK requirements. If voluntary regulation is to be effective, it is essential that there is an adequate programme of monitoring and enforcement in place to identify failings. The LINK process of enforcement has been ad hoc and inadequate to protect consumer interests.

91. Since we started our inquiry LINK have promised some improvement in the monitoring and enforcement process. The meeting on 14 December 2004 committed LINK to "undertake periodic sample surveys of all ATM signage and idle screens in randomly selected geographical areas, and report incidences of non-compliance; such surveys be commenced as soon as is practicable to determine compliance with all the rules on ATM signage (i.e. not limited to warnings about charging) applicable at the time; [and] in the case of a persistent non-compliance, sanctions such as fines, a refusal to allow the Member to install any more ATMs, disconnection of the non-compliant ATMs, or all the Member's ATMs to apply."[139] We welcome moves by LINK to strengthen its capability to monitor and enforce the requirements for transparency of cash machine charges. LINK should, before the end of this year, publish details of the way it has monitored and enforced its transparency rules, so that the effectiveness of these rules can be judged.

Consumer awareness of charges

92. We were provided with evidence concerning the awareness of consumers of which machines charge. Mr Baxter told us that "research that Which? conducted said that fewer than one in five consumers know which machines are charging and which are not, and that clearly indicates that labelling is not working."[140] Nationwide told us that of the people surveyed that had used a charging machine "a quarter of those (23.5%) had not seen any early warning before requesting their cash. 97% of those surveyed thought that the visibility of warnings should be improved".[141] The charging operators put forward a different view. Mr Delnevo told us that "the vast majority of these people using these [charging] machines use them week in week out… they are aware they are going to pay for it".[142] Different views were put forward concerning consumer awareness of charges. Independent research into consumer awareness of charges and the factors that drive consumer behaviour when deciding which cash machines to use would be beneficial. We recommend that this should be undertaken by LINK in conjunction with the consumer groups and published in full. The research should also examine the approaches taken by the charging cash machine operators to implementing the new LINK transparency requirements and make recommendations for change.

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