Dealing with gone-away clients is a perpetual challenge for investment and wealth managers. The report of the Commission on Dormant Assets published on 7 March 2017 should therefore spark curiosity, if not hope.

The Report focusses on broadening the range of assets for inclusion under the Dormant Bank and Building Societies Act 2008 or introducing a new Act.

Together with banks and building societies, insurance and pensions and securities, the Report deals with investment and wealth management. The Commission’s two recommendations for investment and wealth management go to:

  • inclusion of cash and non-cash assets with both crystalised and not currently crystalised values; and
  • amendments to the FCA Rules in CASS and COLL to conform to primary legislation expanding the Scheme including rules to facilitate the transfer by the depositary/custodian of assets.

The 2008 Act creates a scheme for reuniting assets with their beneficial owners, failing which firms can transfer the assets to an independent body, currently the Reclaim Fund Ltd, which funds future customer claims and distributes any surplus “for the benefit of good causes."

The Commission estimates that expanding the scheme could lead to an extra £1 to 2 billion of funding.

What does this mean for managers?

The report merely sets out recommendations and it will be for the government and the FCA as the “owner” charged with giving effect to the proposals to decide and consult on the final rules.

If accepted, however, the rules could require firms to: produce an annual assessment of assets held that cannot:

  • be reunited with beneficial owners;
  • follow agreed standardised tracing and reuniting procedures; and
  • ensure that depositary agreements and fund constitutional documents are amended to facilitate the transfer of dormant assets.

The Commission suggests that trustee liability be relaxed to transfer genuinely dormant assets and the rules on reuniting assets with beneficial owners be “proportionate”. This offers some hope but there is likely to be work for managers to do.

Dormant Assets in the Industry and “gone-aways”

The Commission noted:

  • the concept of dormancy is not generally recognised, with firms often regarding long periods without client contact as normal;
  • there is little to incentivise identifying dormancy or reuniting dormant assets with their owners;
  • although it contains provision for liquidating unclaimed assets, CASS leaves firms with a perpetual reclaim liability; and
  • the gone-away customer concept is more familiar than dormant assets. These are identified by post being returned and payments remaining uncashed.

Drawing on the CASS definitions for unclaimed status, the Commission settled on “dormancy” being defined differently for different assets with:

  • a combination of some or all of cash balances being unclaimed for a period;
  • no customer/owner-initiated activity; and
  • the customer/owner not being found.

Legal change to bring assets within scope of the expanded scheme

The Commission recommended that cash and non-cash investment assets be included in the expanded scheme.

The inclusion of non-cash investment assets will require a change in law including appropriate enabling legislation and possible changes to the rules in the Client Assets Sourcebook (CASS) and the Collective Investment Schemes Sourcebook (COLL).

Tracing and Reunification

The Commission recommends the industry collectively develops an industry standard for tracing and reunification procedures.

Opportunities and challenges

The Commission identified the following challenges:

  • Tax wrappers: retail investors often invest under these, adding a further, but by no means unfeasible, level of complexity to inclusion and requiring HM Revenue and Customs support.
  • Trust structures: trustees of Unit Trusts have fiduciary duties that may make them reluctant to transfer dormant assets to a reclaim fund. The Commission recommends amendments to trust law to absolve trustees of liability here.
  • Fees: firms may draw management fees from retaining dormant assets, which provides a disincentive to transferring them to a reclaim fund.
  • Fragmentation: the sheer number of industry players makes establishing consensus hard. The Commission encourages firms to engage with their representative body to work towards this.

The Commission identified the following opportunities:

  • Improved relationships with customers through reunification
  • Reduced administrative burden through transfer.
  • Enhanced reputation through creating societal benefits.
  • The opportunity to draw “a line in the sand” and move forward to address dormancy in the industry.