Select Committee on Treasury Eleventh Report


3  THE PROPOSED LEGISLATIVE FRAMEWORK

Introduction

7. Legislation relating to unclaimed assts has been passed in a number of countries, including Australia, New Zealand and Canada as well as the Republic of Ireland. The United Kingdom is also intending to follow a legislative route, but there are significant differences between the Government's proposed approach and those seen elsewhere. We examine three aspects of the proposed legislation—the extent of compulsion, the regulatory arrangements and the extinguishing of liabilities.

The voluntary nature of the proposed scheme

The rationale

8. The Government's most striking departure from the precedents set by other countries' unclaimed asset schemes is the fact that, in the proposed scheme, banks and building societies will be able to choose whether or not to participate. In Ireland, Australia, New Zealand and Canada, participation by banks and building societies is mandatory. One of the key principles underlying the proposed scheme is that "legislation will enable, but not compel, banks and building societies to transfer funds held in dormant accounts".[7] The then Economic Secretary to the Treasury, Ed Balls MP, confirmed that, while the scheme would have "proper protections and proper regulation to make sure that it works"[8], if a "laggard" bank decided to opt out of the scheme, that institution would suffer no sanction of any kind.[9] Which? argued that the Government should publish details of the banks participating in the scheme, because publication of such details would "enable public pressure to be brought to bear on any banks not participating in the scheme".[10]

9. There are some potential benefits to a voluntary scheme. The BSA identified flexibility, lower administrative cost, and the ability to adapt to changing circumstances.[11] The Government also deployed the more prosaic argument that a voluntary scheme would be more likely to gain the enthusiastic support of the banks and building societies.[12] Some parallels can be drawn between the proposed voluntary scheme for retail banks and the Balance Foundation scheme, which was set up by the investment banking industry. The Balance Foundation was established in order to release unclaimed assets held in client money accounts and, as a voluntary scheme, was successful in releasing £8 million from unclaimed assets in a short period of time. However, Balance explained that there was a key difference between unclaimed assets held in client money accounts by investment banks and dormant retail bank accounts: The former is held "in custody" for the client and never touches the bank's balance sheet but, when a retail bank surrenders a dormant account to a Central Reclaim Fund, the asset (and related liability) are removed from the bank's balance sheet.[13] In the case of the retail bank therefore, the incentive to participate is weaker than in the case of the investment bank.

10. The Government's consultation paper stresses that "banks and building societies have committed to work with the Government to design, and participate in, the UK scheme".[14] The Economic Secretary highlighted the fact that the BBA Chief Executive and BSA Director-General had both signed the consultation document, indicating their approval of the scheme.[15] The industry representative bodies are clearly committed to the scheme, but it is the individual banks and building societies that will need to be engaged if the scheme is to work. However, the BBA thought it was "going to be enormously difficult for anybody to duck out of this".[16] The Economic Secretary admitted that the "proof of the pudding of [participation in the scheme] will have to be in the eating", but he was confident that the banks and building societies were keen to make the scheme work.[17]

The case for a compulsory scheme

11. During our visit to Dublin, we learned how institutions were obliged to participate in the Irish scheme, and, equally importantly, to do so in the same way. With a definition of dormancy written into statute, banks had no 'wiggle room' in identifying dormant accounts and, although some banks may have had to invest in costly data systems as a result, the consistency of the scheme's application was a significant advantage. Mr Patrick Storey of Grant Thornton, who were appointed Inspectors of the Irish Dormant Accounts Act, was concerned by the voluntary nature of the scheme in the UK, fearing that it would not create the level playing field that existed under the Irish scheme:

Mr Peter Graham considered that participation would indicate "good co-operative citizenship" but, beyond that, "cynically one finds it hard to understand why there is a benefit".[19] Mr Storey suggested that participation would "be inconsistent with the objectives of the institution to maximise shareholder/policyholder wealth".[20] Sir Ronald Cohen of the CUA described unclaimed assets as a "headache" for the banks, rather than an "opportunity".[21]

Conclusions

12. The Unclaimed Asset Scheme will cost banks time and money to administer, without benefiting them financially. The prospect looms of some banks and building societies choosing not to participate, particularly if the banking sector sees a downturn in profitability and also once the current spotlight on unclaimed assets has faded. If that were to occur, there is a possibility that such behaviour would be emulated by the rest of the market, which could result in the scheme's abandonment. There is no international precedent for a dormant accounts framework that has been run on a voluntary basis. For financial institutions to participate fully and effectively in the proposed scheme, there need to be significant incentives for them to do so. Notwithstanding the assurances of the BBA and BSA, we are concerned that, whilst the BBA and BSA have pledged their commitment to the scheme, individual banks and building societies may find it in their interests to opt out.

13. We welcome the Government's commitment to legislate to facilitate the use of unclaimed assets for the public good. However, we are unconvinced that the Government is correct to pursue a voluntary approach. A compulsory scheme has the overwhelming advantage of guaranteeing fairness and consistency between institutions. We urge the Government to reconsider the voluntary basis of its proposals. If the Government is still minded to continue with a voluntary scheme, we recommend that the forthcoming legislation be prepared so as to include reserve powers for Ministers to establish a compulsory scheme at a later date without recourse to further primary legislation, should a voluntary scheme prove unsuccessful. If a voluntary scheme is established, we recommend that the Government put in place arrangements to ensure information about institutions that are, and are not, participating in the scheme is publicly available.

Regulation of the scheme

Overview of proposed regulation

14. The Government does not propose that a single regulatory body would oversee all aspects of the Unclaimed Asset Scheme. It is proposed that the Banking Code would be amended to provide safeguards for the banks' ongoing relationships with their dormant customers. The Banking Code would cover only the interface between the financial institutions and the customer. Participation in the scheme itself and spending money identifying dormant accounts falls outside the scope of the Banking Code.[22] The Central Reclaim Fund would be an independent body regulated by the Financial Services Authority and transfers from financial institutions to the Central Reclaim Fund would be audited by external auditors.

Regulating the interface between customers and financial institutions

15. The Banking Code is sponsored by the BBA, the BSA and APACS (the UK payments association). It is a voluntary code which sets standards of good banking practice for banks and building societies to follow when they are dealing with their customers. The Banking Code Standards Board monitors compliance with, and enforces, the Banking Code and ensures signatories provide a "fair deal to their personal and small business customers".[23] The Banking Code is a form of self-regulation adopted by the banking industry with no involvement from government or the Financial Services Authority (FSA).

16. Witnesses pointed out that in other financial fields, including the work undertaken by the Takeover Panel, self-regulation has proven to be a success[24]. Specifically in relation to unclaimed assets, however, the CUA argued that:

    you have to have something with teeth that is the regulator. It is fine to go for self-regulation if we do not want to go for legislation, but the regulator has to be in a position to enforce what he or she feels to be appropriate.[25]

The CUA went on to say that there was an "onus on the industry to demonstrate a willingness to impose self-regulation that will create the level playing field … and avoiding the scenario where there are one or two institutions who appear to be making much less effort to identify the accounts in the first place".[26] The BBA was confident that such a level playing field would be established under the Government's proposals:

    How do we bring about the uniformity? The first is that, of course, there will be a statutory framework that goes around this scheme, second, we need to agree how it works, third, we have the Banking Code in which both the principles and, indeed, the detailed guidance and information to the institutions is contained within the Banking Code, the information on the detail goes into the Banking Code, and the subscribers to the Banking Code are the banks and, indeed, the building society.[27]

Nevertheless, the BSA admitted that "every single institution will not act exactly the same in relation to this scheme".[28]

17. The Government's proposed Unclaimed Asset Scheme contains aspects that could give rise to consumer concern. Funds held in dormant accounts are being surrendered by the banks to the Central Reclaim Fund, before being distributed to good causes. Consumers will seek reassurance that they will always have a right to reclaim the money held in their account, and that they will suffer no inconvenience when they come do so as a result of this scheme. The Government's consultation paper explains what changes to the Banking Code (and the similar Business Banking Code) would be required to ensure customers are not disadvantaged by the introduction of the proposed Unclaimed Asset Scheme:

    The Code should include a specific commitment in respect of the bank and building society sector, as agents of the central reclaim fund … [which] will confirm that customers (or their estates) continue to have a legal right to repayment of their money by the fund. The BBA and BSA have also proposed that the Code provisions relating to dormant accounts be expanded to reflect key aspects of the scheme and that the ten core pledges under which the [existing] bank and building society schemes operate are built into the Code guidance.[29]

18. The BBA's preferred approach in dealing with dormant accounts transferred to the Central Reclaim Fund is for the customer interface to continue to be provided by banks and building societies, both directly and also through the industry central tracing schemes. This customer interface would be governed by the Banking Code, with oversight provided by the Banking Code Standards Board and, in the case of dispute, a right of redress provided through the Financial Ombudsman Service.[30] The BSA assured us that "the Banking Code Standards Board has got a very good record of ensuring compliance with the existing Banking Code, and we think they will do a good job in relation to this new responsibility that they are taking on."[31] The Banking Code is currently undergoing a triennial review, which is due to conclude in March 2008, before the Unclaimed Asset Scheme comes into existence.

19. We welcome the Government's commitment to grant customers a legal right to their account funds in perpetuity. We also support proposals to maintain the customer interface with the customer's own bank or building society, rather than with the proposed Central Reclaim Fund, and we expect the scheme to be designed to ensure that customers will not face any additional inconvenience as a result of the scheme if they try to reactivate a dormant account. We are unconvinced that the Banking Code Standards Board has the proven track record of protecting the interests of consumers and sufficient independent authority to enable it to take the proportionate but firm action that might be necessary to regulate the scheme. If the Government is minded to leave regulation in the remit of the Banking Code Standards Board, we recommend that the legislation includes power for regulatory responsibility to be given to a statutory regulator in the future without the need for further primary legislation. Finally, we recommend that, in its response to this Report, the Government clarify the circumstances in which disputes relating to the scheme could be considered by the Financial Ombudsman Service.

Regulation of the Central Reclaim Fund

20. The proposed Central Reclaim Fund is to be independent of Government and industry. It will be registered with, and regulated by, the Financial Services Authority (FSA). Part of the FSA's responsibility will be ensuring that the Central Reclaim Fund is prudent in assessing the proportion of funds held back from disbursement in order to cover reclaim risk. The Economic Secretary also explained that the FSA will oversee the relations between the Central Reclaim Fund and its individual agents, the banks themselves.[32] FSA authorisation would bring the reclaim fund under the coverage of the Financial Services Compensation Scheme (FSCS), which is the compensation fund of last resort. We welcome the Government's proposal that the Central Reclaim Fund will be regulated by the Financial Services Authority.

Audit

21. The Government is proposing that financial institutions will each sign an agency agreement with the Central Reclaim Fund. Under this agreement, the banks would manage the customer relationship, maintain customer records and manage the transfer and reclaim of money between customers and the Central Reclaim Fund. The precise terms of the agency agreement will be a matter for negotiation between institutions and the Central Reclaim Fund.[33] There is a need to monitor the processes followed in the identification of dormant accounts, transfer of monies to the Central Reclaim Fund and sums being reclaimed by the banks on behalf of reawakened customers. The Government proposes that the "calculation of the value of assets in dormant accounts and the transfer of those assets to the Central Reclaim Fund will be made at least annually and be subject to independent audit; this will also be a condition of the agency agreement".[34] The BBA and BSA both acknowledged that transfers made by banks and building societies ought to be subject to third-party audit certification.[35]

22. The Government proposes that the revised Banking Code would require financial institutions to publish their policies on how they intend to participate in the scheme.[36] The Commission on Unclaimed Assets argued that the banks should be obliged to publish details of their involvement in the scheme, suggesting that "amounts reunited with consumers and amounts transferred to the Central Reclaim Fund should be provided annually by each financial institution, and should be made publicly available".[37] The Economic Secretary agreed that it would indeed be helpful to the transparency of the scheme to publish the volumes of funds from individual institutions that flow into the Central Reclaim Fund.[38] He also agreed that, in principle, it would be beneficial if the published accounts of the banks contained a note detailing not just the flow of funds to and from the Central Reclaim Fund each year, but also the stock of dormant accounts held on the institution's balance sheet. He warned, however, that some banks would find it extremely difficult, if not impossible, to calculate the stock of dormant accounts on their books.[39]

23. We are not convinced that a voluntary scheme can work but, if it can work at all, it will only be through having a regime which is highly transparent. It is important that those institutions claiming to participate do so in a way that can be verified. Participating institutions should be subject to an annual certification of their involvement, signed by a nominated senior employee. Transfers of monies from the banks to the Central Reclaim Fund, and reclaims going the other way, must be audited by external auditors. The auditors' duties should include checking that all dormant accounts are being transferred and, where an institution claims an account is active despite an absence of transactions, the auditor should check that appropriate evidence is being retained. There should be credible sanctions for those institutions where the auditors discover a breach of their agency agreement with the Central Reclaim Fund. We also urge the Treasury to work with the banking industry in examining the prospects for publishing the stock and flows of dormant accounts as a note to the annual published accounts of the banks and building societies.

Extinguishing liabilities from institutions' balance sheets

24. If banks and building societies are to be asked to surrender the funds held in their dormant accounts, it is right that they should also be absolved from any financial liability to repay those funds if a customer comes forward to reclaim their account at a later date. The Government proposes that a new Central Reclaim Fund will collect funds held in dormant accounts and bear the reclaim risk associated with those funds. Under International Accounting Standard (IAS) 39, "An entity shall remove a financial liability (or a part of a financial liability) from its balance sheet when, and only when, it is extinguished—i.e. when the obligation specified in the contract is discharged or cancelled or expires."[40] Listed banks (and other institutions using IAS 39) therefore need a statutory discharge from the Central Reclaim Fund if they are to remove unclaimed account monies from their balance sheet as proposed. The Government's consultation paper explains that in order for a bank to obtain a statutory discharge from its financial obligations, the Central Reclaim Fund must consent to the transfer, and the bank or building society must undertake to hold all records relating to an account until the customer has been repaid.[41] In the 2006 Pre-Budget Report, the Government announced it would legislate to establish the statutory underpinnings necessary for this to happen.[42] The BSA made clear the importance of this issue, saying that "If that legislation does not work, then this [unclaimed assets] scheme cannot work".[43] The establishment of a statutory framework that enables financial institutions to extinguish their dormant account liabilities is of vital importance to the viability of the whole Unclaimed Asset Scheme. We note the Government's co-operation with banks and building societies in examining this issue in detail, and welcome the Government's commitment to bring forward legislation to resolve this issue.


7   A UK Unclaimed Asset Scheme: a consultation, p 6 Back

8   Q 257 Back

9   Q 267 Back

10   Ev 111 Back

11   Q 165 Back

12   Q 257 Back

13   Q 41 Back

14   A UK Unclaimed Asset Scheme: a consultation, p 6 Back

15   Q 257 Back

16   Q 202 Back

17   Q 264 Back

18   Q 16 Back

19   Q 36 Back

20   Q 37 Back

21   Q 212 Back

22   Q 197 Back

23   BCSB website, www.bankingcode.org.uk Back

24   Q 224 Back

25   Q 206 Back

26   Q 222 Back

27   Q 175 Back

28   Q 176 Back

29   A UK Unclaimed Asset Scheme: a consultation, paras 3.19 and 3.20 Back

30   Ev 91 Back

31   Q 175 Back

32   Q 259 Back

33   A UK Unclaimed Asset Scheme: a consultation, para 3.8 Back

34   A UK Unclaimed Asset Scheme: a consultation, para 3.10 Back

35   Ev 91 and Q 199 Back

36   A UK Unclaimed Asset Scheme: a consultation, para 4.8 Back

37   Ev 103 Back

38   Qq 263, 265 Back

39   Qq 314, 315 Back

40   International Accounting Standards Board website, www.iasb.org Back

41   A UK Unclaimed Asset Scheme: a consultation, para 3.8 Back

42   2006 Pre-Budget Report, December 2006, para 5.88 Back

43   Q 178 Back


 
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Prepared 6 August 2007