Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 1 - 19)

TUESDAY 15 MAY 2007

MR PATRICK STOREY AND MR PETER GRAHAM

  Q1  Chairman: Welcome to our first session on unclaimed assets within the financial system. Could you identify yourselves for the shorthand writer, please.

  Mr Storey: Good morning. My name is Patrick Storey. I am a lead partner in the financial markets group at Grant Thornton, which is a large firm of chartered accountants and professional services. I specialise in the retail financial services sector.

  Mr Graham: I am Peter Graham, director of Grant Thornton financial markets group.

  Q2  Chairman: Thank you very much. I know the involvement Grant Thornton has had in Ireland. Could you outline briefly for the Committee your role in the Irish dormant accounts experience.

  Mr Storey: Yes, indeed. About two years ago, the Irish Financial Regulator who is responsible for policing and monitoring the Irish dormant accounts legislation asked Grant Thornton to help it to monitor the implementation of the statutory regulations in Ireland. This involved us visiting a number of financial institutions on behalf of the Regulator to see whether those institutions were applying the regulations according to the statute.

  Q3  Chairman: In Ireland in 1997 it was estimated that there were approximately €3 million in dormant or abandoned deposits. By 30 April, after the first year of reawakening after the first run of the legislation, €196 million was remitted into the dormant accounts. In the UK we have estimates ranging from £400 million to £450 million to maybe even £30 billion, so it is all wild. At the start in 1997 in Ireland we were talking about €3 million and by 5 April 2003 that had changed enormously. How will that impact on the UK, do you think?

  Mr Storey: It first of all demonstrates how difficult it is and how difficult it was in Ireland to estimate just how much would be realised or how much lay dormant in bank accounts. Perhaps we will come on a little later to describe the technical difficulties that the institutions will have had in identifying the dormant accounts, but, as you say, the estimates in Ireland range from €3-6 million to ultimately €196 million which was collected in the first year in 2003. If we were to implement parallel regulations in the UK—and I would emphasise the word "if" because the proposals are fundamentally different from the structure in Ireland—then surely looking at the population sizes initially, the population differential between Ireland and the United Kingdom at the relevant years, so we would be looking at a 15-year dormancy and that takes us back to 1986-87, the population differential between Ireland and the UK is between 16-17 times. Multiplying, on the basis of population, the amount that would be realised or that could be lying dormant in UK accounts in the UK, could be in the order of 2.2 billion and that is without them looking at the differential in personal wealth in the two countries at the relevant times. The GDP per capita in the Republic of Ireland in 1986 was roughly half of what it was in the UK in 1993, which would be the beginning of the dormancy period we have been looking at in the UK. That is pure mathematics.

  Q4  Mr Newmark: In defining unclaimed assets, do you think that 15 years is an appropriate term, particularly when you look at the US, for example, which I think has a shorter term.

  Mr Storey: Yes, I am aware that some jurisdictions have an extremely short term. It seems appropriate. It is the most common period that seems to be used in certain European jurisdictions and has been used in the Republic of Ireland. The difficulty of defining a very much shorter period of time is: are the accounts in fact dormant or are they rainy day accounts that people have left?

  Q5  Mr Newmark: The proposed scheme minimum criterion of dormancy is that there has been no customer-initiated transactions for 15 years. Beyond this, banks and building societies will be able to use other forms of communication with customers as evidence of customer activity. What issues is this likely to raise?

  Mr Storey: Possible issues of objectivity but the proposals I believe are very sensible. The Irish process required a customer-initiated transaction. If I can call upon my colleague Peter to describe the difficulties there were in identifying "rainy day" accounts.

  Q6  Mr Newmark: Or retirement accounts.

  Mr Storey: Or retirement accounts, that is right.

  Mr Graham: Within the Republic of Ireland legislation, for example, I could operate three accounts. I could have my current account; my regular savings account; and a rainy day account or my daughter's wedding account. My current account I use weekly or daily; my regular savings I use monthly; and because I have put the lump sum into my rainy day or my daughter's wedding account, I do not touch it. In theory, that account, under the rules in the Republic of Ireland, can become dormant and transfer to the National Treasury Management Agency dormant accounts fund.

  Q7  Mr Newmark: What happens in the case in which I only have a retirement account or a rainy day account? For me, I have stuffed some money for my kids in an account that I leave there for when they go to college. If, when they were born, my parents gave me some money and I just shoved it into an account, technically for 18 years that money could be just sitting in an account doing nothing other than me getting statements.

  Mr Graham: In the Republic of Ireland, if you had not transacted on that account that, in theory, would become dormant. I do not live in the Republic of Ireland, but—

  Q8  Mr Newmark: It would be a bit absurd if I exist and I have put money into an account for a number of my children. A lot of parents do this. A lot of parents will put money aside for their grandchildren and say, "Here is some money for when they want to go on to university." That is an 18-year period. How do you deal with those sorts of situations?

  Mr Storey: For the record, I agree, the problem is capturing the fact that you exist.

  Q9  Chairman: When we visited the Republic of Ireland we saw this, but I do not think Brooks was on that visit.

  Mr Graham: Within the Republic of Ireland legislation, it is not a case of a guillotine comes down or a portcullis comes down and a drawbridge comes up and the account holder can never see that money again. The legislation allows for a reawakening period. On the first run through, that was a 12-month period, the annual cycles followed.

  Q10  Mr Newmark: So there is some mechanism to try to identify who the people are.

  Mr Graham: Definitely.

  Mr Storey: On the other hand, the proposals which offer other means of identifying that the account is still active seem eminently sensible. In the example Peter has given, if you know and you are able to objectively show that the customer is using a linked current account, it seems sensible.

  Q11  Mr Newmark: Should there be a minimum amount in the account, like £100, for it to be included?

  Mr Storey: I do not think we have a view on that.

  Q12  Peter Viggers: In the Irish model, was there flexibility in the way banks could interpret the definition of unclaimed assets?

  Mr Storey: No. Absolutely not. It was a difficulty in the presentation of that model. It created a level playing field—absolute objectivity—but at the edges there were some difficulties and that did put some of the banks to disproportionate expense to identify, particularly, excluded accounts.

  Mr Graham: The registration in the Republic allowed for certain exclusions of accounts which by dint of the Act could not be dormant within the definition. As far as the banking system is concerned, if it is an account numbered 1, 2, 3, 4, that is a cheque account; if it is numbered 5, 6, 7, 8 that is a savings account. They did not know if that savings account was necessarily a lien on that with regard to other accounts. The effort to which they had to go to identify these to comply with the Act is an area that, if I were allowed to rewrite the Republic's rules again, I might improve, but I am not.

  Q13  Peter Viggers: Some banks will need to invest a considerable amount of money in setting up the structures here and reviewing the structures.

  Mr Storey: Yes.

  Peter Viggers: Will the legislation need to be inflexible in order to force the banks to do this?

  Q14  Chairman: There is not legislation proposed at the moment in the Treasury documents.

  Mr Storey: Will the legislation need to be inflexible? If the rules or requirements are flexible, you must expect flexible application of those rules. The one merit of the Irish system was its objectivity and it did create a common playing field, an even playing field, and everybody was playing by the same set of rules.

  Q15  Peter Viggers: Did your studies lead you in discussions with the banks to any ideas about the amount of money that the banks would lose by way of the scheme of unclaimed assets being changed? Because the banks obviously have been drawing revenue from unclaimed assets; they must make up for it somehow. Did your work lead you to any discussion with them as to how much they would have to recover in some other way from their customers?

  Mr Storey: No. The amounts that different institutions ended up paying over to the central fund in the Republic of Ireland depended very much on the maturity of those institutions. Clearly the newer, younger institutions had far fewer dusty, genuinely dormant accounts sitting in the background. For the older institutions this will have depleted their asset base to a greater degree. We were focusing on the application of the rules, not on the consequences for the institutions.

  Chairman: Just for the record, on Brooks' point, in terms of equalling balances, in 2003 to 2006 in the Republic of Ireland over €110 million was reclaimed by people. I think that is helpful.

  Q16  Mr Gauke: The Irish scheme was compulsory though the UK government was proposing a voluntary scheme for the UK. Do you think that is feasible and what would be the advantages of the voluntary scheme as opposed to a compulsory scheme?

  Mr Storey: I have some reservations about a voluntary scheme in that it does not create the level playing field that I have talked about in Ireland. There are some distinct disadvantages of having a very rigid structure such as the Irish model, but at least the institutions know where they stand. The concerns I would have is that whilst most institutions would be very noble and I am sure enter into the spirit of this there may be others that will give it lip service.

  Q17  Mr Gauke: Would you agree with that Mr Graham?

  Mr Graham: I would agree entirely. I remember my auditing career starting off in the early 90s in the Royal Bank of Scotland, and we are in very profitable times for these institutions and of course it is easier to comply.

  Q18  Mr Gauke: Do you see there being any particular problems with the fact that it is self-regulatory that it will be through the banking code and that itself is a voluntary form of regulation, or does that further increase the difficulties with the voluntary system?

  Mr Storey: I do not think it further increases it. I think there is just an inherent difficulty in a voluntary structure that you will have some who will enter into the spirit of the structure and others who will not, and that leads to competitive disadvantage. I mentioned that there were some of the older institutions which perhaps stood to suffer more in terms of depleting their asset base. It is perhaps unfair.

  Q19  Mr Gauke: One possible solution that has been put to us by the Commission on Unclaimed Assets is the need for a regulator to ensure public confidence that it is a level playing field. Are there any existing bodies that you can see that would fulfil the role of regulator and what would be the responsibilities of such a regulator?

  Mr Storey: First of all, I find it difficult to understand what the role of the regulator would be if you have a voluntary process, except if you are going to perhaps say what good boys we are in our annual accounts and dissipating this process perhaps, and the company's auditors will vouch for that, that it is a fair representation. So I find it difficult to see the role of a regulator at all in the voluntary system. If it is a compulsory system there are a range of options. I know that the Financial Services Authority has been mentioned as a potential body to regulate this set of rules. This is not consistent with the FSA's current role and it is not consistent with the FSA's more statutory objectives. This is, I daresay, more of a fiscal process and perhaps HM Revenue & Customs would be a more appropriate regulator for the process. There are of course a number of trade associations and we had a self-regulatory system in the UK financial services before the creation of the Financial Services Authority, and it worked pretty successfully with those self-regulatory organisations, so perhaps the respective trade associations could step in. I do not think we have a particular view. As I mentioned earlier, the Irish financial regulator was designated by the Irish legislation as the appropriate body to police and monitor the Irish legislation.


 
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