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If I were still an auditor and advising a company such as a reclaim fund on the proper sorts of controls that needed to exist, I would say that it could not have a proper system of internal control that did not identify the potential obligations that it took on—which would have to be on a named basis—and it would then have the ability to match those off when repayments were made. I simply cannot conceive of a body keeping proper accounting records without knowing what they are all about. Perhaps the Minister can explain.
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Lord Shutt of Greetland: We are going a long way from the amendment but the question is how the reclaim fund is going to operate. Let us get back to basics. The customer, member or whatever has a relationship with his bank or building society and he has nothing to do with any reclaim fund—that comes later. Therefore, if a person unearths a pass book in an attic, he should go to his bank and say, “I want my £10,000. Here’s the book. It got lost 40 years ago but here it is”. I do not see that he should be troubled with going anywhere near the reclaim fund. Surely that is why the fund exists. In one sense, the fund is an insurance policy and, in effect, the bank or building society is saying, “We’re claiming on our insurance policy by going to the reclaim fund”.
Baroness Noakes: The noble Lord, Lord Shutt, is absolutely right but the reclaim fund has to have information on which dormant accounts it is taking over so that it can check them off when it is asked to repay them. It cannot be in an information void. The noble Lord, Lord Shutt, may well be right that the customer’s relationship is with the bank but there must be a relationship between the bank and the reclaim fund, as I cannot see how the fund can operate without having personal information.
Lord Davies of Oldham: I have let the noble Baroness down because I did not introduce the crucial word “audit” at any stage in this discussion and, rightly, she is holding me to account on that.
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Perhaps I may make the most obvious point first. The fund does not need the personal details of bank accounts and therefore it does not need the safeguard contained in the amendment. The identity resource contained within the individual bank account is the responsibility of the bank or building society, and, as the noble Lord, Lord Shutt, so graphically illustrated, it is to the bank or building society that the customer will inevitably go. Those running the fund will certainly need to know how much money is in the account and the potential interest rate because they will be holding that money and a claim may come in that they have to meet. Therefore, as the noble Baroness rightly indicated, the size of the claim will dictate the level of resources that the reclaim fund has at its disposal, but it will not hold personal information. In that sense, the banks have an agency role and there will be an agreement between them and the fund on how things operate. However, the banks and building societies will retain the crucial information, the confidentiality of which is addressed by the amendment.
On the question of audit, the flows of money from the banks to the fund will be independently and externally audited; thus, a crucial check on probity will take place in that respect. However, here I am referring to the flows of money and not to the data relating to individual accounts, which are the subject of the amendment.
Lord Hamilton of Epsom: Perhaps we can explore that a little further. If the noble Lord, Lord Shutt, finds a pass book in his attic which is worth £10,000 and the building society transfers £25 million, if he then comes along and says, “Hello, I have just found this and I want my £10,000”, would the reclaim fund repay that money when it did not know that it had £10,000 belonging to the noble Lord, Lord Shutt?
Lord Davies of Oldham: The noble Lord has largely answered his own question. He asked whether the banks and building societies would act with a degree of prudence in relation to a percentage of claims which might come in, despite the fact that they had identified these dormant accounts. We expect dormant accounts to be exactly what they are categorised as being; that is, dormant accounts on which future claims will not obtain in the vast majority of cases. That is why their resources can properly be directed towards the objectives that the Bill identifies. It would be a foolish bank or building society that did not have any resource to cover itself against a potentially successful claim. It is for the bank or building society to make a judgment on that.
The Lord Bishop of Chelmsford: Perhaps I may clarify that the relationship of the person or agency whose account has gone dormant, and whose pass book is discovered in the attic, is with the bank and with no one else. Therefore, there may be a relationship between that bank or building society and the reclaim fund, but not between the person and the fund. We need to make clear how that triangular relationship works. Am I correct?
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Lord Davies of Oldham: The right reverend Prelate is correct, except where there is a dispute, where the claimant goes into the bank and the bank says, “We don’t recognise the validity of the evidence that you have brought before us”. The claimant could then go to the reclaim fund. If the bank says, “We regard this account as dormant. You’re not the rightful owner of these resources. That money anyway has already gone to the reclaim fund; that, as far as we are concerned, is the end of the matter”, it might not be the end of the matter for the individual in certain cases. The reclaim fund might then have to reach a judgment on the position, and would need the information which the bank supplied to it. The noble Baroness was concerned about the confidentiality of that information. I am trying to assure the Committee that it is covered. Reaching that judgment is the only circumstance in which the reclaim fund would become involved with information of this degree of detail.
Baroness Noakes: We have heard very interesting exchanges on what the reclaim fund is about. The Minister believes that it will have information only in relation to disputes. I simply do not believe that. In practice, it cannot operate without information because it cannot be satisfied that it is meeting the right obligations. Having the money audited when it flows in has nothing to do with knowing when money eventually has to flow out again. I can perhaps think further about that.
My noble friend Lord Higgins and the right reverend Prelate were concerned about reuniting and whether advertising would be prevented. My amendment would have permitted that, because it exempts disclosure that,
- “is necessary for the purpose of enabling or assisting the reclaim fund to exercise any of its functions”.
If one of its functions were reuniting, which I do not think it is, that would not be a problem.
The big issue is whether it is a public body. The noble Lord, Lord Newby, picked me up for saying that it is a public body. I do not think that it is intended to be a public body; it may be intended to be, or actually be, a private body. Many private sector bodies carry out public functions—we have seen that in a number of instances. It has often been my view that the standards that we expect of public authorities where private bodies carry out their functions should be the same as those of public authorities. I can think of amendments that we have successfully made to legislation to enshrine that principle; that is, that when public functions are being carried out, they should be to the same rules. I shall not pursue that argument in this instance, but I would not like to let it pass without making the important point that if functions of a public nature are carried out by a private body, they should be done to the standards of the public authorities and not to any other standards, which is why protection would in principle be valuable.
However, I can see that others are not convinced that the body in question will have a lot of information. I can be proved right only after the event. For today, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
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Baroness Noakes moved Amendment No. 23:
(1) If a reclaim fund is unable to meet repayment claims for any reason, the Treasury shall make those repayment claims or arrange for them to be paid on its behalf.
(2) A reclaim fund shall be obliged to provide the Treasury with whatever information it needs to make repayments under subsection (1).
(3) Any amounts paid by the Treasury under subsection (1) will be treated as a liability of the reclaim fund to the Treasury.
The noble Baroness said: Amendment No. 23 also inserts a new clause after Clause 5. The new clause is entitled “Treasury support for repayment claims” and subsection (1) states:
“If a reclaim fund is unable to meet repayment claims for any reason, the Treasury shall make those repayment claims or arrange for them to be paid on its behalf”.
I have tabled this purely as a probing amendment to find out what happens if a reclaim fund runs out of money.
The whole scheme of the Bill is that the banks and building societies hand over their dormant account money and the related obligation to their customers—or “account owners”, to meet the terminology preferred by my noble friend Lord Higgins—is extinguished. It would have been difficult, if not impossible, to set up a scheme which did not protect the banks and building societies in this way, and we support that.
The money is then handed over to the reclaim fund, which assumes the obligation to repay the customer. Under Clause 5(l), the reclaim fund's objectives include meeting repayment claims and managing dormant account funds,
- “in such a way as to enable the [reclaim fund] to meet whatever repayment claims it is prudent to anticipate”.
While not all account holders are expected to come and ask for their money back, there will be some and the reclaim fund must, as we have already discussed, keep enough money back so that it can meet repayment claims.
The Minister has so far given us no information on what sorts of prudent level of reserves the reclaim fund will need. When we tried to discuss figures in yesterday's sitting, I remarked that the Minister’s remarks at Second Reading suggested that the Government do not have much idea of how much money is involved in dormant account money or how much would be involved in subsequent repayments. Indeed, the Minister told me yesterday that there was “much work” to be done on how the structure will develop, and I was told to be patient. Well, it is 24 hours later, and I have come back for more answers.
I am sure that the reclaim fund will be set up with some excellent and diligent directors who will look at this very carefully. I know that the noble Lord, Lord Newby, will probe later on who those directors are. However, there is no magic formula for working out how much will be needed. As the noble Lord, Lord Shutt, rightly told us yesterday, there will be a judgment about the level of reserves. But, like all judgments, it will be validated only after the event.
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The Treasury may or may not leave this entirely to the directors. The Treasury will have the power under Clause 5(4) to direct the reclaim fund to comply with its articles, which include the requirement to set up provisions relating to repayments. The Treasury will have to consider whether the directors’ reserving policy is adequate and form a view on whether it needs to use the power of direction. So, by act or omission, the Treasury will be closely associated with the policy of reserving. Regardless of whether it chooses to exercise a direction, it must have considered whether that requirement to set aside money to meet repayment claims has been met.
The amendment is asking what happens if the directors and the Treasury do not get it right and the reclaim fund runs out of money. It cannot realistically ask the Big Lottery Fund to let it have its money back. The banks will have handed over the whole of the dormant account money and they will not want to shell out again. One way or another, the Treasury will look like a natural port of call. I do not believe that that could be a problem in the early years when the backlog of dormant account money is transferred to the reclaim fund. Reserving policy will be largely immaterial when there are significant inward flows, but the issue will become highly relevant once the backlog is cleared and the amounts flowing in annually have dropped to the much lower level.
The Minister himself has pointed out that the sums available for transfer to the Big Lottery Fund and transferred to the reclaim fund as liabilities will depend on how successful the reuniting activities are. As we know, the charities are very keen to ensure that reuniting activities are better than they have been in the past. It is just possible that, if that is successful, the amount of dormant account money declared for transfer via the reclaim fund in future will drop down to a significantly lower level. In some ways that would indicate the success of the policy, but it would not necessarily indicate success in getting money to the Big Lottery Fund. So if the reclaim fund did not set aside enough money when the money was flowing in, possibly because pressure was put on it to release as much as possible for good causes, we might find that the ongoing annual inflows were not enough to fund the ongoing demands for repayment, especially as the repayments may well be much higher than the amounts originally handed over. As we also know, interest may well be added on to those figures, which will increase the amount that has to be repaid.
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If we assume that about £500 million flows in in the first few years, in line with the figures quoted by the BBA and the BSA, and that the annual flow then drops down to £10 million annually, which is broadly what the BBA has suggested, an error of only 2 per cent in the reclaim fund’s reserving policy would use up the whole of a year’s inflow. If those inflows were actually lower due to more successful reuniting, the ongoing cash problems could become severe. This is therefore not a fantasy amendment: this is something that could happen down the line because not enough was kept back when large amounts flowed into the fund.
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I understand that the reclaim fund will be covered by the Financial Services Compensation Scheme so that any unpaid repayment claims could eventually be recovered within the terms of that scheme. That raises two sorts of problem. First, the cost of the compensation scheme is met by the whole financial services industry. The Minister will be aware that there is currently considerable controversy about how the costs of the compensation scheme are borne. Asking the whole of the financial services sector to underwrite the potential costs of over-distribution of dormant account money via the Big Lottery Fund would at the very best be unpopular. Secondly, the compensation scheme presently covers only £35,000. The Government are consulting on proposals to increase that to £100,000 but, as the Minister will also know, that proposal is itself not without controversy. Only last week, the British Bankers’ Association voiced considerable opposition to that proposition.
Whatever the compensation limit is set at, the Bill imposes on an account holder the possibility that the strength of his covenant will be weakened. If I had a dormant account with, say, Barclays, I would not worry unduly about the compensation scheme terms or limits because I would see the strength of the Barclays balance sheet as my main security. The reclaim fund is quite a different proposition. If my dormant account money went via the reclaim fund, the Bill would give me the covenant of the reclaim fund, which would operate on completely separate financial dynamics. I am not at all sure how the Government have managed to convince themselves that the loss of security entailed in going into a much smaller and weaker organisation does not breach Article 1 of the European Convention on Human Rights. Perhaps the Minister will comment on that.
I do not like Treasury guarantees any more than the Government, but the Treasury has created this scheme and it cannot simply turn its back on how the scheme works out in practice. Even if there is not an explicit Treasury guarantee, will there not be an implicit guarantee because of the existence, if not the use, of the Treasury’s powers of direction? So, I ask again: what happens if the reclaim fund runs out of money? I beg to move.
Lord Newby: The noble Baroness has asked a sensible question but I do not agree with the answer that she has come up with. This gets back to the question of whether this is a private or a public scheme. If it is a public sector scheme, perhaps the Treasury should be doing as the noble Baroness suggests. However, under the Government’s current model, this is a private company and a voluntary scheme. If it runs into difficulties, the people who should be sorting it out are those who are responsible for it—namely, the banks and building societies. Under the current model, as I understand it, they will appoint the directors of this body and they must take some responsibility. If the reclaim fund ran into difficulty, I do not see why the banks and building societies could not make an additional payment into the reclaim fund as an advance on payments that they would be due to make in forthcoming years. The poor old Big Lottery Fund would then be starved of funds while this got sorted out, but that would be a logical way of dealing with the matter. The
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All this demonstrates that what looks like a simple scheme is much more complicated than it first appears. Although it will depend to some extent on what the Minister says in this case, the examples that we had in previous amendments do not satisfy me that the Government, in consultation with banks and building societies, which seem to be driving a lot of this, have thought out many of the details of how some of these problems will be dealt with.
Viscount Eccles: From the previous debate and this one, it seems to me that the difficulty we are in arises from Clause 1(2)(b), which states that,
- “the customer has against the reclaim fund whatever right to payment of the balance the customer would have against the bank or building society if the transfer had not happened”.
There is a similar provision in Clause 2(2)(b):
- “the customer has against the reclaim fund whatever right to payment of the balance the customer would have against the bank or building society if the transfers had not happened”.
If I am reading the Bill correctly, it transfers the contractual obligation from the bank or building society to the reclaim fund. My noble friend argued that that lessens the security of anyone who originally had a claim against a bank or building society but now has a claim against the reclaim fund. We need an explanation of why the Treasury has chosen to transfer the contractual obligation from the banks and building societies to the reclaim fund. The obligation could have been left in the original contract with the bank or building society and, as has been suggested before, the reclaim fund could have been made an agent that holds the money and sends it back to the bank or building society only if the bank or building society says that it has found that the contract still applies and that it has to make a repayment. The bank or building society would trust that the reclaim fund had kept enough money to meet the repayments, which we all know are bound to happen. That is not the way the Bill has gone; it has transferred the contractual obligation from the original holder of the debt to the reclaim fund.
Lord Hamilton of Epsom: I support my noble friend. The obligation has moved from the banks and building societies to the reclaim fund and, as the noble Lord, Lord Newby, suggested, it is quite unfair to put the obligation on it.
I am extremely unhappy about the Big Lottery Fund spending all this money. I will be coming to this when we deal with the question of the social investment bank. This will be a one-time splurge of money that may possibly substitute even taxpayers’ funds and, if it does not do that, it will be other lottery funds—if it is neither of those it will be very surprising. At the end of this spending, when the money starts to run out, people will ask whether any is left in the reclaim fund. There will be enormous public pressure to spend down any reserves that that fund has. The people who run the fund may responsibly say that they are going to keep quite a large sum of money in case there are later claims. But the pressure will be there, and we know that political life is such that, when the heat comes on,
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Therefore, ultimately the Treasury, rather like in the Northern Rock example, will find itself paying up anyway, so it might as well give that guarantee. I share my noble friend’s reservations about Treasury guarantees on anything, but we are not talking about inordinate sums of money in Treasury terms. If the fund is sensibly run, this should never arise anyway. I do not believe that the Treasury would be putting its head in a very big noose by undertaking to do this; it would be a more sensible way of seeing the matter through.
Lord Bach: The Treasury has no intention of putting its head in that particular noose, as the noble Lord so graphically put it. To be just to the noble Baroness, she is not suggesting that this is the solution to the problem that she so interestingly expounds. It is a probing amendment, so when the noble Lord, Lord Newby, accuses the noble Baroness of wanting this to happen, I say to him, “Just hang on a moment”, as I do not think that that is what she is suggesting. She is pointing out, justifiably, a potential problem that might arise. I say “might arise” because we think it highly unlikely that the reclaim fund will become insolvent.
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