Many people forget about or lose track of small deposits of money in bank and building society accounts. These deposits remain in the banking system as Unclaimed Assets. In recent years, several countries have set up successful schemes to enable such Unclaimed Assets to be reinvested in purposes beneficial to society.

In 2005, the Government’s Pre-Budget Report announced an intention to take action on Unclaimed Assets. The Government stated a number of aims, chiefly:

·           to encourage people with Unclaimed Assets to claim those assets; and

·           to allow Unclaimed Assets in dormant bank and building society accounts to be reinvested in society, whilst protecting consumers’ rights to reclaim their money at any time.

The Government believes that it will find a large amount of money in dormant bank accounts for investment in good causes. This money will be used for one of three purposes: the provision and improvement of youth services; improving financial capability and financial inclusion; and funding third sector investment through a social investment wholesaler.

Following last year’s Queen’s Speech, the Government has now published a Parliamentary Bill on this subject, available here.

1.    Introduction

Under the Government’s proposals for unclaimed assets (“the Scheme”):

·           banks and building societies (collectively, “Banks”) will identify accounts which have remained dormant for 15 years or more;

·           an equivalent amount to the assets in these accounts (“the Unclaimed Assets”) may then be transferred by the Banks to a central fund;

·           the central fund (“the Reclaim Fund”) will hold back a proportion of the assets in order to repay any holders of dormant accounts who might make a claim; and

·           the Reclaim Fund will distribute the remainder of the assets to a separate fund, which will distribute the assets according to three investment objectives.

The majority of the proposals for the Scheme have been provided in a series of consultation papers:

·           A UK Unclaimed Assets Scheme: a consultation (“the Scheme CP”) published in March 2007;

·           Unclaimed Assets Distribution Mechanism: a consultation (“the Distribution CP”) published in May 2007; and

·           A UK Unclaimed Assets Scheme: a summary of responses to consultation (“the Responses CP”) published in November 2007.

The Scheme has been developed in co-operation between Ed Balls, Economic Secretary to the Treasury; Angela Knight, Chief Executive of the British Bankers Association (“the BBA”); and Adrian Coles, Director General of the Building Societies Association (“the BSA”). Apax Partners’ former Chairman, Sir Ronald Cohen, heads the Commission on Unclaimed Assets, which is backed by eight charities, including the Rowntree Foundation and the Carnegie Trust and provides advice to the Government on the use of funds gained by the Scheme.

2.    The Mechanics of the Scheme

2.1   Dormant Bank and Building Society Accounts Bill

In 2005, the Government announced a number of legislative proposals, including the Climate Change Bill, which would set a general framework for UK carbon reductions (for more on this subject, see the article in the November 2007 edition of Financial Services Briefing) and the Unclaimed Assets Bill. The Unclaimed Assets Bill, now renamed as the Dormant Bank and Building Society Accounts Bill (“the Draft Bill”), (and referred to in last year’s Queen’s Speech) provides a framework for the Scheme.

2.2   Reuniting Customers with their Unclaimed Assets

The Government has maintained an intention to reunite customers with their Unclaimed Assets. The bank and building society sector, including National Savings and Investments (NS&I), have already started the first phase, a publicity campaign aimed at promoting the ability to reclaim money from forgotten or lost Bank accounts. Difficult to reach customers will be targeted with information literature and posters provided in care homes and libraries; and financial institutions will undertake the necessary proactive steps in reuniting their customers with accounts which are in the early years of dormancy, such as checking the Registry of Deaths to ascertain whether account holders are deceased. Banks will update the related guidance issued to customers, and are in the process of creating a single portal which customers searching for dormant accounts can easily access.

2.3   Transferring Assets from Bank Accounts to the Reclaim Fund

Under the proposed legislation, “assets” are defined broadly, so as to cover all Bank accounts. Assets are defined as “unclaimed” if they are placed in an account which has been dormant for fifteen years or more. An account is classed as “dormant” if no transactions have been carried out in relation to that account, and no instructions in relation to that account have been issued by the account holder.

Under the Scheme, if an account has been inactive for a number of years, the Bank will write to the customer, at his/her last known address, asking whether they wish the account to remain open. If the institution receives no reply, the account will be classed as dormant, so as to prevent fraud.

Where assets are held in an account that has been dormant for fifteen years or more, the Bank may transfer an amount equal to the Unclaimed Assets into the central fund (“the Reclaim Fund”). The legislation is intended to be “enabling” and Banks are not, therefore, obliged to take part in the scheme. Rather, the Government argues that Banks will participate in the scheme on a purely voluntary basis.

The Responses CP shows that a number of respondents to the Scheme CP were concerned that Banks will not participate in the Scheme unless it is mandatory to do so. The Government, however, argues that most Banks will wish to participate in the Scheme because of one incentive which is offered. Namely, by participating in the Scheme, Banks will be released from their liability to repay dormant account holders. This liability will pass to the Reclaim Fund, enabling Banks to voluntarily transfer assets without impacting on their profit and loss accounts.

2.4   The Reclaim Fund

The BBA and BSA are taking the lead in setting up a Reclaim Fund which will be independent of the Government, the banking industry and the distribution mechanism.

The Government and the Financial Services Authority (“the FSA”) are currently in dialogue over the possibility that, subject to meeting any regulatory requirements, the Reclaim Fund will be entitled to receive FSA authorisation. The FSA envisages this development as occurring in 2009. Further to this end, the Draft Bill includes an amendment to the Financial Services and Markets Act 2000 (“the FSMA”) so as to include “the activities of a reclaim fund” as a regulated activity.

The activities of the Reclaim Fund will be restricted to:

·           the meeting of repayment claims;

·           the management of dormant accounts in its charge with a view to the meeting of repayment claims;

·           the transfer of money to the Scheme fund which is responsible for distribution of Unclaimed Assets into the community (“the Distribution Fund”); and

·           objects that are incidental or conducive to, or otherwise connected to, the above activities. This may include the prudent investment of dormant account funds.

Although, under the Scheme, the Reclaim Fund will accept liability for the repayment of customers, the process of reclaiming deposits will not change for customers, who need only to visit their Banks, which will repay them as now. The Banks will act as agents for the Reclaim Fund, and the agency agreement will be provided as a standardised document, to reduce costs. The Reclaim Fund will hold back a reasonable amount of money to meet any requests from the Banks, on behalf of the beneficial owners of Unclaimed Assets. Any Unclaimed Assets which are not held back for meeting the Reclaim Fund’s responsibility in this regard will be passed on to a separate fund (“the Distribution Fund”) for investment in the wider community.

2.5   The Distribution Fund

Big Lottery Fund (“BIG”), which currently distributes money raised by the National Lottery, has been chosen as the vehicle which will distribute Unclaimed Assets. The Distribution CP argues that, by using a single, co-ordinated and skilled UK-wide distribution mechanism, the Scheme will make significant savings, which can be passed on to the community. BIG will remain an independent body, and will be responsible for managing the Unclaimed Assets prudently and separately from lottery funds. BIG will distribute Unclaimed Assets in accordance with a strategic plan, provided by the Secretary of State, for meeting the Government’s three intended uses of the Scheme assets.

3.    The Three Intended Uses of the Scheme Assets

The Unclaimed Assets Register estimates that £15 billion lies unclaimed in UK Bank accounts. It should be noted that this estimate relates to the total amount of unclaimed funds in UK Banks. The Scheme CP estimates that the total amount of Unclaimed Assets (funds in an account which has remained dormant for fifteen years or more) may exceed several hundred million pounds. Moreover, the Scheme CP predicts a further flow of tens of millions of pounds becoming available each year.

Therefore, by launching the Scheme, the Government attempts to meet its manifesto pledge to reunite account holders with Unclaimed Assets, whilst gaining access to significant funds for investment in community projects.

In the beginning, the Government’s plans for English use of Unclaimed Assets were quite limited: providing youth facilities and increasing financial capability. (The devolved administrations of Scotland, Wales and Northern Ireland will determine the priorities for distributing Unclaimed Assets in their own territories). Over the course of 2005 and 2006, as the plans for an Unclaimed Assets scheme developed, the Government seems to have produced increasingly ambitious plans for the use of unclaimed Bank deposits. The Distribution CP lists three intended uses of the Scheme assets, which are listed in order of priority:

(i)    investment in youth services;

(ii)    investment in financial inclusion and capability; and

(iii)   cultivation of third sector investment.

3.1   Investment in Youth Facilities

The first use for Unclaimed Assets, and the Government’s highest priority for use of Scheme funds, is investment in youth facilities. Gordon Brown, giving his Pre-Budget Report of 2005, stated that Unclaimed Assets would be used for “investing in youth and community facilities that are modern, relevant and welcoming for teenagers up and down the country” to encourage children and teenagers “to engage in their local communities and help them through the transition from childhood to adulthood”. The Distribution CP expands on this commitment: the Scheme will provide funding to initiatives which provide, and encourage children and teenagers to attend, “positive activities” and “exciting, good quality places to go”, whilst working to co-ordinate the provision of support.

3.2   Financial Capability and Inclusion

The second use for Unclaimed Assets is the provision of advice and programmes aimed at increasing “financial capability and inclusion”.

3.2.1       Financial Capability

By improving financial capability, the Government aims to ensure that people make the right financial choices and develop the skills, knowledge and motivation to manage their finances to their own advantage. The FSA and several bodies within the financial services industry have previously noted the “vital need” of increasing levels of financial capability in the UK. The Government published, in January 2007, Financial Capability: the Government’s long term approach, in which the Government set out three methods of increasing financial capability:

·           the provision, to adults, of high-quality generic financial advice, to help in dealing with financial matters;

·           a school programme of personal financial education for all children and teenagers; and

·           a range of Governmental programmes aimed at helping those who are most vulnerable to the consequences of poor financial decisions.

3.2.2       Financial Inclusion

By improving financial inclusion, the Government aims to help the small minority of “financially excluded” UK residents who “are unable to access even the simplest financial services” by virtue of their low incomes. In Financial Inclusion: the way forward, the Government set out a strategy for helping people to manage their money; invest effectively; and deal with financial distress. The Government’s plans place significant reliance upon the third sector institutions, such as Credit Unions and Community Development Finance Institutions, which can play a vital role in increasing financial inclusion by providing affordable loans and connecting people to mainstream financial products.

3.3   Investing in the Third Sector

The third use for Unclaimed Assets is the cultivation of investment in the third sector. The third sector is the not-for-profit sector (as opposed to the first sector, the governmental sector; and the second sector, the for-profit sector) and comprises charities, voluntary organisations and community groups. The Government have acknowledged the vital role played by the third sector in cultivating strong communities and an entrepreneurial society, tackling deprivation and improving life in underprivileged sectors of society. However, third sector funding is still lacking in some respects. The Commission on Unclaimed Assets published a paper in July 2006, in which it argued that the third sector suffers from under-capitalisation and inadequate technical support. The Government therefore aims to enable third sector organisations to gain access to more diverse sources of funding and to improve third sector access to sustainable funding.

The Government’s major initiative in this area is the development of a social investment bank. This bank would provide, to third sector institutions and to existing investment intermediaries, a range of products such as development grants; bonds and other securities; loans; guarantees; and business support, as well as products such as long term risk-taking investments; equity and quasi-equity instruments; and patient capital. The social investment bank would also increase the demand for social investment by developing a source of market information, providing business support and providing advice to start ups.

The Government are currently unable to predict what funds will be available for investment in the third sector. This will depend on how much money is required to cover the risk of customers claiming their Unclaimed Assets; and on how much is invested in youth services and the improvement of financial capability and inclusion.

3.4   Provisions for Small, Locally-Based Institutions

Small, locally-based financial institutions, such as many building societies, will be able to invest their Unclaimed Assets with regard to the needs of their communities. These institutions will agree with the Reclaim Fund an amount appropriate to cover reclaim applications. This money will be transferred to the Reclaim Fund, with the remainder of the Unclaimed Assets being spent for the benefit of the local community. Most respondents to the Scheme CP agreed that a £7bn threshold should identify “small locally-based institutions”- which would give the vast majority of building societies the discretion to distribute their unclaimed deposits for the benefit of their local communities.

4.    Customer Protection

The Government places a great emphasis on protecting customers, and has introduced the following safeguards, which will be reflected in the amended Banking Code to be promulgated in March 2008.

4.1   Most importantly, customers will retain beneficial ownership of assets once they are transferred into the Reclaim Fund, and liability to dormant account holders for Unclaimed Assets will never be extinguished; it will merely pass to the Reclaim Fund. Further, assets will continue to accrue interest on the same basis as the preceding live amount.

4.2   The Unclaimed Assets (and liability for to dormant account holders) will not be transferred to the Reclaim Fund unless and until the Reclaim Fund accepts the transfer, which it will not do unless the participating Banks adhere to conditions which will be provided in the agency agreement. The Government proposes that all such agency agreements should include a requirement that Banks:

·            retain customer records in perpetuity;

·            undertake external audits of transfers to the reclaim fund;

·            deal with any complaints;

·            calculate the amount due to any customers who claim to be owed funds;

·            meet statutory reporting requirements; and

·            provide management information to the Reclaim Fund.

4.3   The Reclaim Fund’s Articles of Association will ensure that the fund manages risk prudently. This will involve holding back a reasonable proportion of the assets which it receives in order to repay any customers who have a right to claim previously Unclaimed Assets.

4.4   Because Banks will continue to provide customer interface, individual account records will be retained by the Banks, ensuring that the customers are not inconvenienced, and avoiding the need for a (potentially dangerous) transfer of personal data.

4.5   The Reclaim Fund will be authorised by the FSA, subject to FSA approval. This will bring any complaints against BIG within the ambit of the Financial Services Compensation Scheme. In addition, Customers will have access to the Financial Ombudsman Service for any disputes with the fund or with their Banks.

4.6   Banks will inform their customers of the Scheme, including publishing their policies for treating accounts as dormant, and information on how to claim any assets to which they are entitled.

5.    Conclusion

The Government, the BBA and BSA continue with their preparations for the Scheme. A major publicity campaign is already underway to encourage the reunification of customers with their assets in Bank accounts; the BBA and BSA are working to create a Reclaim Fund; the Commission on Unclaimed Assets is currently researching a social investment wholesaler; and the devolved administrations are consulting on priorities for the use of funds in Scotland, Northern Ireland and Wales.

The Scheme is still far from complete: crucially, the Draft Bill still needs to receive Royal Assent, and is presently awaiting consideration at the third sitting of the House of Lords Committee. However, subject to the Draft Bill’s passage through both Houses of Parliament, the Scheme will provide an effective means of reuniting customers with lost or forgotten assets, whilst using genuinely Unclaimed Assets for the good of the wider community.

Grania Baird and Adam Carvalho

Financial Services Team