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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