Select Committee on Treasury Minutes of Evidence


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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