House of Commons - Treasury

Select Committee on Treasury Fifth Report

4 Regulation

93. The cash machine network is subject to a form of voluntary regulation governed by the LINK network. LINK is divided into two parts: a commercial company which facilitates the technology and settlement of cash machine transactions and the 'card scheme' which sets the rules surrounding the cash machine network. Mr Hardy, the Chief Executive of LINK, told us the "card scheme…is essentially a member-owned organisation. It is an association, if you like, governed by a vast body called the Network Members Council, which I think at the moment has 53 members on it, and which debates the terms of trade, if you like, the rules applying [to cash machines]."[143] Mr Aiken, Director of the LINK card scheme, confirmed that "the members write the rules" but that the Office of Fair Trading regulates the LINK card scheme under competition law.[144]

94. LINK's web-site notes that it has "vast experience and detailed understanding with regard to the establishment and growth of shared ATM networks by balancing the needs of consumers, acquirer banks and card issuers." Asked how LINK took account of the interests of the consumer in its policy development, Mr Hardy confirmed that they did not have any consumer representation on their board and did not invite consumer groups along to the LINK meetings when they were discussing relevant consumer issues such as early warning of charges. He told us that LINK "had spoken to consumer groups on numerous occasions" and while he had no objection to inviting consumer representatives along to LINK meetings it would ultimately be up to the members of LINK to determine whether they were in favour of consumer representatives attending the meetings.[145] Mr Crosby told us that while there may be questions about them attending all meetings, "it would not be unusual for a commercial organisation that wanted to get close to what its customers thought of its services to have [consumer representatives] present their opinions and I would certainly be keen to encourage LINK to do that."[146] Votes taken among LINK members on consumer issues (as for example with the new rules governing transparency agreed in December 2004) are not published. LINK should take steps to improve consumer representation within its organisation. Consumer groups could be invited to attend relevant meetings of LINK or invited to sit on working groups, so that their views can be taken into account. Openness would also be improved if the details of how member organisations had voted on consumer issues were made known.

95. It is important if there is to be voluntary regulation that the rules set down are properly monitored and enforced. As noted earlier, LINK's process for enforcement of its own requirements in respect of transparency has been inadequate to protect consumer interests. The approach by LINK to self-regulation in respect of enforcement, as illustrated by the absence of a systematic mechanism for enforcement of its transparency requirements (already discussed above), is totally inadequate for a part of the financial services industry used by millions of consumers each year. An absence of effective self-regulation beyond this year would not be acceptable.

The Banking Code

96. One approach to improving regulatory supervision of the ATM market and industry would be to bring it within the Banking Code. The Banking Code is a voluntary Code "followed by banks and building societies ('subscribers') in their dealings with personal and small business customers in the UK. They set standards of good banking practice and aim to allow competition and market forces to operate and encourage higher standards of banking practice for the benefit of customers."[147]

97. The Banking Code Standards Board told us that operators of charging cash machines which are not banks or building societies are outside the Code. "Furthermore, a [charging] cash machine operator that is a subsidiary of a Code subscriber is not automatically subject to Code requirements".[148] This means that Hanco (the largest charging machine operator) is not subject to the requirements of the Code, even though it is owned by RBS. We asked RBS if they would support an amendment to the Banking Code so that subsidiaries such as Hanco were automatically subject to the requirements of the Code. Mr Higgins told us that "in principle" he would have no objection to that.[149] We recommend that the Banking Code be amended to ensure that it applies automatically to any of the main subscribers' subsidiaries which are engaged in banking-related businesses.

98. There was widespread support amongst consumer groups for charging cash machine operators to be brought within the scope of the Banking Code. Mr Baxter told us that Which? would like to see the independent ATM operators signing up to the Banking Code because they are providing a banking service.[150] Ms Perchard, of Citizens Advice, told us that the Banking Code was probably the best of its type and that if charging cash machines were brought within the scope of the Code then that "also brings with it the auditing system that is run by the Banking Code Standards Board, which has been incredibly helpful in highlighting issues about compliance with the Banking Code".[151] Major banks were also supportive of bringing cash machines within the scope of the Code. Mr Crosby told us that HBOS would support "ATMs and ATM-related services being brought within the Banking Code because it makes good sense".[152] Mr Higgins of RBS told us that he would have no objection to ATMs being brought under the Code.[153]

99. The response of the charging cash machine operators was mixed. Mr Delnevo, of Bank Machine, said "he would support signing up to the Banking Code if it assisted transparency", but that "this remained to be established".[154] Mr Mills, of Cardpoint, claimed that the Banking Code would mean "less stringent" regulation than that provided by LINK[155]—though this of course would not be the case if the LINK requirements were incorporated into the Banking Code. Mr McNamara, of Moneybox, told us that he would have "no problem" signing up to the Banking Code and "would make requests for equivalent levels of transparency and a more equitable LINK arrangement about enforcement than presently exists".[156]

100. The Minister told us that he thought "the Banking Code is an excellent example of self-regulation…The Banking Code is, of course, much broader than ATMs in its coverage, so there may well be some issues about what exactly it would mean for purely an ATM operator to sign up to the Banking Code, but in principle it sounds to me like a welcome step".[157] The Banking Code is a good model of self-regulation. It is independently reviewed taking into account the views of consumer groups, industry and government. The Banking Code Standards Board conducts a systematic programme of monitoring and enforcement. We believe that negotiations should begin immediately for the Banking Code to be extended to cover all charging cash machine operators, with a view to the negotiations being concluded before the end of the year. The Code should be amended to include the new transparency requirements agreed at the LINK meeting on 14 December 2004. All charging cash machine operators should sign up to the Banking Code, and become subject to its processes of monitoring and enforcement.

Governmental regulatory authorities

101. There will always, however, be a need for government and statutory regulatory authorities to stand behind the industry's self-regulatory bodies. We have already referred to the role of the OFT in the approval of the basic LINK agreements governing the interchange fee.

102. One further specific issue brought to our attention[158] concerns the length of the contracts between site owners and charging machine operators. In the case referred to us, a contract required the site owner (the owner of a small business) to give 7 years written notice of cancellation, while the charging machine operator had the right to remove the machine without notice. The owner wished to end the contract because he was receiving no commission as a result of the level of usage not reaching the required contract threshold. It is of course possible that contracts of this length may have been decided by the market and may be efficient. For example, where a charging machine operator incurs significant up-front installation costs (as perhaps with a through-the-wall machine requiring significant building work) such long term contracts would enable efficient risk-sharing between the retailer and the charging machine operator. For a free standing or so called convenience machine with a far more simple and less permanent method of installation it may be more difficult to justify such a long contract length. Excessive notice periods for the removal of a free-standing charging machine and unduly long contracts could be hindering competition. We recommend that the OFT conduct a short investigation into the length of contracts between small business owners and charging cash machine operators to determine whether they are 'hindering, restricting or distorting' competition.

143 Q 68 Back

144 Q 77 Back

145 Q 72 Back

146 Q 268 Back

147 Ev 97 Back

148 Ev 98 Back

149 Q 272 Back

150 Q 29 Back

151 Q 30 Back

152 Q 269 Back

153 Q 270 Back

154 Q 618 Back