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These notes refer to the Dormant Bank and Building Society Accounts Bill [HL] as brought from the House of Lords on 27th February 2008 [Bill 80]
DORMANT BANK AND BUILDING SOCIETY ACCOUNTS BILL
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EXPLANATORY NOTES
INTRODUCTION
1. These explanatory notes relate to the Dormant Bank and Building Society Accounts Bill as brought from the House of Lords on 27th February 2008. They have been prepared by Her Majesty's Treasury in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.
2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.
BACKGROUND
3. There are many bank and building society accounts that are lying dormant and unclaimed, often because people have forgotten about them. A number of countries have introduced unclaimed assets schemes to manage such accounts. These include Australia, Canada, Ireland, New Zealand, Spain and the United States. These schemes have a variety of different features.
4. It was announced in the UK 2005 Pre-Budget Report that the Government had taken the view that an unclaimed assets scheme should be established in the UK. The objective was a scheme which both preserved the rights of the individual customer and at the same time allowed unclaimed assets to be reinvested in the community.
5. The Treasury have undertaken two consultations with regard to the establishment of an unclaimed assets scheme. The first, "A UK Unclaimed Asset Scheme: a consultation", was published in March 2007. The second consultation "Unclaimed assets distribution mechanism: a consultation" was published in May 2007.
Bill 80—EN 54/3
6. The Treasury Select Committee of the House of Commons has conducted an inquiry into unclaimed assets. It published its report in August 2007. The Government's response to the Committee was published in October 2007.
7. Arrangements already exist under UK law for dealing with dormant bank accounts belonging to charities. Under section 28 of the Charities Act 1993, the Charity Commission has powers in England and Wales to direct funds held in dormant charity accounts to be transferred to another charity. Similar powers exist for the Office of the Scottish Charity Regulator. 1 The Charities Bill, which was introduced in the Northern Ireland Assembly on 10th December 2007, will make corresponding provision in Northern Ireland.
1 See sections 47 and 48 of the Charities and Trustee Investment (Scotland) Act 2005.
8. Arrangements also exist for ownerless property (known as bona vacantia), to pass by law to the Crown. Bona vacantia includes assets that belonged to dissolved companies and to people who have died intestate, with no known kin.
SUMMARY
9. The purpose of the Bill is to set up the framework for a scheme under which money in dormant bank and building society accounts can be distributed for the benefit of the community, whilst ensuring the right of owners to reclaim their money is protected. A dormant account is an account on which there have been no customer initiated transactions for 15 years.
10. A deposit in a bank or building society account constitutes a debt owed by the bank or building society to its customer. Although banks and building societies are free to make use of money received from customers (subject to prudential rules which aim to ensure the institution always retains an adequate capital base) the institution remains liable to repay the debt to its customer indefinitely. There is an exception to this in relation to accounts governed by Scots law, where rules under the Prescription and Limitation (Scotland) Act 1973 provide for liability to be extinguished after certain specified periods during which no relevant claim or relevant acknowledgement of the debt has been made.
11. The purpose of the Bill is to enable banks and building societies to cancel their liability to repay a customer where the money in a dormant account is transferred to a reclaim fund. The customer's right to repayment will be exercisable instead against the reclaim fund. This cancellation of liability is required in order to ensure banks and building societies can participate in the scheme without suffering an adverse impact on their balance sheets (on which the liability would otherwise need to be recorded in line with applicable accounting rules). Building society membership rights are preserved.
12. The Bill establishes the criteria for a body to qualify as a reclaim fund, and provides that a reclaim fund must be authorised by the Financial Services Authority ("the FSA").
13. An alternative scheme is available for building societies and smaller banks. This permits any building society, or a bank whose group assets were less than £7 billion at the end of the most recent financial year for which accounts have been prepared, to transfer an agreed proportion of a dormant account to a reclaim fund and to distribute the remainder to charities which benefit its local community (or in the case of a building society with a special purpose, to charities with similar purposes).
14. The reclaim fund will transfer surplus money to nominated distributors. The Big Lottery Fund will be the distributor of such sums, although the Secretary of State will have power to replace it and to appoint additional distributors.
15. Sums available for distribution by the Big Lottery Fund will be apportioned by the Secretary of State among England, Wales, Northern Ireland and Scotland. The Big Lottery Fund will be required to distribute money for social or environmental purposes, with more detailed spending areas being identified by each country for its apportioned share of the money available. For England, the spending areas relate to youth services, financial inclusion, financial capability and social investment. The devolved administrations may each identify their spending areas by order. Each country will be able to further specify preferred spending areas by direction.
16. The Bill sets out the powers which the Big Lottery Fund will have to distribute dormant account money. These powers are based on and are broadly similar to the powers it has to distribute money under the National Lottery etc Act 1993.
17. The Bill will be supplemented by other elements of the scheme outside legislation. These include:
- changes to the Banking Code: this Code sets standards of good banking practice for banks and building societies in the UK and is enforced by an independent board, the Banking Code Standards Board. An updated version of the Code is due to be published in March 2008, and the industry has indicated that this will be amended to take account of the scheme;
- agency arrangements: the reclaim fund is expected to enter into agency arrangements with participating institutions reflecting the provisions in the Code; and
- a reuniting campaign: the bank and building society sector is making efforts to reunite dormant account customers with their money in advance of, and after, the launch of the scheme. A new free internet tracing service for customers trying to
locate their lost accounts - mylostaccount.org.uk - was launched on a cross-industry basis by the British Bankers' Association, the Building Societies' Association and National Savings & Investments on 30th January 2008.
18. On 8th November 2007 the British Bankers' Association published a statement on the responsibilities of the industry to deliver the non-legislative elements of the scheme, including the reuniting campaign, revising the Banking Code and leading on the selection or establishment of a body to act as the reclaim fund.
OVERVIEW OF THE STRUCTURE
19. The Bill is divided into three Parts. Part 1 (clauses 1-16) deals with the cancellation of a bank or building society's liability to its customer and the transfer of money to a reclaim fund. Part 2 (clauses 17-28) deals with the distribution of money by the Big Lottery Fund for social or environmental purposes. Part 3 (clauses 29-33) contains the final provisions of the Bill.
TERRITORIAL EXTENT
20. The Bill extends to the whole of the UK. Clauses 19 to 22 contain specific provisions for each country of the United Kingdom respectively.
21. This Bill contains provisions that trigger the Sewel Convention. The provisions relate to the delegation to the Scottish Ministers of the power to restrict the purposes for which, and the kinds of person to whom, dormant account money apportioned to Scotland may be distributed. The Sewel Convention provides that Westminster will not normally legislate with regard to devolved matters in Scotland without the consent of the Scottish Parliament. On 24th January 2008, the Scottish Parliament passed a Legislative Consent Motion, agreeing that the provisions in the Bill that relate to the distribution of dormant account money in Scotland should be considered by the UK Parliament. The consent of the Scottish Parliament will be sought again if there are amendments relating to the distribution of dormant account money in Scotland which trigger the Sewel Convention.
TERRITORIAL APPLICATION: WALES
22. The Bill applies generally to Wales. Part 2 of the Bill concerns distribution of money, and clause 20 contains specific provisions conferring on the Welsh Ministers the power to restrict by order the distribution purposes and kinds of recipient for Welsh expenditure. Unlike England, the purposes and kinds of recipient of dormant account expenditure in Wales will not be set out on the face of the Bill, as they have not yet been determined. This order must be approved by the National Assembly for Wales.
23. In addition to the power conferred under clause 20, subsection (6)(a) of clause 23 gives Welsh Ministers power to specify further by direction to the Fund the particular purposes and kinds of recipient for money apportioned to Wales. And subsection (6) of clause 27 gives the Welsh Ministers the power to instruct the Fund to deduct from money apportioned for Welsh expenditure such amounts as the Welsh Ministers determine to be appropriate to defray their expenses incurred under the Bill.
24. The Bill also requires the Secretary of State to consult the Welsh Ministers on various matters. Clause 18(5) requires the Secretary of State to consult the Welsh Ministers before making an apportionment of dormant account money. The Secretary of State must consult the Welsh Ministers before exercising his power in clause 24 to prohibit distribution where the exercise of the power would relate to Welsh expenditure or would be likely to affect persons in Wales. The Secretary of State must also consult the Welsh Ministers before using his power under clause 25 to add or remove distributors.
25. Paragraph 2 of Schedule 3 confers on the Welsh Ministers the power to instruct the Fund to prepare, adopt and modify strategic plans in relation to Welsh apportioned expenditure. Where the Fund adopts a strategic plan it must send a copy to the Welsh Ministers, who must lay a copy before the National Assembly for Wales.
26. Paragraph 9(4)(b) of Schedule 3 requires the Welsh Ministers to lay the Fund's annual report before the National Assembly for Wales. Paragraph 10(2)(b) of Schedule 3 requires the Fund to send a copy of its accounts to the Welsh Ministers, and paragraph 10(4)(b) requires that the Comptroller and Auditor General must lay the accounts, and a report on them, before the National Assembly for Wales.
COMMENTARY ON CLAUSES AND SCHEDULES
Part 1: Transfer of balances in dormant accounts
Clause 1 Transfers of balances to reclaim fund
27. This clause provides that a bank or building society's liability to pay the balance owed to a customer in relation to a dormant account is extinguished where that balance is transferred to an authorised reclaim fund which consents to the transfer. This clause will allow a bank or building society's liability to a customer in relation to a transferred balance to be de-recognised under International Accounting Standards (IAS 39) and UK Generally Accepted Accounting Practice ("GAAP") (FRS 26). Clauses 7-11 contain definitions of a number of terms relevant to this provision, including "authorised", "building society", "bank", "balance", "account" and "dormant".
28. Subsection (2)(b) gives the customer a legally enforceable right to repayment of their balance against the reclaim fund. The customer is entitled to the same right to repayment as they would have against their bank or building society had the transfer not taken place. It should be read subject to the provisions of clause 9(2) which sets
out the customer's entitlement to interest (and permits the deduction of charges), and clause 13, which explains the effects of events such as insolvency of the bank or building society on the calculation of the customer's entitlement.
29. The requirement that the reclaim fund must consent to the transfer of any balance enables the reclaim fund to ensure that suitable arrangements are in place to handle claims for repayment. It is expected that banks and building societies will agree to act as agents of the reclaim fund and continue to manage the customer relationship. The precise details of any agency arrangement will be a matter for negotiation between the bank or building society and the reclaim fund.
Clause 2: Transfer of balances to charities, with proportion to reclaim fund
30. This clause establishes an alternative scheme for all building societies and for smaller banks which meet the assets test in clause 3. There are currently, 59 building societies 2 established in the UK and perhaps a small number of banks which would qualify to participate in this alternative scheme. These institutions may also participate in the main scheme under clause 1.
2 A directory of building societies can be found on the Building Societies Association's website: www.bsa.org.uk/keystats/buildingsocietysector.htm
31. Subsections (1) and (2)(a) provide that the liability of a building society or smaller bank to pay the balance owed to a customer in relation to a dormant account is extinguished, where an agreed proportion of the balance is transferred to an authorised reclaim fund and the rest is transferred to a charity or charities which meet certain conditions. "Agreed proportion" is defined by subsection (3). Both the reclaim fund and the charity (or charities) must consent to the transfers.
32. The charity or charities must either be considered by the bank or building society to have a "special connection" with that institution or undertake to spend the money for the benefit of communities local to the institution's branches. The first option enables money to be transferred to local charities, whilst the second option enables money to be transferred to non-local charities (for example national charities) which support local projects.
33. Subsections (4) and (5) explain that a charity has a 'special connection' with a bank or building society if the charity's main purpose (or one of its main purposes) is to benefit members of communities local to the bank or building society's branches. In the case of building societies, a charity will also be regarded as having a "special connection" with the society if the charity's main purpose (or one of its main purposes) reflects any particular purpose which the society has (apart from that of making residential loans as required under section 5(1)(a) of the Building Societies Act 1986). A building society's purposes are set out in its memorandum. An example would be a particular purpose to promote sustainable development or education.
34. Subsection (2)(b) provides the customer with a legally enforceable right to repayment of their balance against the reclaim fund. The customer is entitled to the same right to repayment as they would have against their bank or building society had the transfer not taken place. As for clause 1(2)(b), clause 2(2)(b) should be read subject to the provisions of clauses 9(2) and 13.
35. As explained in relation to clause 1, the requirement that the reclaim fund must consent to the transfer of any balance enables the reclaim fund to ensure that suitable arrangements are in place to handle claims for repayment. As for the main scheme (clause 1) it is expected that banks and building societies will agree to act as agents of the reclaim fund and continue to manage the customer relationship.
36. The requirement that the charity (or charities) must consent to the transfer enables a charity to refuse money where appropriate, for example, if it does not have the resources to distribute the payment.
37. Building societies and smaller banks will be required to report on how much money they transfer to charities and the identity of those charities, in their annual reports. For building societies, it is intended that these requirements be imposed by amending the Building Societies (Accounts and Related Provisions) Regulations 1998 (SI 1998/504) which are made under section 75 of the Building Societies Act 1986. For banks, provision is made in clause 15 of the Bill for this information to be included in their annual reports.
Clause 3: The assets-limit condition
38. This clause sets out the assets-limit condition with which a bank must comply in order to participate in the alternative scheme under clause 2.
39. Subsection (1) defines smaller institutions as those that had total assets of less than £7 billion on the last day of the most recent financial year for which accounts have been prepared. The term "financial year" is defined in clause 7. Once a bank's annual accounts for a financial year show total assets in excess of £7 billion it is no longer eligible to participate in the alternative scheme.
40. Subsection (2) explains how the assets-limit condition is applied in relation to banks which are members of a group (as defined by clause 7).
41. Subsection (3) explains how the assets-limit condition is applied where the bank's accounts are not reported in sterling (for example if it is a UK branch of a foreign bank).
42. Subsections (4) and (5) contain an order-making power to allow the Treasury to amend the assets limit.
Clause 4: Effect of balance transfer on membership rights
43. Building society members enjoy various rights under the Building Societies Act 1986, subject to the internal rules of the building society. These include the right to receive distributions when a society merges or demutualises in accordance with section 96 or 100 of the Building Societies Act 1986.
44. Subsections (1)-(4) ensure that building society membership rights are preserved where the balance of a dormant account held by a member of the society is transferred under clause 1 or 2, until the point at which the customer is repaid.
45. Subsection (5) ensures that where a reclaimed balance is paid back into a building society account within a reasonable time, membership rights continue to be preserved until the money has been credited to the account. After the money has been credited, application of the usual rules relating to membership will resume. This ensures that continuity of membership rights is preserved throughout. The period of membership immediately prior to the transfer of the balance to the reclaim fund, the period it remained unclaimed, the period between the claim and the deposit of the money in a building society account, and the subsequent period, will all count towards calculating the total length of membership for the purposes of any rights for which a qualifying period of membership applies.
46. Subsection (6) ensures that membership rights are preserved where a customer's original building society merges with or transfers its business to another building society.
Clause 5: Functions etc of a reclaim fund and Schedule 1: Provision to be made in articles of association of reclaim fund
47. A "reclaim fund" will receive money from dormant accounts transferred from individual banks and building societies under clauses 1 and 2. Clause 5 defines "reclaim fund". It must be a company incorporated under the Companies Act 2006 with restricted purposes (company objects). The main purposes are:
- the management of money transferred from dormant accounts;
- the payment of claims by dormant account holders whose balances have been transferred into the scheme; and
- the transfer of surplus money to the Big Lottery Fund (or any other distributor appointed under clause 25).
48. The reclaim fund will be expected to keep sufficient reserves of money to meet anticipated levels of claims for repayment by customers, to comply with rules imposed by the Financial Services Authority and to cover its running costs.
49. Schedule 1 sets out further provision that must be included in the articles of association of a reclaim fund. The requirements are designed to ensure that the deductions of expenses which are made from a reclaim fund's income are reasonable, that no distributions are made to its members and that information about levels of participation in the dormant accounts schemes is published.
50. Subsection (4) of clause 5 contains a direction-making power for the Treasury to ensure compliance by a reclaim fund with its articles of association. Clause 6 requires the Treasury to lay before Parliament any directions its gives under this subsection.
51. The British Bankers' Association and Building Societies Association have committed to lead on the selection or establishment of a body to act as a reclaim fund.
Clause 6: Parliamentary accountability of the reclaim fund
52. This clause requires the reclaim fund to send specified information, including its annual report, to the Treasury as soon as possible. The Treasury must lay this information before Parliament, together with any directions it has given to the reclaim fund under clause 5(4).
Clause 7: Interpretation of Part 1
53. This clause defines of a number of terms used in Part 1 of the Bill, including "building society".
Clause 8: "Bank"
54. This clause explains which banks are eligible to participate in the schemes under clauses 1 and 2. "Bank" is defined by reference to persons authorised for the purposes of the Financial Services and Markets Act 2000 ("FSMA") to accept deposits. (Deposit-taking is specified as a regulated activity under section 22 of FSMA, by article 5 of the Regulated Activities Order 2001 (SI 2001/544)). These are either banks incorporated in the UK (or foreign banks incorporated outside the EEA) which are authorised to accept deposits in the UK by the Financial Services Authority; or credit institutions authorised in another EEA Member State in accordance with the Banking Consolidation Directive (Directive 2006/48/EC) which exercise passport rights under Schedule 3 to FSMA to accept deposits in the UK. Broadly speaking, the definition aims to capture all retail banks operating from branches in the UK.
55. Subsections (3) and (4) exclude from this definition:
- those institutions that have permission under FSMA to accept deposits only in the course of another activity, for example insurance providers;
- those specified, or within a class of persons specified, by an exemption order made under section 38 of FSMA. The Financial Services and Markets Act 2000 (Exemption) Order 2001 (SI 2001/1201) specifies various banks and
classes of persons, with the effect that, for example, certain international development banks and charities are excluded from the definition of "bank"; and
- UK building societies, credit unions and friendly societies.
Clause 9: "Balance"
56. This clause sets out the meaning of the term "balance". This definition is relevant to understanding the amount of money which must be transferred to a reclaim fund and the amount which a customer is entitled to reclaim, under clauses 1 and 2. It ensures that a customer is entitled to payment of their original deposit plus interest due in accordance with the terms of the original contract (less any charges which would have been deducted).
Clause 10: "Account"
57. This clause explains which accounts are eligible to be included in the dormant accounts schemes under clauses 1 and 2. Accounts which are operated by a bank or building society in connection with activities other than deposit-taking (for example those which relate to the provision of insurance or mortgages) are excluded from the definition.
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