Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 260 - 279)

TUESDAY 19 JUNE 2007

ED BALLS MP, MR CLIVE MAXWELL, MR PAUL JOHNSON AND MS SUE CATCHPOLE

  Q260  Chairman: Just in case, for the public record, there is a misinterpretation here, we are not suggesting legislation and State control. The Republic of Ireland has legislation and it is not State controlled; they have a central management of assets separated from politicians (which we want above all) and government. So legislation can ensure the best returns in terms of resources without the State being near it. That is the last thing we want as a Committee.

  Ed Balls: I think, though, the issue comes down to whether this is something which is being managed by the private sector; whether the private sector is managing the process of reuniting, or whether this is a set of obligations taken on by the public sector. I understand what you are saying about politicians and it being at arms-length, but the reality is that the Irish do have a publicly-run and guaranteed scheme, which has a different impact in terms of financial reporting, and the like. There are, though, a number of similarities, and we both have similarities in the way in which we will conduct the regime and the regulatory regime, but there is a fundamental difference, which is we are seeking to do this with the private sector managing its liabilities; in the Irish case, those liabilities are passed on to the public sector balance sheet and are managed by the public sector.

  Q261  Mr Simon: The Government's definition of "dormant" is no customer-initiated activity for 15 years. Why 15 years?

  Ed Balls: Fifteen years is one of the similarities with the Irish. The Irish have gone for 15 years as well, and we have a challenge here because we have to show to the public that our first priority is to make sure that wherever possible people are reunited with their own assets. If we were giving the impression that it was a much shorter time period, people might doubt that that is our intention. One of the things which we do, importantly, in the Bill is write into the face of the Bill, in primary legislation, a statutory right for consumers to reclaim their money at any time. You have to have a decent length of time for people to do that. Secondly, in order to have some stability in the Reclaim Fund and in the flow of resources from the Reclaim Fund into spending, if you have a considerably shorter period of time than 15 years, then I think it would be much harder to manage because at any point in time there would be money moving into the Reclaim Fund and then out again back to consumers at a much more rapid rate, and I think that would make it much harder to manage the liabilities for the Reclaim Fund, and much harder to plan the spending consequences. We did look at the Irish experience, and we judged that 15 years seemed a sensible time.

  Q262  Mr Simon: If one of the main reasons for the 15 years is the Irish experience, the Irish have defined their customer activity as "account transactions" whereas we are going to define it as any activity at all: a `phone call, a vote at a shareholder meeting, or activity on a different account by the same customer. If we are defining it much, much more stringently, is not the logic, therefore, that we should have a reduced, 10 or 12-year, time period?

  Ed Balls: This is part of the consultation. It is something which can be discussed as the legislation is before Parliament. We have had to look at these issues carefully to make sure that customers were being and were seen to be treated fairly, and to understand exactly how, in a UK context, activity should be defined. As I have said, we have tried to strike a balance in a way which we think will give assurance to customers that their moneys are not being unfairly, pre-emptively or overly-quickly taken. Our starting point was that 15 years seemed to be a sensible time period. I do not feel, from the responses we have had from the private, or, actually, from the wider, consumer responses that people think that 15 years is an overly-long period of time.

  Q263  Mr Simon: Quickly, and finally, if the banks are going to be using things like a `phone call and whether or not it was responded to, and whether or not letters were replied to, to make judgments, are we going to be requiring them to prove these activities—to prove the `phone call, to give us written evidence—or are we just going to take it on trust from the banks that they have done this?

  Ed Balls: This will be a matter for the relationship between the individual banks and the Reclaim Fund, which will be overseen by the FSA. In order to show this is being done properly we will need to have transparency in the way in which these things are done. I had a meeting yesterday with the British Bankers' Association and the Chief Executives of all of the clearing banks, and one of the things which we said to them was that we will need to have transparency in the relationship between the Reclaim Fund and the individual institutions, to show people that things are being done in the right way. Also, I think, to publish the volumes for individual institutions that flow into the Reclaim Fund.

  Q264  Angela Eagle: Are you not being a touch na-£ve about the readiness of some of these institutions to co-operate in an enthusiastic and meaningful way with this process, which after all transfers assets that they can put to productive use for their own profits into a fund that is used for other things, and therefore becomes out of their reach?

  Ed Balls: The proof of the pudding of that will have to be in the eating, but I do not think that, so far, the evidence to us is that the banks and the building societies are dragging their feet. In fact, I think that they are working pretty closely with us—and I hope you drew that conclusion from the evidence they gave when you saw them last week. I met, as I said, with all the chief executives of the clearing banks yesterday. I do not have the impression that they are reluctant to make this work.

  Q265  Angela Eagle: If the pudding turns out to be smaller, to use your analogy, or less healthy than we thought it was going to be, what fall-back position do you intend to take to ensure that co-operation is as enthusiastic as they are telling you it is going to be at the moment?

  Ed Balls: There are advantages for the banks themselves in this arrangement, because once the money goes into the Reclaim Fund their liability at that point is extinguished. So that is strengthening, from their point of view, in terms of their financial arrangements. So it is not simply a one-way gain to us. As I said, one of the things which I think we will need to do is show in a transparent way the flows of resource from individual institutions into the Reclaim Fund. The impression I had from the Chairman was that he thought that, maybe, the numbers could turn out to be larger, and that is something which we will need to monitor. That is an important part of the work of the Reclaim Fund. FSA regulation and then wider oversight will be to keep a close eye on these things. However, our judgment—

  Q266  Angela Eagle: What will you do if you find a laggard? Let us just say, for theoretical reasons, there are two fairly similar institutions with a similar range of customers who you would expect to have a similar range of transfer to the Reclaim Fund, and one has transferred a lot and one has transferred almost nothing. What would you do in those circumstances, under these arrangements?

  Ed Balls: It is a voluntary scheme, so if a laggard chooses—

  Q267  Angela Eagle: Does that mean nothing?

  Ed Balls: No, if a laggard chooses not to make any payments at all, despite the transparency of the regime, then that is a matter for them. What the Government is not doing is making this a compulsory scheme. That is a fundamental decision, as the Chairman said at the beginning. Do you go down a compulsory, statutory route, or do you go down a voluntary route? As I said, I think transparency will be an important part of this process, and my impression is that if there are laggards; that the BBA and the BSA want to be part of this and want to make this work, and in fact are already getting on with trying to start the process of reuniting. If your question is, do we have a reserve power to compel those who choose not to participate in a voluntary scheme, the answer is no.

  Q268  Angela Eagle: In terms of the unclaimed assets and the Central Reclaim Fund, the Treasury said that it wanted a freestanding body, independent of government, the banking industry and the distribution mechanism. You have given the banks and building societies responsibility for taking the lead in setting up the Central Reclaim Fund. How is that consistent with it being seen as independent?

  Ed Balls: It has to be set up by somebody, and we wanted this to be a private sector-led, voluntary scheme, not a government, mandated scheme. Therefore, while, understandably, the banks and the building societies are very keen to keep it at arm's length from themselves for their own balance sheet reasons, we thought that, given it was their responsibility to make this work, it should be their responsibility to get the Reclaim Fund established. That is what we asked them to do and that is what they agreed to do, and that is what is in the consultation document.

  Q269  Angela Eagle: What progress are they making?

  Ed Balls: I know that they are thinking at the moment about how to do it. Clearly, we are—

  Q270  Chairman: Thinking?

  Ed Balls: We are currently conducting a consultation in order to produce draft primary legislation, to then enact in Parliament over the next year. So we are some way off getting the Royal Assent which will allow this organisation to come into operation. My sense is that the first priority for the banks and the building societies themselves is to move ahead quickly with the process of reuniting, because I actually think that we need to show to the public that our first priority is to reunite people with their own money, with their own deposits in bank accounts, and then if the process of reuniting does not work effectively, to see the money flow into the Reclaim Fund. So in the messages I have sent to the banks and the building societies over the last couple of months we were certainly keen for them to move first on reuniting while working out the plans for the Reclaim Fund which will then kick in over the course of the next year.

  Q271  Angela Eagle: Do you envisage an insurance policy to bear the reclaim risk once the fund is set up? Or is that something they will decide?

  Ed Balls: No, not a public insurance policy, because we are not here talking about a government statutory scheme; we are talking about a private sector, voluntary scheme—

  Q272  Angela Eagle: So it is a matter for them what they decide to do with the risk for reclaim—bear the risk?

  Ed Balls: No, because the FSA will regulate the Reclaim Fund. It will be for the Reclaim Fund itself to manage its own liabilities; to make sure it does so in a proper way, and we have requirements on it to report its activity in order to make sure it is doing so properly, and there is FSA regulation. If you had a government guarantee then that would be—

  Q273  Angela Eagle: I was not asking that, I was saying do you envisage that an insurance policy would be the right way to bear the reclaim risk. I suspect you are going to tell me that is a matter for them.

  Ed Balls: I am partly going to say it is a matter for them, or for the Reclaim Fund, but, also, I think, given the scale of the resources you are talking about here, and the management of those liabilities, it ought to be possible for them to manage these liabilities in a way which deals sensibly with the risk without needing to, in the first instance, have an insurance policy. As I said, that will be for their judgment rather than for mine.

  Q274  Mr Fallon: Minister, National Savings and Investments have completed their review of their unclaimed assets under the 15-year definition, and they have told this Committee that the total they have unclaimed is £993 million. Why are you excluding from the scheme money in your own accounts?

  Ed Balls: In?

  Q275  Mr Fallon: In government accounts.

  Ed Balls: It is not money in a government account. That is what is unusual about National Savings. As I understand it, the money is—

  Q276  Mr Fallon: Whose account is it, then?

  Ed Balls: £436 million of unclaimed assets, using the same definition as the banks and the building societies; £974 million, if you also include all NS&I products (e.g. Savings Certificates), and then £993 million additional including unclaimed Premium Bond prizes. What happens with National Savings is that when an individual saves by saving with the Government they, effectively, save by taking out national debt. So these are not unclaimed accounts which are sitting there in some other part of the forest, it is a direct reduction in government debt. That is what people do; they lend to the Government and by lending to the Government they reduce national debt. So if we were to repay or to transfer all unclaimed National Savings products that would not be money which is sitting in an account, that would be a direct increase in the national debt. So the judgment for us is: do we think it would be right for the taxpayer, for public spending, to transfer that amount of public spending of taxpayers' money into the Reclaim Fund? The judgment we made is that, actually, it plays a more important role in reducing the national debt, which is not to say that there is not an important obligation on National Savings to reunite—and I can say something about that if you would like. However, this is not money which sits in an account in National Savings; National Savings exist in order to service national debt, and that is what they do.

  Q277  Mr Fallon: It must be sitting in an account otherwise they could not count it. Funding the national debt serves the population in general. You want your scheme to focus on youth services, financial capability and inclusion. Funding national debt is quite a different purpose.

  Ed Balls: But it is an important purpose. I am sure you will accept that an increase in the national debt is not desirable, in its own terms. Lending to the Government and reducing national debt is a public good.

  Q278  Mr Fallon: You are in charge of this confusion, not me. It is for you to explain why you are excluding—

  Ed Balls: I am not confused, though.

  Q279  Mr Fallon: You are not confused about it? You have decided to exclude it. You are not concerned with the issue of equity; that the banks and building societies say their unclaimed assets are being taken but not National Savings?

  Ed Balls: No, for the reasons I explained, that this is not money which simply sits in an account; this is money which directly reduces the national debt. If we were to pass unclaimed assets from National Savings into the Reclaim Fund that would be a direct increase in public spending and the national debt of half a billion pounds. If that is what you are proposing, I understand the proposal, but I would not agree with it.


 
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