Select Committee on Treasury Written Evidence

Memorandum submitted by the Association of Friendly Societies

  1.  I am writing in response to Treasury Committee press release no.19 which announced this inquiry, on behalf of the Association of Friendly Societies.

  2.  The Association of Friendly Societies (AFS) has over 50 members and represents Friendly Societies in the UK. Between them, these organisations manage the savings and investments of over 5Ö million people, and have total funds under management of around £16 billion.

  3.  Friendly Societies are mutual, member-owned organisations, set up originally to encourage self-help and personal responsibility and to enable people with limited financial resources to improve their economic status. They typically provide and promote financial products—including life insurance, income protection insurance, and savings and investment plans—to this sector of the market, although their products and services are generally open to all.

  4.  These products are different from the banking products that are the primary focus of the inquiry. The concept of dormant accounts is appropriate for banking or deposit accounts. Under these, providing there is some transaction history, the value of the monies in the account will be known. Hence it will be possible to:

    a)  determine the value of the account to be given up by the bank/savings institution, and

    b)  if the account holder subsequently comes back and make a claim it should be possible to identify and return the monies, together with some appropriate rate of interest.

  5.  Savings accounts and banking accounts will generally be set up with the purpose of holding monies for (relatively) short terms—even in extreme cases no more than a few years'. Hence designating an account as "dormant" after perhaps 15 years is not unreasonable. In many cases the bank/savings institution will be proprietary. It does seem reasonable that for a shareholder company, the proceeds of such dormant accounts should not fall to shareholders but be applied for other purposes.

  6.  But the simple definition of an unclaimed asset that is adopted for banking does not translate to products offered by friendly societies. By way of illustration, a Child Trust Fund by its nature may have no activity for 18 years, and a burial policy is designed to be held untouched until the death of the beneficiary.

  7.  Further, by nature of their constitution and business strategies, friendly societies operate quite differently to most proprietary (plc) insurers:

    —  as member-owned organisations, the entire assets of a friendly society are owned in perpetuity by the members: past, present and future;

    —  a very large proportion of the business transacted attracts only a small premium or contribution, and the level of insured benefit or funds accumulated is commensurately modest;

    —  this also means societies are able to operate on low charging structures, and as a result have been able to deliver and promote products with long profit horizons (for instance AFS members administer around half of all Child Trust Funds);

    —  the social and non-economic benefits of the friendly society model mean that persistency levels are very high, and most customer retain a high affinity with their friendly society.

  8.  More fundamentally, the financial viability/ solvency of a friendly society is measured in relation to its assets. Such assets have been accrued over many, sometimes hundreds of years, and so include assets attributable to the current policyholders including any unclaimed policies, but also from previous policyholders via the inherited estate. Friendly society legislation, coupled with insurance law requires that these assets are used solely for the purposes of the society's business and other activities defined by the Rules of the Society. Often these Rules provide that any unclaimed funds are to be used for the benefit of all members, current and future. This is of critical value for a friendly society, which does not have access to wholesale markets to raise new assets. So compelling a friendly society to give up unclaimed assets could have three very dramatic effects:

    —  forcing them to act ultra vires to transfer unclaimed assets to a third party;

    —  increasing the risk that they fail to meet minimum solvency requirements; and

    —  increasing the prospect that they will need to demutualise to raise further capital.


  9.  Friendly societies have a clear basis for attributing assets, in order both to retain their solvency margins, and to ensure they have sufficient liquid assets to pay anticipated liabilities as they arise. Of course these vary on a day to day basis, as the valuation of assets varies. So as noted above, whilst deposit or other banking accounts have a defined value, this is not so clear for a friendly society or insurance policy. If a policy has matured and not been claimed, the value at the time of maturity should be clear. But for open ended policies (often called "whole of life" policies), the contract may still be in force even if contact with the policyholder has been lost. The "value" of the policy at any given time could be defined by:

    —  The value the policyholder might be paid if they requested surrender of the policy.

    —  The value of the policy if it were to pay out on a death claim (or other claim, such a serious illness).

    —  The value of the policy as reserved for in the insurers accounts or statutory reserves.

  10.  Where a policy is due to mature, the society will write to the member to explain their options. If the letter is returned, the society will make other efforts to trace the member. The box to the right provides examples of the kind of actions societies take.

    —  using local information supplied by the local lodge: in small societies, most members are known to other members;

    —  tracing the member through their bank account;

    —  using the national insurance number to trace with DWP;

    —  using 192, supported by Experian;

    —  writing to the occupier of the last known address asking for new address details; and

    —  using trade association registers where the society distributes through occupational affinity groups.

  11.  Some societies also subscribe to external commercial organisations, such as the Unclaimed Assets Register who help consumers identify a missing policy, though the very small volume of relevant queries would make such a scheme uneconomical for small societies. It is worth reiterating that many friendly society policies are opened ended and it's not possible to identify the point at which the assets are unclaimed.

  12.  Through the process of mergers and acquisitions of friendly societies it is sometimes the case that the society through which a member purchased their policy is no longer trading. In such cases the Mutual Societies Register, currently managed by the FSA, has been created to help members of friendly societies and other mutual organisations track down their policy. This offers a phone and online service. In addition, where consumers contact the Association of Friendly Societies we will provide contact information where we have it, or direct the call to the Register.


  13.  As per the argument above, unclaimed policies are put to full use by a friendly society in maintaining their solvency margin and in delivering benefits to the members. This is as required by the rules of the society. A friendly society for example would not normally consider the kind of reattribution exercise that some insurers are conducting, because the inherited estate is put to full use in maximising returns to their members, as well as providing non-contractual benefits in times of need, and there are no shareholders to distribute to.

  14.  That said, all friendly societies should proactively seek to repatriate unclaimed assets as part of obligations under Treating Customers Fairly. And as the figures show in the table below, a representative sample of seven friendly societies[8], shows that the proportion of unclaimed policies is incredibly low.

Unclaimed policies as
proportion of all policies
Unclaimed assets
asproportion of total assets

Up to 0.1%
0.11% to 0.5%
0.5% to 1%
1% to 2%
Above 2%

  So this brief survey indicates that on average around one quarter of one per cent of friendly society policies are unclaimed. Extrapolating these figures across all societies indicates significantly less than £50 million of friendly society assets is unclaimed. (Many small societies were able to confirm this with complete accuracy: one for example quoted a total of 131 policies with total assets of £1,599 (or £12 each)).

  15.  In many respects therefore the friendly society model already delivers the kind of social redistribution of unused assets that the inquiry proposes. And because a large proportion of friendly society policyholders are the financially disadvantaged or young or are attracted by the premise of mutual self-help, that redistribution has a high social element to it.

  16.  There would be significant costs and risks involved in including unclaimed policies from friendly societies in a "Social Investment Bank". These include making changes to friendly society legislation and the rules of individual societies, as well as the administrative costs of a Commission. It would also be necessary to agree a consistent basis for valuing the assets, and with the transfer of assets comes the potential for transfer of liabilities. For example, if an unclaimed policy was transferred based on its current value, but the policy was designed to pay out ten times that amount on death, the Commission would be liable for the additional payment upon a claim (and would itself need to be authorised to conduct long-term insurance business). Alternatively the society would retain the liability with no accompanying asset, adding new risk to the balance sheet. And this for the very small number of unclaimed policies highlighted in the table in paragraph 14. So it is difficult to imagine how including friendly society funds in any "Social Investment Bank" will redistribute unclaimed assets more fairly or more cost effectively than societies already do.


  17.  We are aware that the Irish government created legislation to take unclaimed assets. As friendly society products cannot be sold across national boundaries, only a few of our members have knowledge of the market there, so we have limited evidence of the impact of this legislation. This tends to reinforce the difficulty of applying the definition for dormant account to friendly societies (as per paragraph 4 above). As a result we believe there is disappointment in Ireland that the legislation has failed to attract a significant proportion of the assets expected, and that the revenue created had almost wholly a first year effect.

  18.  In summary, a core virtue of the friendly society model is that all the assets of a society are distributed to the policyholders/ members. Similarly the method of distribution, the nature of products, and the social benefits of membership create high levels of loyalty. As a result very few policies go unclaimed, and societies have effective solutions for tracing missing policyholders. So the forced withdrawal of assets from friendly societies would never recuperate the costs. AFS and its members would be delighted to present their position to the inquiry.

February 2007

8   Societies contributing were: Druids Sheffield, The Children's Mutual, Sheffield Mutual, Kingston Unity, Scottish Friendly, National Deposit and Compass Friendly Society. Back

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