Select Committee on Treasury Written Evidence


Memorandum submitted by the British Bankers Association

INTRODUCTION

  1.  The British Bankers Association (BBA)—the principal trade association for banks in the UK—welcomes the opportunity to contribute to the Treasury Select Committee's Inquiry into Unclaimed Assets within the Financial System. This relates, in part, to the Government's initiative aimed at releasing unclaimed assets in bank and building society accounts for use on community causes.

  2.  The discussion between the banking industry and HM Government has taken place within the context of reunification activity undertaken by banks and the availability of free central tracing services through the BBA and Building Societies Association (BSA). In this discussion we have underlined the need to make sure that the balance sheet release takes place on a basis compatible with maintaining customers' rights to reclaim their monies at any time. We believe the customer's interests are best served through monies being released only at the point at which they are likely to be genuinely lost and will remain unclaimed. Even on this basis there is a need to maintain a central reserve against future reclaim. In the event of customers reclaiming their monies subsequent to reclaim we see merit in their utilising the existing industry channels.

  3.  There is a need for a statutory discharge if unclaimed asset monies in banks accounts are to be released for use on community causes. We propose that banks and building societies continue to provide the customer interface subsequent to the monies being transferred and their commitment to assisting the customer in this instance set out in the Banking Code—the industry self-regulatory code on good banking practice. Compatible with the financial liability having been removed from bank balance sheets, we believe that the maintenance of a central fund to meet reclaims subsequent to transfer and the disbursement of monies to community causes should take place on an arm's length basis independent of the industry.

EXECUTIVE SUMMARY

  4.  In the detailed discussion with HM Government that has taken place since the 2005 Pre-Budget Report on the introduction of an unclaimed asset scheme for bank and building society accounts we have emphasised the need to ensure that any scheme was compatible with the right and ability of customers to regain access to their monies at any time.

  5.  Bank accounts most frequently become dormant as a result of customers overlooking the need to advise all of their financial service providers of a change of address when moving house. In these and other circumstances, banks will seek to re-establish contact and in the event that this fails the account will be made dormant in order to protect against fraud and ID theft. Arrangements are in place, however, to enable customers to regain access to their monies. This includes the use of the bank and building society retail network and the use of free central tracing schemes introduced by the BBA and BSA in 2001.

  6.  The BBA believes that the first objective of any unclaimed asset initiative must be to encourage customers regain access to their monies. This is broadly in keeping with the central tracing schemes introduced voluntarily by the industry six years ago. For this reason the banking industry is planning to undertake a further coordinated reunification exercise in the 12 month period running up to the introduction of the unclaimed asset scheme.

  7.  The release of monies from bank balance sheets for use on community causes can only take place if the means can be found of ensuring that customers, including legal heirs in the case of an estate, are entitled to reclaim their monies at any time, even subsequent to their being transferred from bank and building society balance sheets under the Government initiative. This has involved addressing complex legal and accounting requirements.

  8.  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. A second essential component is ensuring that customers face no additional hurdles in seeking to regain access to their monies. This, we believe, is best served through banks and building societies continuing to provide the customer interface subsequent to the balance sheet transfer under the scheme.

  9.  We have therefore proposed to HM Government that the unclaimed asset scheme for bank and building society accounts should combine a statutory right for the customer to regain access to their monies at any time with an industry-based commitment to provide the customer interface even after the account monies have been released from bank balance sheets. This will involve revisions to the Banking Code.

  10.  While there will be a need to establish a central reclaim fund to provide a reserve against which reclaims subsequent to transfer can be paid, the approach proposed avoids the need for the wholesale transfer of customer records and is therefore in keeping with maintaining the customer's right to privacy. It also removes a substantial administrative task from the central fund, provides a basis on which the risk of reclaim can be managed with reasonable certainty and enables the allocation of risk-free monies for distribution on a non-recourse basis. It draws on the existing industry infrastructure and in the process should ensure that any administrative costs attributable to the central reclaim fund are kept to the bare minimum. This will optimise the monies available for disbursement on community causes.

  11.  The 2006 Pre-Budget Report announced that HM Government recognised that enabling legislation was needed to bring about an unclaimed asset scheme and indicated that it would bring forward proposals for consultation. In addition to initiating a legislative proposal for the statutory discharge needed to underpin the unclaimed asset scheme, the Government also needs to consult upon the institutional arrangements concerning the retention of monies to meet the cost of reclaims subsequent to transfer and the arrangements for the disbursement of monies free from the risk of reclaim. We estimate that unclaimed assets within bank accounts currently amount to £250 million-£350 million.

Why does dormancy arise?

  12.  It is not in the commercial interests of banks for them to lose contact with their customers. If, however, an account has been inactive for an extended period, the account holding institution will write to the customer asking whether they wish the account to remain open. If no response is received, the institution will stop sending out correspondence and will class the account as dormant. This ensures that financial details are not sent to what might be an old address and reduces the prospect of fraud and ID theft. The most typical cause of a bank account being made dormant is a customer omitting to advise all relevant financial institutions of a change of address.

  13.  Institutions have set procedures for contacting customers in advance of making accounts dormant. This contact is normally in addition to other regular customer mailings. Depending on the circumstances, institutions may also undertake other forms of pro-active search to trace customers with whom they have lost touch. Given the development of multi-product relationships with customers and advances in IT, institutions are less likely to lose track of customers than previously was the case. This reduces the likelihood of accounts becoming dormant.

How can customers regain contact with their monies?

  14.  If the customer is aware of the specific bank that holds their account, they need only approach that institution. They will need to provide the bank with their contact details and information about the account. They are invited to provide as much information about the account as possible and are advised that proof of identity will also be needed.

  15.  If, however, the customer is unaware of the specific bank or building society that holds the account, they can use the BBA and BSA central tracing schemes. These schemes have been in existence since 2001 and are designed to help customers trace dormant accounts in instances where they are unsure of which institution holds an account, including where the bank or building society has closed or merged. The BBA and BSA tracing schemes are free of charge and the banks and building societies' commitment to assist customers search for their accounts is set out in the Banking Code.

  16.  The BBA tracing scheme is underpinned by 10 core "pledges" setting out the commitment of banks on dormant accounts. In addition to explaining that the bank will usually write to the last known address before making an account dormant included in the terms of the scheme is a commitment to a record of accounts made dormant being maintained in perpetuity. It is explained that the funds remain in the beneficial ownership of the customer and will continue to attract interest on the same basis as the preceding live account. Claim forms are available through the branch network, central institutional points and through the BBA. Institutions commit to process claims as quickly as possible, in all circumstances taking no longer than three months. In the event of a valid claim the customer will be advised of: the balance of the account, the amount of interest that has accrued if the account is interest-bearing and how they can access the funds.

  17.  The principle underpinning the scheme is that customers are given a clear understanding of their right to reclaim their monies and easy to follow instructions on how to proceed. Where only one institution is involved, customers are encouraged to engage directly with that institution. Where there is more than one institution at which the dormant account may be held, the BBA coordinates the application. It also acts as a central enquiry point.

  18.  The banks reviewed the BBA central tracing scheme during the course of 2006. As a result, the scheme was refined and refreshed, with the BBA modernising its claim forms, updating the related guidance and introducing an electronic facility enabling reclaims to be made by internet.

  19.  Since its inception, the BBA scheme has handled 35,000 claims and its telephone helpline has fielded in excess of 70,000 enquiries. In 2006, 7,000 claims were processed, 1,000 of which were made using the internet facility introduced in July. It needs to be appreciated that reclaims via the BBA scheme are additional to the reactivation of accounts by individual institutions. In addition to reclaims being made through the BBA scheme, the dormant account pages of our website attracted 149,000 visits in 2006. In many cases this will have resulted in customers reactivating their accounts by approaching individual financial institutions direct. The reactivation of dormant accounts needs to be viewed in the context of UK financial institutions holding some 150 million current and savings accounts.

  20.  Customers have a right to appeal through the bank or building societies' internal appeals process. They also have the right to refer the case to the Financial Ombudsman Service and ultimately can pursue their claim through the courts.

The customer interface under an Unclaimed Asset Scheme

  21.  In discussion with HM Government, we have proposed that the customer's interests would best be served through the introduction of a scheme grounded in the existing industry infrastructure. We have therefore proposed that individual banks continue to provide the customer interface in the event of account monies being transferred, including through the BBA tracing scheme, and that the commitment to assist customers reclaim access to dormant monies reflected in the Banking Code apply equally to account monies transferred under the proposed unclaimed assets scheme. We believe this to be the best means of ensuring a seamless approach for customers seeking to regain access to their monies subsequent to transfer under the 15 year definition. It also avoids the need for a wholesale transfer of individual customer records. This is in keeping with the customer's right to confidentiality and reduces substantially the administrative burden on the central body receiving the funds. This will optimise the monies available for disbursement on community causes.

  22.  Banks also consider it appropriate that a further specific reunification exercise should take place in advance of establishing the unclaimed assets scheme. This will reactivate as many accounts as possible and reunite owners and their assets and as a result will minimise reclaims subsequent to the transfer to the central reclaim fund. This will enable a clearer view to be taken on the monies that need to be kept in reserve for reclaims subsequent to transfer. The intention would be for the central tracing schemes to be actively promoted for a 12 month period leading up to the introduction of the unclaimed assets scheme and customers encouraged to reactivate their dormant accounts in advance of the introduction of the unclaimed assets scheme. Individual banks are also planning to undertake proactive search initiatives in the run up to the unclaimed assets scheme in addition to their usual activity. The precise nature that this will take will depend on reunification activity previously undertaken and the institution's assessment of whether it is likely that attempts to remake contact will be successful.

  23.  Providing the unclaimed assets scheme for bank accounts is introduced on the basis proposed, customers, including legal heirs in the case of an estate, will be afforded the same legal protection in terms the security of their deposit and will not have any additional hurdles to address in seeking to regain access to their monies. Banks would calculate the monies owed under the unclaimed asset scheme and transfer these to a central fund. This would maintain a reserve to meet the cost of future reclaim and make available the reclaim-risk free surplus for use on the community causes.

The proposed definition of an Unclaimed Asset within the United Kingdom banking sector and whether the scope of assets for inclusion within the scheme is appropriate

  24.  Banks have been clear from the outset that they could only contemplate the release of unclaimed account monies from their balance sheets as proposed if the means could be found of undertaking such a transfer in a way that had no bearing on the right of customers to reclaim their monies at any time, including after transfer. This is fundamental to the confidence that account holders place in UK financial institutions.

  25.  In discussion with HM Government we have sought to find the means by which banks and building societies can release from balance sheets genuinely lost accounts and savings for use as proposed, while ensuring that consumer rights are fully protected and customers seeking to reclaim their monies are not inconvenienced.

  26.  Key to establishing that consumer rights are fully protected is the establishment of a statutory definition that results in monies being transferred only at the point at which the likelihood of reclaim subsequent to transfer is improbable and capable of reasonable estimation. The experience of the Irish banking industry, confirmed by reclaim experience in the UK, firmly indicates the appropriateness of a 15 year definition if the intention is to release monies capable of being allocated for expenditure on community causes net of an identifiable reserve to meet future reclaims.

  27.  In considering the definition, the banking industry was also conscious of the fact that many institutions now aim to manage their customers' accounts on a relationship basis. It must be right that monies are not be transferred in circumstances where the deposit holding institution has evidence that it has not lost contact with the customer or where the customer has made it known that they remain aware of the account monies. At the same time, we see a need to guard against legislation that mandates wholesale IT system upgrades solely for this purpose.

  28.  There is also a need to reflect that reclaim experience varies in accordance with the nature of the account in question. We can see grounds therefore for concluding that for fixed maturity savings accounts the "lost contact" clock should only start ticking at the end of the fixed maturity period. We also see grounds for treating accounts operated on a "no mail" basis, often relating to overseas depositors, as falling outside the definition.

  29.  We believe that reallocation for use on community causes can have popular appeal if the definition used is aimed at capturing account monies in circumstances where the financial institution and the customer are unlikely to remake contact. This appeal falls away however if customers were to perceive that their monies had been transferred prematurely or in such a way that lead them to believe that their right or capability to reclaim their money has been put at jeopardy.

  30.  It needs to be added that international accounting standards followed by all listed companies since January 2005 introduce much stricter rules for derecognising liabilities from balance sheets as a result of UK accounting standard, "Reporting the Substance of Transactions" being replaced by IAS 39 "Financial Instruments: Recognition and Measurement". Under IAS 39, a financial liability may only be removed from the balance sheet when the obligation is discharged, cancelled or expires, whereas the UK standard allowed financial liabilities to be derecognised if they were considered no longer likely to occur. This results in a need for a statutory discharge if banks are to remove unclaimed account monies from their balance sheet as proposed. This would in essence be an exception to the stricter approach introduced by IFRS.

The scope for extension of the scheme, or for another scheme, relating to unclaimed assets held by other financial institutions, such as insurance companies and National Savings & Investments

  31.  The banking industry has approached the discussion with HM Government purely from the perspective of what is needed in order to ensure that an unclaimed assets scheme for bank and building society accounts can be introduced on a basis compatible with maintaining the customers' right to their monies. We believe that questions concerning insurance and national savings are best addressed by others.

  32.  There are, however, varying factors to take into account when considering the arrangements that may be put in place for other types of financial product. These include differences in the nature of the financial product in question, the pattern of their holding and the infrastructure that may already be in place for assisting customers to regain access with lost monies. Financial products are not homogenous and their differences merit specific arrangements being put in place to reflect their varying circumstances.

Any potential estimates of the scale of unclaimed assets, using different criteria to define an unclaimed asset

  33.  We believe that the need to maintain customer confidence in the security of deposits determines that any unclaimed asset scheme for bank and building society accounts must be based on a definition that would ensure that account monies are released from the balance sheet only at the point at which they are likely to be genuinely lost and not subject to future reclaim.

  34.  This necessitates a statutory definition for the scheme of no less than 15 years. At this point, 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.

  35.  We can confirm for the Committee that we expect that monies that would be raised in the first year of an unclaimed asset scheme for bank accounts to amount to several hundred millions of pounds. We estimate unclaimed account monies at present to be in the region of £250 million-£350 million for banks overall. This relates to the historical legacy of lost account monies; in subsequent years the annual amount falling dormant under the definition would reduce to a figure in the tens of million of pounds. This figure has been based on estimates gathered by the British Bankers' Association; it is corroborated by cross reference to the figures released by NS&I for unclaimed monies based on a 15 year definition and the experience of the Irish scheme. The amount ultimately available for transfer will depend on the outcome of the reunification exercise.

  36.  An exercise undertaken with the Charity Commission a few years ago has also provided an insight into the need for a substantial maturity period if the outcome of the exercise is to identify genuinely lost monies as opposed to the identification of monies lying dormant on account with the knowledge of the account holder.

Who should monitor the running of the collection scheme and ensure that financial institutions should identify, and provide for use, unclaimed assets?

  37.  We believe that the approach adopted should be self regulatory within a statutory framework and that the customer interface is best provided by banks and building societies directly and through the industry central tracing schemes. As a result, regulation in respect of the 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.

  38.  This leaves a need for monitoring arrangements in respect of the transfer of account monies, in terms of the amount of money involved, adjustments in respect of reclaims and the processes followed in the identification of the monies. We therefore believe that transfers made by banks and building societies should be subject to third party audit certification.

Whether the collection of unclaimed asset funds should be organisationally separate from its disbursement

  39.  We can see benefit in separating collection and disbursement in order to ensure that decisions about the amount to hold against reclaims subsequent to transfer can be made separate to decisions about disbursement. It is compatible with the financial liability having been released from the banks' balance sheets for the reclaim risk management and disbursement both to take place on an arm's length basis independent of the banking industry.

Whether enough is being done to ensure that unclaimed assets will be reunited with their owners, especially after the assets have begun to be dispersed

  40.  Substantial efforts are made by banks to maintain contact with their customers and to renew contact in instances where that contact has been lost. This includes activity on the part of individual institutions and the free central tracing schemes established under the aegis of the BBA and BSA six years ago. More can always be done and it is for this reason that the banking industry plans to undertake a further coordinated reunification initiative in the run up to the introduction of the unclaimed asset scheme for bank and building society accounts.

How unclaimed assets that have been dispersed can be reclaimed should their owners be found, and who should bear the final burden of repaying such monies owed

  41.  We see merit in utilising the existing reunification channels currently available from within the industry. We believe this to be far more effective than setting up new institutional structures to deal with post-transfer reclaims. Only risk-free monies only should be available for disbursement. In advance of reaching this stage monies should be pooled in a central reclaim fund. This should maintain a reserve against which reclaims subsequent to transfer will be met. It is compatible with the monies having been released from institutions' balance sheets for financial responsibility for meeting reclaims subsequent to transfer, including interest, to rest with the central reclaim fund.

February 2007





 
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