Examination of Witnesses (Questions 40
- 59)
TUESDAY 15 MAY 2007
MS SUSAN
HITCH, MR
PIERS LE
MARCHANT, MR
MARTIN THOMAS
AND MS
PATRICIA LANKASTER
Q40 Chairman: This was just for investment
banks, Piers?
Mr Marchant: This was just investment
banks; Lehman Brothers is purely an American investment bank as
opposed to a commercial bank. The result of those queries, each
year I was saying, "No, you cannot do that" and each
year I saw the same amounts of unclaimed money growing notch by
notch rather than the amount decreasing. So the idea formed which
was really between myself and Martin Thomas in discussions of
creating a scheme that we initially discussed with the FSA on
an informal basis and the basic idea was how do you improve the
situation for a consumer while also releasing the money to the
charitable sector? The difficulty that a consumer has in relation
to holding cash with a bank is that bank's insolvency; so, in
a Barings type situation, when the bank goes down you take the
credit risk on that bank. The thought was that if we could created
a pooled insurance policy that would back the release of money
to the charitable sector then you could improve the credit risk
that the consumer had because it would no longer have a credit
risk purely on the financial institution, it would have it on
a pooled insurance policy, and at the same time you would then
be able to release the unclaimed money into the charitable sector.
And that was really the basics of the idea that Martin and myself
formulated and discussed with Susan and the team as part of Lord
Sainsbury's office—particularly it was the Gatsby Foundation.
Q41 Chairman: Martin, do you want
to add anything to that?
Mr Thomas: I will just say three
things around that, which might be helpful for your inquiry. The
first one is that the Balance project and charity, as it quickly
became, was wholly voluntary and was based on and completely took
advantage of the fact that all the investment banks who participated
did so with open alacrity. That is the first point. The reason
I make that point is that there is a fundamental distinction between
the nature in legal analysis—and I gather you have just
had Grant Thornton, so you will have had it in accounting analysis—of
an asset held by a stockbroker, if I can use an old-fashioned
but simple expression—they are not called that any longer—and
money held by a bank. As Piers has said, an asset held by a stockbroker
is not on its balance sheet, it is held, as they say, "in
custody", like having it in a cupboard, so from the stockbroker's
point of view they cannot use it—it is not theirs, it never
was theirs—it is an easy win for them to give it up to charity.
Money at a bank, as I suspect you all know, is different, it is
part of the bank to the extent that a high street bank gives up
£10 to charity they are by £10 a smaller bank. The second
point I would make—the same thing again from a different
perspective—the financial markets, the wholesale markets,
the markets in which investment banks such as Lehman Brothers
operates, are almost entirely intermediated markets, by which
I mean almost all of the wealth and assets that are in any shape
or form in play belong to somebody else. So it is, if I can put
it that way, a natural vein that one might want to mine for assets
which have become disunited from their owners because the owner
is almost never the person who actually has it. The third and
final point I would make is that we found throughout the Balance
story—with which, by the way, simply for your record I must
add that I am not connected. The form I saw describes me as a
Trustee of Balance—I resigned from the board in 2004 because
at the time the Bank of England sent me to the European Commission
overseas. This all takes advantage of and to do with the progress
of computerisation and technology. Everybody is conscious of the
fact—perhaps at different levels of ability to articulate
it specifically—that we are moving into an era where the
disconnect between an asset and its owner will become less and
less frequent because computers will tie everything up. Therefore,
we are currently going through a phase where there is an addition
spur for people who have dormant assets to find a solution because
the fact that they are dormant will be put into an ever harsher
light as the march of progress goes forward.
Q42 Mr Gauke: The evidence that we
have received from retail banks and building societies, that one
of the main reasons why assets are unclaimed is because of customers
failing to inform the banks and building societies of a change
of address, and the evidence we have from you seems to suggest
that actually computerisation and loss of corporate memory, because
of mergers and what have you, play a big role. Is that because
we are looking at slightly different sectors and it is different
for investment banks than it is for retail banks?
Ms Hitch: Yes, in part. I think
there are some real differences and I think that the biggest difference
is the one that Martin has just gone over which I think is the
most important of all. I think that the second is precisely that
one, though I want to stress in the first place that we at the
beginning of this were just guessing and as far as we can see
guessing is what anybody does until you put a mechanism in and
start working it, so that we have had a few surprises on the way
in discovering where the money came from in the end and how much
there was at different stages. We have already touched on the
way that this looks as if it is going to be a dwindling problem
or indeed resource, whichever way you think of it, and I think
we have had surprises on the way where we have discovered, for
example, that when you go back into the records, before computerisation,
what you get is in some ways perhaps a slightly smaller sum than
the kind of mega sums that were being talked about as guesses
in the first place and then a much larger stream on until its
eventual dwindling. So the shape of that money was different and
it came in slightly different proportions from the Aunt Emily's
£600 and the individual customer, and corporate activity.
Mr Marchant: The way that the
investment bank money was split up was really into two buckets.
You still had the individuals' money within some investment banks
that was sitting there, but you also very much had large quantities
of unclaimed money where one corporation had been doing business
with another corporation and there was a disagreement as to the
amount of money owed. There is a good reason that after a one-year
period that remains permanently dormant, and that is because of
the closing of the accounts on an annual basis of a corporation,
and so if a corporation decides it actually did miscount and forget
money it held elsewhere it then needs to reopen its accounts for
the previous year, which makes it very unlikely that the corporation
does want to take those sorts of sums back, and therefore the
money arising through transactions commercial counterpart to commercial
counterpart tend to also give rise to large pools of unclaimed
monies. What I would also add though is the Balance Foundation
project and certainly what we are seeing is very much an annuity
scheme. These amounts of money are continuously accumulating year
by year and we would expect the investment banks to continue to
release on an annual basis. While I completely accept Martin's
point in relation to the advance of technology, what we have also
seen is increasing amounts of money on the investment banking
side remaining unclaimed because of the number of transactions.
So while computers have made identification easier they have also
given rise to a greater pool of assets rather than a smaller pool
of assets because of the frequency and volume of transactions.
Ms Hitch: We are closing Balance
in a month or so, not because Balance has worked but because we
have the mechanism now, which anybody can pick up and take—I
have brought you copies in case you are all interested—and
use to release more in perpetuity. So it exists, it is out there,
it is completely usable, and we do not see there being a moment
at which we say that the job of release is done—the job
of designing the mechanism is done.
Q43 Mr Gauke: In your view are banks
as successful at finding dormant savers as they are dormant borrowers,
and if not why not? Other than the obvious!
Ms Hitch: Ours have been very
cooperative. As I am not a customer of an investment bank and
I am not borrowing from one I do not know how hard they would
work at me—I expect they would—but actually the banks
that have signed up to our voluntary scheme have seen real advantage
on both sides and have cooperated with us all the way along the
line. The interesting thing is that now we have existed for several
years there were investment banks that had early conversations
with us, and it does require work from the investment bank that
actually does it, and they had conversations with us two years
ago, three years ago and it looked to us as though it had died,
and actually it has not, so we are now finding that there are
people picking up and using the mechanism that we thought had
decided they were not interested and were not going to do the
work, and actually they have been quietly getting on with it and
we are finding that stuff is now happily being released when we
thought it would not be.
Q44 Mr Gauke: Can I ask briefly about
letter writing? The BBA and BSA do not propose that letters should
be sent to the last known address of dormant account holders.
How important do you think a letter to the last known address
is in reuniting account holders with their funds?
Mr Marchant: Certainly our experience
and belief is that it is important. It was critical in part of
the FSA's agreement for the investment banks to release the money.
They had two requirements: one, the writing of the letter; secondly,
the insurance policy. It seems to us that letters are regularly
written in the form of statements in any event. We have found
that these letters can be computer generated because effectively
what you are doing is identifying an amount that would otherwise
be on the valuation statement in any event, so it is not a very
manual exercise, it is one that can be achieved through automation,
and therefore from my perspective it is not burdensome, it is
one that could be easily achieved and I think that it is a significant
event for an individual's deposit with a bank to be moved to a
central fund away from the bank and one of which an individual
ought to be notified.
Mr Thomas: I do not have anything
to say about whether retail customers should be contacted by letter
or not in my experience only in the wholesale. There is a cost
point—and you probably have this already—generally
speaking retail banking, if you stay in credit, is free, and therefore
for the retail bank to write to a customer is an expense for that
bank—a very small expense but an expense. On the wholesale
market side, the inter-bank market side, which is the centre of
gravity of where Balance was active, from time to time—we
have not measured it—there will be amounts—I do not
know the amounts—£7000, something like that, £5000,
where the cost of incurring the many professional fees necessary
to find the true owner would be as great as or greater than the
amount involved because you would have to pay your accountants
and somebody else would have to pay their accountants and everybody
else has to have lawyers and the thing has to go through so many
hoops that you reach the point where—again, as I say, I
do not know what the figure is, but let us say for this £7000—you
would spend £7000 to reunite £7000. So from the wholesale
side the burden of going through the Balance mechanism—and
I use the word burden ironically because it is not much of a burden—is
extremely small compared with what would otherwise have to happen.
Q45 Mr Gauke: Is there any argument
for saying that it does not particularly matter whether account
holders are informed that their account is going to be transferred
because they are treated in just the same way under the new situation
as they were in the previous situation?
Ms Hitch: I think that is a very
powerful argument. In practice it is a question of trust, that
the problem with saying by whatever means—in our case buying
insurance—you have exactly the same right in perpetuity
to take your money back with all the interest it will have accrued
if it can be identified and you are identified as the owner. So
it should be possible simply to put it to use, pay a bit more
on insurance because of course it increases—if you have
not made a big attempt to reunite it—the chance that people
will come back and reclaim, but that you can do it straight away
almost and that you do not have to make big efforts. I think that
the problem there is not really one of substance, it is one of
trust in the system, and I think it is very important for banking
trust in the system and consumer trust in general that those efforts
be seen to have been made.
Q46 Mr Todd: The precise mechanism
that the so-called reclaim fund will operate under has not been
defined as yet. How long do you think there should be between
the point where an asset that has been unclaimed is identified
by a bank and the sum is transferred to the central reclaim fund?
Ms Hitch: I am going to hand this
over to the technicians to answer because I think there is a point
of principle here, which is very like the one I have just made,
which is that if you are absolutely sure that your reclaim mechanisms
really work then you can do it quite fast. But I think in practice
there are differences between the retail and the wholesale sector.
Mr Marchant: Can I start with
the wholesale sector? In the wholesale sector under the Balance
experience we took a period that was three years and that was
in agreement with the Financial Services Authority. That three-year
period, I think a large degree of the comfort from that came from
what I mentioned at the outset, that actually we were improving
the credit-worthiness of the counterpart for the underlying investor.
Also there was an experience of going through looking at what
happened after a certain number of years and how likely future
claims were because obviously if you are under the scheme that
Balance set up a premium needed to be paid to the insurance policy
and therefore if there were lots of claims in year two there was
no point in using that as a cut-off point, you would end up paying
more into the insurance industry than you would you be able to
release to the charitable sector. So there came a natural point
where the unclaimed assets really saw very little activity, and
that was around the three-year point. As regards the retail banks—and
Martin may be able to speak more from his experience on the Bank
of England side—one of the issues there is when have they
themselves treated an account as dormant? So looking at their
own practices to date my understanding is that that period can
be around the six-year mark. Therefore the proposal, as I understand
it, to use a 15-year mark seems to me a long way out and certainly
beyond the level of practice that already exists within the wholesale
sector.
Q47 Mr Todd: But that does not quite
cover the point I was making, which was the interval between the
point where you do accept that an asset has not been properly
identified and is lost from its customer and the point where it
is transferred, which is really the interval in which you give
the financial institution the task of carrying out the checks
of writing letters and so on.
Mr Marchant: I apologise.
Q48 Mr Todd: The Irish example, I
think there was a 12-month initial interval which was in place
and then a change to six months once the scheme was going. Do
those seem reasonable intervals for carrying out the various tasks
involved?
Mr Marchant: Yes, it absolutely
does; six months, if anything, seem long to me. The sort of interval
in practice that the investment banks are operating under is approximately
a three-one one.
Mr Thomas: Can I add one thing
to that, purely in support? Surely you do not want it to be a
fixed period, exactly for the point that Piers has made, that
you will find quickly you will have experience about the extent
to which dormant accounts turn out to be claimed after all. Really
the length of time both for the definition of dormancy—which
is not your question—and for the waiting room period, which
is your question, is really an actuarial matter; you can simply
do it by statistics and you will find that over time it might
or might not get longer or shorter.
Q49 Mr Todd: Yes, but we will probably
want to define this in law; but I accept the point you are making.
What about the interval between the reclaim fund receiving the
money and it being transferred for disbursement? Again, that is
a process issue of their analysis of what has been transferred
to them and, to some extent, the experience—and this is
an actuarial point—the proportion of funds that are then
reclaimed after they have gone to the reclaim fund. What sort
of reasonable period should be put in place there?
Ms Hitch: I think this is an interesting
one because I see that the earlier period will probably have to
be enshrined in law and I rather like the 12 months because it
seems to me to behove us to be generous to the banks' administrative
needs at that point. Once it is really up and operating it seems
to me that any reclaim fund should be budgeting ahead of time,
working out what it is going to do with the money and then spending
it when it comes in the way any other disperser should. But there
are going to be a few years in the first place—a couple
of years at least at the beginning—where you are not really
going to know with any great accuracy how much is going to come
in, except that there is going to be a lot, and that therefore
if you could structure something that was pretty flexible at that
stage in the first place that would seem wise to me.
Q50 Mr Todd: I was going to ask what
they do with the money when they have it, the reclaim fund, the
rules that they should have in place of managing that asset? What
sort of constraints should they operate under because they will
be sitting on this money and expecting to make a return on it?
What constraints should be in place?
Ms Hitch: Could I put a bit of
context on this?
Q51 Chairman: The quick answer, please.
Ms Hitch: I am also a Commissioner
on the Commission on Unclaimed Assets so I have those views about
it, but from the Balance point of view we were not primarily interested
in distribution; we had a little exemplary of grant programme
to show how you could do it really well, which Patricia ran. But
as to the distribution from the reclaim fund as you have designed
it—does anybody have any comments?
Mr Marchant: I would just make
one. Not being part of the Commission on Unclaimed Assets I do
think that the concept of using it in a leveraged way, i.e. through
the creation of a bank of a mechanism which can benefit not just
pound for pound but potentially leveraging the money that is coming
in and use it in a leverage manner is the right mechanism.
Q52 Mr Mudie: That is just where
I want to go really. Would you say to the Committee that the model
you have built up, have you been primarily interested in how you
got your hands on the assets or are you equally as proud of a
model of how you distribute it to the best effect?
Ms Hitch: We are extremely proud
of how we distributed the very small proportion of the money that
was released, that was granted back to us. So all our running
costs were paid for by charity—
Q53 Mr Mudie: No, Susan, we have
not much time—
Ms Hitch: It was small.
Q54 Mr Mudie: Yes, it was small,
but do you have anything to say to the Committee as to your approach
or the Social Investment Bank approach? How do they differ, which
one do you prefer, do you have views?
Ms Lankaster: Can I just say that
I advised on the whole approach to grant making and the message
was very clear that we needed to get the money out as quickly
as possible through an open application process in an area of
social need. So we adopted a very conventional but efficient grant-making
programme. We had thought that if much more money came into balance
then we would think about it differently. So it was a very traditional
but effective model that we adopted in an area that was not terribly
interesting to other grant makers.
Q55 Mr Mudie: So therefore when you
now move to a national scheme with far larger sums you would not
press your model, you would prefer the social bank investment
model, is that what you are saying?
Ms Lankaster: No, I am not saying
that. I am just explaining what Balance did.
Q56 Mr Mudie: What would you say
then?
Ms Lankaster: I had not really
thought about that. The problem is that the model we use for Balance
is actually quite similar to the big lottery fund in a way and
the Social Investment Bank approach is more entrepreneurial, but
I think there might be room for both approaches.
Mr Marchant: Can I just mention,
as perhaps a bit of an outside observer on this side of it, that
one of the things I thought was excellent in the way that Susan
and Patricia put the giving part together was that it brought
together many of the major charities that had already supported
the Balance Foundation, and so it created a dialogue between them
and an understanding of perhaps the different areas of focus they
had and therefore the gaps that may be existed as a result of
where the major charities were currently looking at their giving.
Q57 Mr Mudie: In the minute I have,
just carry on, Patricia, when you mention the lottery. Coming
from a deprived constituency I am not a great favourite of the
lottery in terms of it ever reaching the people that really need
it. Too many middle class people intervene, too many authorities
intervene with very good applications rather than the deprived
person. How do you see the Social Investment Bank not replicating
the advantages to the deprived of the lottery fund approach?
Ms Lankaster: I have to pass that
to Susan because I do not know enough about it.
Ms Hitch: I think that the Social
Investment Bank would have the capacity not just to wholesale
the money but to enable people to ask for it. I think there is
a problem of capacity among the disadvantaged in general; there
is the same that the disadvantaged have in using and accessing
ordinary bank accounts. But I think to be, like the Social Investment
Bank, set up and I hope it will be set up, in a framework of capacity
building so that local small charities could be privileged within
it in the sense that they would be helped with the know-how to
use it as well as given the access to it.
Ms Lankaster: I would like to
add one thing to that. We did not publicise particularly the grant
making programme of Balance. The first year we had 800 applications,
the majority from very small local charities working with disadvantaged
older people and the second year we had 600, and we did go out
of our way to stress that we were looking for local and regional
applications as much as national ones, and I think that is very
important.
Ms Hitch: And we got them and
we met them.
Q58 Peter Viggers: Were there any
difficulties with the insurance policy that underpins the scheme
and, drawing on that experience, do you envisage that it would
be possible to set up a broader insurance policy on a broader
scheme if that is the way that the government decides to proceed?
And I ought to declare my interest in the insurance industry.
Mr Marchant: We were very pleasantly
surprised by how easy it was to establish the insurance policy,
largely because of the tracking that the banks have to carry out
in any event of the history in relation to the unclaimed money
and correspondence and claims on that unclaimed money. So because
it was actuarially quite easy to be able to establish how much
was out flowing on an annual basis the insurance company found
it fairly easy to be able to calculate the sort of premiums that
they would need to charge in relation to the unclaimed balances.
It is pre-determinant on the books and records of the bank being
up to date and being clean and kept in good order, but that is
something that the bank should be doing in any event as part of
their general good housekeeping. But as long as those books and
records were in order then it was something that the insurance
company had no difficulty in providing an insurance scheme for
and it probably took us only about five to six months of discussions
in order to be able to establishment that it did truly work. I
personally see no reason why it should not be available in other
sectors, not just retail banking but also, for instance, in the
insurance market and unclaimed insurance policies.
Q59 Chairman: Can you tell me what
percentage of the investment bank sector signed up to this initiative?
Mr Marchant: It depends how you
judge it, by number of banks or by the percentage of the market
share they have? As percentage of market share I would say that
probably between 70 and 80% of market share of the banks—certainly
all of the large ones, Lehman Brothers, UBS, Goldman Sachs, HSBC
and others all signed up. I think where it became a little more
controversial was for the commercial banks who also had an investment
banking arm.
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