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.
THE DEFINITION,
IDENTIFICATION AND
COLLECTION OF
UNCLAIMED ASSETS
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.
THE DISTRIBUTION
AND USE
OF UNCLAIMED
ASSETS
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
|
|
| 0% | 2 |
2 |
| Up to 0.1% | 2
| 2 |
| 0.11% to 0.5% | 2
| 1 |
| 0.5% to 1% | |
|
| 1% to 2% | 1
| 1 |
| 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.
THE POSSIBLE
RELEVANCE OF
SCHEMES IN
OTHER COUNTRIES
FOR PUTTING
UNCLAIMED ASSETS
TO PRODUCTIVE
USE
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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