Memorandum submitted by the Balance Charitable
Foundation for Unclaimed Assets
This submission is made by the Trustees of the
Balance Foundation. The Balance Foundation, established in 2003,
has put together a mechanism which has over the last three years
enabled a number of investment banks and brokers to release in
the region of £8m in unclaimed assets to good causes to date,
with more fund releases in the pipeline.
EXECUTIVE SUMMARY
1. The Balance Foundation has demonstrated that
unclaimed assets in the financial sector can be applied to good
causes whilst at the same time protecting the ongoing rights of
the original owners of the assets.
2. Whilst any solution requires consideration
of a number of complex and inter-related legal, regulatory and
accounting factors, the issues are not insurmountable. The Balance
Foundation has from the outset focussed on achieving a voluntary
rather than legislative solution. Goodwill and a common desire
to make better use of financial assets for the benefit of all
has been a powerful motivator in achieving results.
3. The Balance solution has been successfully
applied to one group of unclaimed assets, but the Trustees take
the view that the basic principles could be adapted and applied
across numerous types of financial assets, ideally continuing
with voluntary participation, but applying enabling legislation
where necessary. Unclaimed assets will always arise, but in the
future all new financial products and services should have a mechanism
available to resolve this potential issue effectively.
4. Any solution must protect the interests of
the customer but, providing this is achieved, the distribution
of the assets to good causes should not be restricted or delayed.
In the opinion of the Balance Foundation it is essential that
whatever distribution method is agreed, there should be no delays
in the application of the newly released funds to good causes.
To tie the funds up in a bureaucratic organisation could be seen
as betraying the objective of going through the release in the
first place.
FULL SUBMISSION
Identifying and collecting unclaimed assets
1. The Balance initiative grew out of an awareness
that many financial institutions maintain accounts and policies
or hold assets for customers whose identity or whereabouts is
unknown. In many cases, these unclaimed assets are likely to remain
unclaimed indefinitely. The Balance Foundation focussed particularly
on unclaimed balances which had arisen in the broker/dealer operations
of investment banks during institutional trading on behalf of
clients. For a variety of reasons, trades had given rise to amounts
which had not been resolved, despite the institutions' best endeavours.
2. The rules governing the treatment of client
money are set out in the Handbook which the FSA is required to
publish under the Financial Services and Markets Act 2000. The
Client Money rules ensure that clients can have confidence when
dealing with an institution that the funds they place there are
"ring-fenced" from the other assets and liabilities
of the institution. The Client Money rules require proper segregation
of funds at all times, so that in an insolvency of a financial
institution, Client Money funds will be protected from the claims
of the institution's other creditors and so be available for settlement
of claims by clients. As primary regulator, the FSA controls the
manner and timing of transfer of funds designated as Client Money
without the agreement of the customer: the rules governing this
process are restrictive and this had led to a number of investment
banks holding unclaimed cash in their Client Money accounts which
they were unable to reconcile back to the original client.
3. Balance, working with the regulators, investment
banks and brokers in the City, professional advisers and insurance
specialists, put together a proposal which would allow institutions
with unclaimed Client Money assets to apply to the FSA for permission
to release those assets, subject to satisfaction of certain conditions.
A key part of this proposal was the availability of a bespoke
insurance policy to protect the ongoing rights of the customer
after the assets were released to charity.
4. With the assistance of its advisers, Balance
proposed to the FSA a modification to the Client Money rules.
Balance argued that if unclaimed assets had been outstanding for
at least three years and had not yet been reunited with their
rightful owners, then, provided that the client's ongoing rights
to claim were recognized by the institutions and protected with
the benefit of insurance, they should be able to be applied to
charitable causes. Balance emphasised the clear public benefit
in releasing to charitable purposes moneys which would otherwise
be expected to remain sterilised for an indefinite period, especially
as the proposed course of action would only have a nominal impact
on clients' interests, given the availability of insurance protection.
5. In March 2004, following Balance's representations,
the FSA policy committee endorsed the necessary policy change.
The FSA confirmed that it would consider, on a case by case basis,
applications for waivers to permit the release of unclaimed assets
from the Client Money rules. There were two provisos: that all
affected clients should be written to once more and given further
opportunity to claim funds; and that before any release of funds,
insurance should be put in place which would be available if valid
claims were subsequently made by the original owners of the released
funds. Since this policy change Balance has worked closely with
a number of leading financial institutions to assist them in releasing
their unclaimed client money assets via this route.
Achieving reconciliation, before and after distribution
6. In the experience of the Balance Foundation,
banks have historically made great efforts to reunite their clients
with their funds. For many reasons, an institution's records can
be corrupted or lost over time; these can include changes in recording
of data from manual to computerised systems and the loss of the
"corporate memory" held by individuals, particularly
on changes of ownership of the institutions concerned. With the
greater use of automated processing of transactions, the incidence
of unreconciled balances has lessened in recent years; however
it is still the case that clients lose touch with an institution
and it can prove extremely difficult to trace them. Generally,
the outstanding balances at institutions with which Balance has
worked have been at least six years' old and all efforts by the
institution to resolve them had failed. Often the amounts owed
to individual clients were very small, so that the client was
unlikely to pursue the claim, and even if the institution had,
in an attempt to finalise matters, issued cheques to their clients,
these would often remain uncashed.
7. For banks participating in the Balance initiative,
on sending the final notification letter to clients, there has
generally been a rate of response in the region of 15-20%. Even
then, the owner has often not pursued the claim once the institution
sought further information in support. When the institution has
an idea of the size of assets to be released, the insurance is
put in place and funds released. The insurance has a "first
loss deductible" to cover the risk of initial claims, and
institutions will generally hold these funds back in order to
meet any initial claims. Thereafter the insurance would take over
to meet claims above this level. As far as Balance is aware there
have been minimal levels of claims amongst banks which have participated
in the initiative to date.
Applying the scheme to other unclaimed assets
8. Although Balance has focussed its attention
on the release of unclaimed assets subject to client money rules
and held by investment banks and brokers, other areas where the
principles of the initiative could apply were considered. As far
as retail banks are concerned, there seems no reason why a proposal
along the lines of the Balance initiative, with insurance to protect
the rights of customers, could not be applied. The only major
concern would be the potential impact of any release of assets
on the institutions' accounts caused by the revised accounting
rules brought in by IFRS in 2005. This would clearly need to be
resolved before any retail bank could countenance participation.
This issue has, Balance understands, been the focus of much of
the discussion in the working party convened by the Treasury with
the retail banks and building societies.
9. One particular area of unclaimed assets which
the Balance team did explore in more detail related to unclaimed
insurance policies. There are a number of types of insurance policy
under which the benefits, when the policy matures, are held by
an insurance company until the entitled person makes their claim.
Inevitably, some policy holders will have over time forgotten
about the existence of the policy and lost contact with the insurer.
From discussions with a number of leading insurance companies,
Balance believes there are substantial assets which could potentially
be categorised as unclaimed and which could therefore be subject
to a reunification exercise and then be put to use for good causes.
Balance of course acknowledges that the legal, regulatory and
accounting issues would be different and would need to be explored
in detail in order to confirm that any such release programme
would be possible.
The distribution and use of unclaimed assets
10. Funds which have been released under the
Balance initiative to date by investment banks and brokers are
estimated to be in the region of £8m. It is a requirement
of the Balance initiative that funds can only be applied in support
of charitable causes. Many of the institutions which Balance has
dealt with have significant charitable foundations in their organisations
and well established grant making programmes which have been given
a considerable boost with the addition of the funds from releasing
unclaimed assets. Balance established its own grant making foundation
to facilitate the distribution of unclaimed assets in cases where
a bank did not wish to deal with the distribution itself. Also,
in recognition of the important role which Balance has played
in enabling banks to release assets, Balance has in many cases
been given a percentage of the funds released by institutions
for application to its own grant giving programme.
11. In considering its overall grant making
policy and objectives, Balance approached a wide range of consultees
from the voluntary sector, including both umbrella bodies and
individual charities. A number of one to one discussions were
held with voluntary sector organisations, including NCVO, the
Institute of Fundraising and the Social Enterprise Coalition,
and Balance convened round table meetings. The main themes emerging
from the consultation process were a desire to see any new grant
maker demonstrating a clear focus for its policies, a simple and
efficient grant process and clear guidelines for reporting on
outcomes.
12. The Trustees decided to establish a focused
grants programme which would demonstrate Balance's effectiveness
as a grant giving organization in a short time frame and also
show the value of using released funds in this way. A strong case
was made for prioritizing the needs of socially excluded older
people in a grants programme. A wealth of research from both government
and independent sources supported this, particularly Sir Derek
Wanless's review of Social Care and the Joseph Rowntree Foundation's
report on the funding of long-term care. The campaigning work
of Help the Aged, Age Concern, and other charities, raised the
issues starkly: the "crisis of under funding in the current
system"; the regional lottery for services based on where
a person lived and the eligibility and charging policy of the
local authority; the confusion between funding for health and
social care; and the key role of charities in supporting older
people while statutory funding has increasingly focused on acute
services only. Despite this situation, only a small number of
trusts and foundations prioritise the needs of older people.
13. Accordingly, Balance established an open
grants programme for charities working with older people over
75 at risk of social exclusion. The programme set out key criteria
and an external expert panel was appointed to provide advice to
staff and Trustees. So far the Balance Foundation has supported
over a dozen projects with over £0.5m-all of which are providing
vital support to this vulnerable group of people. The projects
which Balance has funded range from national projects covering
advocacy and advice to local community projects offering welfare
benefit advice, befriending and social activities and intergenerational/cross-cultural
arts projects.
14. Balance is proud of its legacy in the voluntary
sector, by which it estimates c £8m has been and continues
to be put to good use in the voluntary sector by financial institutions
themselves, while Balance itself has used some of these funds
to support an important area of social need. As a result of the
Balance initiative, some banks have been able to allocate resources
to new UK or European-wide charitable initiatives while others
have given fresh impetus to on-going projects with the allocation
of substantial amounts of additional funding. The overriding impact
of the Balance initiative is that monies which have been languishing
unused for up to 15 years or more within financial institutions
have, within months of release, been put to work in supporting
targeted projects in the voluntary sector to benefit those most
in need of help.
February 2007
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