Resolving the dormant & unclaimed assets challenges requires innovation, better information and an independent view.

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The context & issues >
Unclaimed assets are (i) an historic KYC challenge resulting from looser client take-on standards pre-2005 and (ii) an on-going challenge relating to ‘gone-away’ and deceased clients. The conduct regulator has strengthened CASS standards from 2014 and will require greater attention to unclaimed assets as part of its TCF agenda. Firms face a perverse incentive in relation to dormant or unclaimed assets: in the asset management sector, returning assets to owners reduces AUM and, thus, firm scale and fees. In some instances, it will also impact remuneration.

The Government sees dormant and unclaimed assets in both the asset management and insurance sectors as an opportunity. The Cabinet Office has established the Dormant Assets Commission to review options for appropriating dormant and unclaimed assets from the asset management and insurance sectors, among others.

Despite growing regulatory pressure, many asset managers presently do not believe they face a compelling reason to address and resolve their dormant or unclaimed assets balances. The investigation by and subsequent findings of the Dormant Assets Commission may significantly alter that view.

But changing regimes may not be simple legally. Any approach will need to be consistent with trust law, with financial regulations and with obligations to and agreements with clients – something of a legal maze.
The scale of the issues >
Within the asset management sector, estimates of the scale of the unclaimed assets problem vary materially. Via its CMAR report, the FCA has data – that may or may not be reliable – that it has not, thus far, agreed to make public. A key starting point will be to examine the scale of the unclaimed assets issues in the asset management sector.

Assuming the FCA maintains its unwillingness to release the value of unclaimed assets, we will need to generate a figure for the industry by survey of firms. With industry body collaboration, firms are likely to release this data, which is already compiled from their existing regulatory data returns.

In the asset management sector, we can use such returns and existing industry data to generate a range of probable values for the scale of the (currently-identified) problem across the sector.

We will seek further review by the FCA of the proposed approach to tracing to confirm they are consistent with the FCA’s expectations of firms’ response to the unclaimed client assets issue.
Solutions to the challenges >
Using Assets Recovered’s tracing methodology, we will sample participating firms’ client data to profile unclaimed assets and gone-away clients and to provide a proof-of-concept for returning deceased clients’ unclaimed assets to estates.

The results of the analysis of participating firms’ client data and the comprehensive tracing exercise will support a detailed analysis of the firms’ (and, by extrapolation, the sector’s) unclaimed assets. It will identify target levels of assets that can ben returned economically to their rightful owners and/or transferred to charity, per the FCA’s guidelines (or subsumed into the process resulting from the deliberati of the Dormant Assets Commission).

We will review the issues that arise for firms, for their clients and for clients’ estates from the proposed approach and from transferring assets to charity and assess how effectively the asset management sector can respond to the unclaimed assets problem. For example, transfers of unclaimed client assets to charities chosen by the asset management firms immediately present reputational risk. Any solutions will need to recognise and address such risks.

We will review the commercial and reputation benefits available to firms acting independently on their unclaimed assets as well as benefits accruing to the sector from co-ordinated action.

Based on our analysis of the issues relating to unclaimed assets and of existing aggregate data in each sector, we will propose alternatives for the asset management and wealth management sectors. We will review any proposed solutions with participants and sponsors to identify potential legal and operational impediments.

The context & issues

Is there an end-to-end solution? >
We will consider the possibility of an end-to-end solution to the sector’s dormant and unclaimed assets issues. An end-to-end solution would offer firms in the sector an option to hand over management of their residual unclaimed assets book to a third party for management. We will look at the solutions that would need to be in place to make such an approach feasible operationally and legally, as well as acceptable to regulators.
Can government help? >
In December 2015, the Cabinet Office announced a review of dormant assets by an independent Dormant Assets Commission. Commissioners were appointed in March 2016. The Dormant Assets Commission will call for evidence in May or June 2016 and is also working with industry bodies, including the Investment Association on identifying issues in the sector relating to unclaimed client assets.

It is likely that any approach the Dormant Assets Commission would recommend will result in (i) removing unclaimed client assets from firms’ balance sheets, (ii) transferring balances to an independent body that would make a provision for subsequent claims and (iii) transferring the remainder to the Big Lottery Fund or to social capital funds. This would represent both a failure by the industry to ‘set its own house in order’ and a grave loss of opportunity.

We will consider alternatives to a government-imposed ‘dormant assets regime’ for asset management sector. As a baseline, we will evaluate alternatives against the observed performance of the dormant assets regime established for banking and building societies sectors.
Doing good; doing well >
We will review the case for a dedicated sector-wide charity as a single recipient for firms’ transfers of dormant and unclaimed assets. Such a solution may address the reputational risk associated with discretionary transfers by each firm. Also, it (or they) would provide funds through which the charities could address, for the public benefit, issues relevant to savers, prospective savers, dissavers and retirees.