Unclaimed money

UK: An alternative way to deal with unclaimed client money? The FCA consults on expansion of the dormant assets scheme | Hogan Lovells

Dormant Assets Scheme – second phase expansion

On 22 May 2023, the FCA published Consultation Paper 23/12 (CP23/12) ‘Expansion of the Dormant Assets Scheme – second phase’.

This is a development for firms which hold client money to watch at this stage. The current proposals provide an alternative to paying unclaimed monies away to charity which is currently set out within the CASS rules (and as reflected in the terms and conditions of many firms in the market). Firms may wish to investigate the proposals as an alternative way to deal with monies they hold for goneaway clients.

In CP23/12, the FCA is considering amendments to its rules and guidance to implement the second phase of the Dormant Assets Scheme (DAS) to enable dormant investment assets and client money including unwanted assets to be available to the DAS. This follows the Dormant Assets Act 2022 (DAA) of February 2022 which expanded the scope of the DAS to include investment assets, client money, insurance, pensions and securities. The FCA amended its Handbook in August 2022 to facilitate phase one of the expansion in August 2022, covering insurance, pensions and securities.

CP23/12 considers:

  • How the expansion of the scheme will apply to investment assets and client money.
  • Changes to FCA rules to take into account the expansion of the scheme to investment assets and client money.
  • The role of the Financial Ombudsman Service (FOS) to handle complaints about dormant asset fund operators.

The proposed rules are in the draft Dormant Assets (Collective Investment Schemes and Client Money) Instrument 2023, which is in Appendix 1 to CP23/12. It sets out the proposed amendments to the Glossary, the Fees manual (FEES), the Client Assets sourcebook (CASS), the Dispute Resolution: Complaints sourcebook (DISP) and the Collective Investment Schemes sourcebook (COLL).

Background to the DAS

The Dormant Bank and Building Society Accounts Act 2008 supported the creation of the DAS.

Under the DAS, bank accounts are deemed dormant when they have been untouched for a minimum of 15 years and the bank or building society has been unable to trace the owner.

Banks and building societies can voluntarily channel funds from dormant accounts to the DAS via an Authorised Reclaim Fund (ARF) or dormant asset fund operator. The ARF is responsible for meeting any reclaims and the distribution of dormant funds to good causes.

The DAS is underpinned by three principles:

  1. Reunification first: assets are only classed as dormant and made available to the Scheme after satisfying strict criteria with participating firms’ first priority being to trace and reunite people with their assets
  2. Full restitution: asset owners are able, at any point, to reclaim the amount that would have been due to them had a transfer into the scheme not occurred
  3. Voluntary participation: potential participants can choose whether to contribute to the scheme and to what extent

Participation in the DAS is voluntary and subject to the ARF’s decision whether to accept an applicant as a new participant to the scheme. Participants are also required to put in place adequate arrangements for the ARF to accept transfers of assets.

Reclaim Fund Limited

There is one ARF in the UK, Reclaim Fund Ltd (RFL). RFL was established in 2011 by the Cooperative Banking Group (now Angel Square Investments Ltd). RFL administers the DAS and is an executive non-departmental public body, sponsored by HM Treasury. CP23/12 details that since 2011, over £745m has been made available through the DAS to social and environmental initiatives, including £150m allocated to support coronavirus recovery. After ten years of operation, the current Scheme is reaching a mature state, with significantly fewer funds flowing through the system each year.

Unclaimed client money

The Client Assets Sourcebook (‘CASS’) provides detailed rules for a firm to follow when it holds or controls client money and/or custody assets (collectively ‘client assets’) as part of its business. This is to ensure adequate protection for client assets while a firm is responsible for them and to allow for them to be returned as quickly and as whole as possible to clients if a firm enters an insolvency process. The CASS regimes for client money currently apply to authorised firms undertaking the following types of business: designated investment business (CASS 7), insurance distribution activity (CASS 5), debt management (CASS 11) and claims management (CASS 13).

The CASS regime supports the FCA’s objectives and underpins FCA Principle 10 by requiring firms to arrange adequate protection for client assets when they are responsible for them. Protecting client assets is fundamental to consumers’ rights and the trust they place in firms that are often acting as their agents, fiduciaries and/or counterparties; it is at the heart of ensuring a well-functioning and robust marketplace.

As with other types of firms, circumstances may arise where a firm subject to the CASS rules is unable to contact a client, for example, the client may have changed address and not contacted the firm to update their details. Such unclaimed money remains client money for the purposes of CASS, meaning that the firm must continue to comply with all relevant CASS rules in respect of this money.

Currently, CASS 7, which applies to investment firms, permits firms holding client money to pay unclaimed client money to charity if after six years, there has been no activity on the client’s account. Firms must take reasonable steps to trace the client and return the unclaimed client money before paying the money away to charity.

The expansion of the DAS will provide firms subject to the CASS rules with an option for the transfer of unclaimed client money to the DAS, providing it meets the relevant dormancy conditions set out in the DAA. Firms subject to the CASS rules will be able to decide whether they wish to apply to participate in the DAS.

CP23/12 sets out that participation in the DAS by firms subject to the CASS rules offers the following potential benefits to clients and firms including:

  • Dormant clients will be able to reclaim their money in perpetuity from the DAS, avoiding the risk a firm ceases business.
  • All types of firms subject to the CASS rules will be able to participate in the DAS (subject to the ARF’s approval of individual firms’ applications and certain exclusions in the DAA eg client money in a lifetime ISA). The RFL intends to take a staged approach to expansion.

In the draft amendments to the client money rules, the FCA has included guidance to clarify that payment of client money under s.21 of the DAA is already permitted by existing CASS rules. The draft investment asset rules also expressly cover the possibility that AFMs transfer unwanted assets to RFL where investors agree.

Investment assets

CP23/12 details that the DAS will apply to dormant ‘investment assets’ as defined in sections 8 to 9 of the Dormant Assets Act 2022. Investment assets are eligible amounts owing by virtue of a collective scheme investment (CIS) – in other words, sums of money attributable to units or shares in collective investment schemes authorised by the FCA under Part XVII of the Financial Services and Markets Act 2000 (FSMA) (“authorised funds”).

Authorised funds are widely used as a way of investing indirectly in a wide range of financial instruments and other asset classes, such as property. In the past, most investors dealt directly with the firm managing the authorised fund and were recorded as its customers. Over time, firms may have lost contact with some of these longstanding customers. The investments of such ‘lost’ investors in a fund may now qualify as dormant investment assets.

The DAS does not apply to overseas recognised schemes, or to unregulated CIS such as hedge funds and other alternative investment vehicles.

Next steps

The consultation period for comments on CP23/12 is open until 10 July 2023. The FCA intends to finalise its proposals in Q4 2023 depending on the feedback received to CP23/12.

We will be keeping a close eye on developments in relation to the DAS.

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