By Jai Baker, Head of Industry at Link Market Services
Did you know that £2bn worth of unclaimed assets could be used to benefit communities around the UK?
Did you know that £2bn worth of unclaimed assets could be used to benefit communities around the UK?
Since 2011, Reclaim Fund (RFL) has made it possible to use money in dormant bank accounts to help good causes. Their mission is to protect the rights of dormant-asset holders while unlocking the potential of dormant assets to enhance communities and help enrich people’s lives.
We wanted to find out more, so we spoke to our own Jai Baker as well as Adrian Smith, CEO of RFL. You can also hear from Adrian and Jai on our latest podcast that you can find here as they discuss RFL’s work to free up unclaimed assets for good causes.
We know that the dormant assets scheme through Reclaim Fund (RFL) has provided large sums of money for good causes. Tell us a bit about the history of the scheme and RFL?
Adrian Smith: In 2008, the Dormant Bank and Building Societies Act was passed. This allowed participating banks and building societies to voluntarily channel funds from dormant accounts (cash accounts with at least 15 years of customer inactivity) towards good causes through an authorised reclaim fund.
RFL, authorised and regulated by the FCA, was established in 2011. It has so far received over £1.3bn of dormant assets from participating banks and building societies, including many high street names.
RFL determines how much it must retain to meet any future reclaims in perpetuity. We also distribute the surplus to The National Lottery Community Fund who, as the legislated distributor, makes these funds available for good causes across the UK.
So far, the scheme has enabled the release of over £745m. This has addressed some of the UK’s most pressing social and environmental challenges, along with a specific focus on youth services and financial inclusion. Dormant assets remain the rightful property of their owners, and the scheme guarantees their right to reclaim the amount owed to them at any time.
What is on the horizon with the proposals for an expanded scheme that are included in the current government consultation?
Adrian: An independent Commission on Dormant Assets, comprising industry leaders and others, have joined forces over the last three years to work on the design of an expanded scheme.
In 2018, the government confirmed its support for scheme expansion and called for industry to set out its proposals on how this would happen in practice. Four senior Industry Champions took on the challenge. Their report, published in April 2019, made recommendations to industry, the government and regulators on broadening the scheme to include assets from the insurance and pensions, investment and wealth management, and securities sectors.
There has been significant stakeholder engagement over the past three years. It was finalised by the Industry Champions convening working groups with around 80 organisations contributing to their report’s recommendations.
The government has considered these and is now carrying out this public consultation to gather a wider set of views on the proposed approach to expanding the scheme. (You can access the consultation here which closes on 16 July 2020.)
Companies are getting to grips with their environmental, social and governance responsibilities. They are obliged to embrace these requirements and report on how meet these challenges in relation to their circumstances. Is there a place for a centrally-operated scheme to benefit good causes that doesn’t take account of individual company circumstances?
Jai: Companies and directors have to take decisions about their ESG responsibilities as they relate to their businesses. We believe the dormant assets scheme and its three core principles can be part of the solution and not a problem for companies.
Adrian: The scheme’s core principles are:
- Voluntary: firms can choose whether to become a participant and contribute to the scheme, and how much they contribute
- Full restitution in perpetuity: customers can reclaim their funds in full at any point, so they return to the same financial position as if the transfer hadn’t occurred. RFL ensures that sufficient funds are available, so this guarantee can be fulfilled with liability for the funds transferred from the participant to RFL
- Reunification first: to protect consumers, assets are only classed as ‘dormant’ and made available to the scheme if they meet strict criteria, and only after participating firms have completed their first priority to trace and reunite owners with their assets. The customer journey is continuous. Customers reclaim any 'lost' assets through their original product provider who holds and protects customers’ personal data throughout the process
The scheme – together with RFL as the potential expanded scheme operator – could be one element of how companies demonstrate their commitment to improving society for all.
This works for unclaimed cash assets now, but will it work in the future when the assets are investments tied up in pensions, insurance and shares?
Jai: There are complexities to navigate, including:
- Defining and establishing dormancy
- The valuation of the assets
- Maintaining tax neutrality
- Monetising those assets
Existing laws and regulation that govern how dormant accounts and assets are treated may need to change. This will require the help and expertise of the markets and companies concerned utilising the government consultation.
Adrian: RFL will use careful calculation and assessment to set aside funds to meet reclaims and provide the surplus for good causes. We are confident of the scalability of RFL’s operations and we are ready to support the sectors in developing the operational framework in what we envisage will be a phased implementation of the onboarding of new asset classes.
Companies have obligations to shareholders. Will they feel that releasing dormant cash/assets to RFL or good causes works against their governance objectives to operate in shareholders’ best interests?
Jai: We understand and acknowledge that it might be necessary for directors to ensure they don’t compromise their duties and obligations in law to shareholders and other stakeholders, or that they have some immunity from challenge when they make decisions regarding unclaimed assets. There may be a need for a change in the law or companies may need to change their Articles of Association.
What if companies already donate dormant money to charities and good causes?
Adrian: The participation in the scheme by 31 banks and building societies to-date has always been voluntary. Contributions into the scheme and how much is the participant’s decision. Some companies may believe that their obligations regarding dormant assets are already set out in law and regulation, and that returning dormant funds/assets to the company represents the best outcome for stakeholders.
Other companies may already have a reunification/dormant asset process that funds local and national charities, and feel reluctant to join the RFL approach. However, we believe that the economies of scale we can demonstrate as a central fund has a much greater impact.
How will questions around the definitions of dormancy be resolved?
Jai: The Industry Champions, working groups and technical committees in each of the proposed new sectors have worked to take their sector views and provide recommendations to the government. This has included detailed discussion about what would constitute dormancy for the new assets under consideration.
It was decided that the ’15-year rule’ for bank and building society accounts would not be appropriate for the other asset classes. For shares and dividends, for example, the definition has built on the industry standard of 12 years of dormancy.
The government consultation identifies three specific areas within securities: dividends, shares and other proceeds from past corporate actions. The proposed definitions all assume that, before being declared dormant, the companies have made proportionate and reasonable efforts to reunite assets with their owners and not been successful:
- Shares qualify if no transactions or contact have taken place for 12 years, and three distributions or other sums remain unclaimed or unpaid
- Dividends qualify if no transactions or contact have taken place for 12 years
- Proceeds from corporate actions qualify if 12 years have passed since date the company received or issued the consideration
The outcome of the consultation and discussions with industry will no doubt follow. There may also need to be some changes to primary legislation before proposals in the consultation can be implemented. The involvement of some assets in an expanded scheme may be more long-term compared to unclaimed cash dividends for example.
How would you advise companies to approach their dormant assets relating to shares and dividends?
Adrian: Both now and going forward, we and the government would encourage companies to manage their dormant accounts and assets with active and regular schemes. This may involve programmes to trace shareholders/customers, verify them and reunite them with their assets or unclaimed cash.
This makes sense for good corporate governance and ESG objectives, but also makes it possible to clearly identify what cash, assets and accounts are truly dormant and available for good causes.
Jai: For years, the securities industry and share registrars have operated such activities on behalf of their issuer clients on an ad-hoc basis. This approach should become more regular in the future and be treated business-as-usual.
Do you envisage the potential pool of unclaimed assets shrinking due to secure electronic records of asset holdings (like dematerialisation) or direct electronic payments (of dividends)?
Adrian: There are clearly changes in the way accounts are operated these days whether it is a bank account, retail account or pension with more digital interaction and electronic record-keeping. Cheques are less popular and direct electronic payments are in vogue. The pandemic has perhaps accelerated these changes.
However, even in a digital world, things go missing, individuals change email addresses, move home, misplace or forget about investments and when they die may leave assets that become dormant. So, whilst over time the size of the unclaimed asset pot may diminish, there is still value in harnessing what’s available in society’s best interests.
If dormant assets didn’t originate in cash but were investments in pensions, insurance and shares, will it be problematic when customers/shareholders come forward to claim them? Could the value of the investments have changed since they were converted to cash to join the scheme?
Adrian: Currently, the proposals are for all new dormant asset classes to be crystallised to cash by the companies before they are transferred into the scheme. The asset value is a challenging area for this sector. It is important that firms, registrars etc consider this point and provide their view when responding to the government consultation.
As with the current scheme, full restitution ensures that customers are able to reclaim their funds in full at any point and we encourage the sector to look at how they can uphold this principle.
Under the proposals for the expanded scheme, companies are required to monetise assets and administer verification/valuation of any claims. Will this approach deter companies from entering the scheme on a cost basis if they can’t commit to the administrative resources?
Adrian: This is possible, especially for smaller companies with cost burdens. However, the workload and associated costs may be low if trace, verification and reunification are undertaken on a regular basis before the dormant accounts are transferred to the fund.
Our experience indicates that the number of reclaims from the fund is low so the company’s involvement in administering and verifying them may be small. However, it is difficult to quantify likely costs for each issuer company of joining an expanded scheme because this will depend on the number of gone-away investors or unclaimed distribution assets each company has.
Jai: In the securities sector, trace, verification and reunification activities are often partly funded from administrative fees charged to the asset owner. The issuer company pays the rest. The fees to asset owners are normally a small proportion of the value of the asset or unclaimed distribution they have been re-united with and relate mainly to tracing costs.
It is likely that trace, verification and reunification outside of an expanded scheme will continue to be funded in this way whilst the practice of more regular and proactive measures to re-unite investors will no doubt spread across the market as industry best practice expands.
Discussion is still underway about how the costs of an expanded scheme will be met. It may be that the expanded scheme should define or address parameters around funding for trace, verification and reunification. This may regularise this ‘contribution funding’ model or at least set out the operating for issuer companies and what costs they face in the future. It may also encourage more issuer companies to participate, especially smaller companies who are deterred by cost burdens.
How much ‘good’ do you believe an expanded dormant assets scheme could do?
Adrian: The success of the scheme is testament to what can be achieved. At its inception with the banks and building societies sector, it was estimated that the value was in the region of £400m. £1.3bn has now been received from participants.
A significant amount of work has been done by the registrars, companies and the Industry Champions’ groups to assess the potential value of an expanded scheme. It is estimated that an additional £1-2 billion could be released to the scheme.
As the rights of the original owner continue to be protected, I think everyone would agree that it is worth re-doubling our collective efforts to meet this potential for helping charities and deserving causes across the UK.
Have you heard the latest Link Group Governance 360 podcast?
If you enjoyed this interview, tune into our most recent episode and hear more from Jai Baker and Adrian Smith about how dormant assets are helping good causes in the UK.
You can listen here: