Select Committee on Treasury Eleventh Report


The definition of dormancy

25. A dormant account is an account which has seen no activity for a sustained period of time. There are two possible reasons why this might occur: first, the account-holder might have forgotten about their account or died; second, the account-holder might be fully aware of the account but is choosing to leave it alone.[44] From the customer's perspective this distinction is trivial—the proposed scheme states they will always have the right to reclaim their account. But from the point of view of the banks and building societies, and the Central Reclaim Fund, it is important to minimise the number of accounts that are designated "dormant", transferred to the Central Reclaim Fund and then returned to the customer at a later stage upon reactivation. Each time a "dormant" account is reactivated, costs will be incurred by the bank and the Central Reclaim Fund, and the Central Reclaim Fund's forecasting becomes more uncertain, which could ultimately lead to a reduced level of funding for good causes.

A fifteen-year term

26. The Government has proposed to define dormant accounts included in the scheme as those current and deposit accounts where there has been no customer-initiated activity for at least 15 years.[45] The BBA approves of this definition, arguing that "the starting point for protecting the customer's interests is the establishment of a definition that results in monies being transferred only in circumstances where experience shows account monies are likely to be genuinely lost. Reclaim experience in the UK shows the need for a definition based on 15 years."[46] After 15 years of dormancy, they argue:

    it can be concluded with reasonable certainty that we have passed an 80/20 threshold in terms of the ratio of lost monies to monies expected to be reclaimed. As you move down the maturity scale, you rapidly reach the point at which transfers from the balance sheet would be accompanied by a shift in the lost/reclaim ratio towards 50/50% and beyond. We would not consider the setting of a shorter maturity period to be compatible with the objective of releasing genuinely lost monies. Nor would it result in an increase in the monies that could be made available for community causes since the amount that would need to be held in reserve for future reclaim would correspondingly increase.[47]

The BSA regarded 15 years as a sensible proposal, in that any shorter period would increase the risk of accounts being included in the scheme that were not lost or unclaimed, and their view was supported by both the Commission on Unclaimed Assets and Grant Thornton. [48] Charity Bank's position was that, although "15 years may be too long a period for an asset to lie dormant, we recognise that a shorter period would add considerably to the quantum of assets and could have a short term destabilising impact upon the financial institutions. We are therefore content to accept the definition on practical and pragmatic grounds."[49]

27. However, the Balance Foundation cast doubt on the need for such a long period of dormancy to be used, noting that the banks' own internal processes treat an account as dormant well before the 15 year point:

    So looking at [the banks'] own practices to date my understanding is that that period can be around the six-year mark. Therefore the proposal, as I understand it, to use a 15 year mark seems to me a long way out ...[50]

The BSA itself regards accounts as "lost" after just three years for its own purposes:

    If you have a personal savings or current account and there have been no transactions (withdrawals or deposits) on it - other than those initiated by the building society (such as interest and charges) - for a set period (usually three years) and the building society has not heard from you during that time … your account may be considered "lost".[51]

Mr Keith Hollander, Managing Director of the Unclaimed Assets Register, cited a survey carried out by Experian in August 2006, which indicated that, "on average, the public felt 9.5 years was a sufficient period of dormancy,"[52] and Mr Martyn Jones MP claimed that "the present proposals for 15 year 'cut-off' point are excessive, and allow banks to continue to hold onto vast amounts of dormant money, that could be otherwise used for charitable purposes".[53] Table 1 shows dormancy periods in various schemes abroad.

Table 1: Dormancy periods of selected unclaimed assets schemes

Country or US State Definition
Nevada3 years
California3 years
Texas5 years
Ohio5 years
New York5 years
New Zealand6 years
Australia7 years
Switzerland10 years
Ireland15 years
UK15 years

Source: Ev 111

28. When the Economic Secretary was asked why the 15 year definition was chosen he answered:

    Fifteen years is one of the similarities with the Irish. The Irish have gone for 15 years as well, and we have a challenge here because we have to show to the public that our first priority is to make sure that wherever possible people are reunited with their own assets. If we were giving the impression that it was a much shorter time period, people might doubt that that is our intention … in order to have some stability in the Reclaim Fund and in the flow of resources from the Reclaim Fund into spending, if you have a considerably shorter period of time than 15 years, then I think it would be much harder to manage because at any point in time there would be money moving into the Reclaim Fund and then out again back to consumers at a much more rapid rate, and I think that would make it much harder to manage the liabilities for the Reclaim Fund, and much harder to plan the spending consequences. We did look at the Irish experience, and we judged that 15 years seemed a sensible time.[54]

Although the Irish scheme does have a 15-year dormancy period, it is also defined very strictly on customer-initiated transactions, whereas the UK scheme will be taking into account all kinds of customer contact. We suggested to the Economic Secretary that perhaps banks could be confident that an account could be classified as dormant after, say, 10 years instead. The Economic Secretary's response to this suggestion appeared to show some room for debate:

    This is part of the consultation. It is something which can be discussed as the legislation is before Parliament … I do not feel, from the responses we have had from the private, or, actually, from the wider, consumer responses that people think that 15 years is an overly-long period of time.

29. In setting the dormancy period, a balance needs to be struck between minimising reclaims from the Central Reclaim Fund, and maximising the funds for disbursement to good causes. The choice of 15 years as the dormancy period is higher than in most other jurisdictions that have set up unclaimed asset schemes. In drawing a parallel with the Irish scheme (which also uses a 15 year definition), the Economic Secretary used an incomplete comparator, because the Irish scheme has a very narrow view of customer activity. In contrast, the UK scheme is set to allow financial institutions not to pass to the Central Reclaim Fund those accounts on which, although no transaction has occurred, the bank has evidence of other customer activity. It is unlikely that a significant number of customers would renew contact with their bank between the tenth and fifteenth anniversary of inactivity. We therefore recommend that the Government reduce the proposed dormancy period from 15 to 10 years.

What constitutes customer activity?

30. On our visit to Ireland, it was explained to us how the definition of dormancy in that country was based on "customer-initiated transactions", rather than "customer activity". The Irish scheme views an account as dormant even if the account-holder has made a telephone query, spoken to a member of branch staff, ordered a cheque book, or (in the case of a building society) voted at an AGM. Arguably, all these actions would prove that an account was active, rather than dormant. The UK proposals have adopted a different approach, which permits banks and building societies to consider any form of customer communication, so long as evidence of that communication is retained.[55] The BBA argued that, if the UK scheme treated dormancy solely as a transaction issue, then some accounts would be incorrectly treated as dormant when the financial institution knew the account-holder was active.[56] Instead, the BBA argued, financial institutions "should be permitted to take into account other forms of customer activity in determining whether an account is truly dormant, and examples of that [are] correspondence, telephone calls, e-mails and, of course, as far as the building societies are concerned, voting at an AGM. We can come up with a list." [57]

31. The approach taken in Ireland maximises the funds remitted from the financial institutions for disbursement, but is likely to lead to the transfer of some accounts of which customers are fully aware. Grant Thornton explained to us some of the difficulties associated with identifying "rainy day accounts" in the Irish scheme, where customers may intentionally leave an account untouched, perhaps in order to put aside funds for a child so that they can go to university. [58] However, Grant Thornton also pointed to the advantage of the Irish approach compared with the Government's proposals:

    Will the legislation need to be inflexible? If the rules or requirements are flexible, you must expect flexible application of those rules. The one merit of the Irish system was its objectivity and it did create a common playing field, an even playing field, and everybody was playing by the same set of rules.[59]

The Commission on Unclaimed Assets were also concerned at the proposed discretion afforded to financial institutions in choosing what customer-initiated activity formed the basis of the definition of dormancy in that institution: "This runs the risk of dormancy becoming too narrowly defined and missing genuinely dormant funds. There is also a danger that the framework would no longer be perceived as fair between financial institutions."[60] Which? expressed concern at the possibility that banks might use the proposal to permit customer communication as evidence of non-dormancy to avoid transferring assets to the scheme. They suggested that a possible resolution to this challenge would be for the Government provide further detail as to what 'other activity' it believes could then be used as an indication that an account is not dormant. Banks could be required to publish details of their definitions of 'other activity' and to retain evidence in those cases where they are excluding accounts from the scheme for these reasons.[61]

32. The Government's proposals for defining dormant accounts have some merit. It is appropriate that financial institutions should be permitted to consider various forms of communication with their customers as evidence of activity, rather than relying merely on account transactions. If the scheme were to focus on transactions alone, this would inevitably lead to significant numbers of accounts being transferred inappropriately. However, certain safeguards must be in place to ensure that financial institutions are not granted 'carte blanche' in identifying dormant accounts, in order to prevent the withholding of genuine dormant funds from disbursement to good causes. We recommend that the Government:

  • publish a precise list of transaction types that it considers to be "customer-initiated" for the purposes of the scheme;
  • publish a list of other forms of communication that it considers to be evidence of non-dormancy;
  • require institutions withholding accounts from the Central Reclaim Fund for non-dormancy on the basis of non-transaction activities to retain evidence of such activities and make them available for external audit.

Scale of unclaimed assets available for use

33. On our visit to Dublin, we heard that in 1997, prior to the Irish dormant accounts scheme commencing, it was estimated that there were funds with an approximate value of €3 million held in dormant accounts. During the first year of operation of the scheme— 2003—€196 million was remitted to the Irish Dormant Accounts Fund.[62] The discrepancy between the forecast and the actual amounts remitted in Ireland indicates just how difficult it can be to accurately predict the likely magnitude of funds that might be available.

34. The BBA estimated that banks held £250 million to £350 million in dormant accounts, and insisted that this estimate was more robust than the Irish estimates had proved to be. The BBA's Chief Executive, Angela Knight CBE, explained how the BBA had arrived at that range of estimates and why she was confident that they were realistic: "we have been back and checked with our member[s] now two or three times, so we have got some real substance for the figures that we have presented to you".[63] The BSA's estimate of unclaimed assets held in building society accounts was previously £50 million to £70 million, but, at the evidence session on Tuesday 5 June, the BSA revised that estimate upwards to £150 million, as a result of one or two societies having looked more carefully at their records.[64]

35. The estimates from the BBA and BSA represent the stock of unclaimed moneys that they believe are currently held in bank and building society accounts, using the "no customer activity" definition. The estimates do not account for the likely impact of the proposed reunification exercise, which is due to occur for 12 months preceding the first transfers to the Central Reclaim Fund.[65] In Ireland, approximately 40% of dormant accounts were reunited in a similar exercise. The BBA was unable to give a detailed indication of the proportion of its estimate which was likely to be reclaimed before the first transfer, although it thought it would be "a lower proportion than you saw in Ireland",[66] reflecting "the high level of reunification that has already taken place [in the UK]".[67] The Chairman of the BSA, Mr Iain Cornish, estimated that 40% to 50% of dormant funds held by the Yorkshire Building Society would be "fairly straightforwardly" reunited with their account-holders.[68]

36. In the light of our visit to Ireland, the UK estimates of available funds seemed somewhat low. When we asked the CUA whether it thought that the banks were downplaying the amount of money held in dormant accounts, we were told:

    [The banks] are very anxious, as I gathered from my discussions with them, that figures should not be floating around that are a multiple of what is likely to emerge because the focus then would be on whether they have done a proper job of identifying and so on. So I think for that reason they are being conservative … My own feeling is that we will be pleasantly surprised when we know the numbers.[69]

The Unclaimed Asset Scheme will not just release funds in the first year, but will also identify and release funds on an ongoing basis, as subsequent accounts exceed the dormancy period. In Ireland, the annual flow of funds was equal to 15% of the original stock. The BBA confirmed that the annual flow in subsequent years would be "a figure in the tens of million of pounds".[70] We were encouraged by the suggestion that the banks are being conservative in their estimates. Based on the Irish experience, we consider that it is more likely that the current estimates of the scale of funds in dormant accounts will prove to be an underestimate than an overestimate, although the actual scale of funds transferred to the Central Reclaim Fund depends critically upon the success of efforts to reunite funds in dormant accounts with their rightful owners. This uncertainty is amplified by the proposed voluntary nature of the scheme, as we cannot say how many financial institutions will participate, nor how full and complete that participation will be.

44   This latter possibility might be explained by a parent or grandparent putting aside a 'nest egg' for a new child to receive on their eighteenth birthday, for example. Back

45   A UK Unclaimed Asset Scheme: a consultation, para 4.4 Back

46   Ev 88 Back

47   Ev 91 Back

48   Ev 80, 102; Q 4 Back

49   Ev 94 Back

50   Q 46 Back

51   BSA leaflet, Lost Savings? How Building Societies help find your lost savings, September 2006, para 1, Back

52   Ev 49 Back

53   Ev 118 Back

54   Q 261 Back

55   A UK Unclaimed Asset Scheme: a consultation, para 4.7 Back

56   Q 104 Back

57   Q 124 Back

58   Q 6 Back

59   Q 14 Back

60   Ev 102  Back

61   Ev 111 Back

62   Ev 103 Back

63   Q 106 Back

64   Ev 79 and Q 111 Back

65   Q 107 Back

66   Q 114 Back

67   Q 108 Back

68   Q 109 Back

69   Q 213 Back

70   Ev 91 Back

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