Considered in Grand Committee
The purpose of this order is to extend the scope of FSA regulation to cover reclaim funds as part of the framework for a UK dormant accounts scheme. I will begin by setting out the purpose and operation of the scheme, before turning to the draft order before us. The primary legislative framework for this scheme was established by the Dormant Bank and Building Society Accounts Act, which received Royal Assent on 26 November 2008. The Act was widely supported during its passage through both Houses. The scheme was strengthened greatly by the contributions made by other noble Lords during debates on the Act.
The UK dormant accounts scheme allows banks and building societies to make funds in dormant accounts available for distribution to the benefit of the community, while ensuring that the right of account holders to reclaim their money is protected. Banks and building societies are committed to reuniting account holders with their dormant accounts. Where reuniting is unsuccessful and an account meets the statutory definition of dormancy, a bank or building society may transfer the balance of that account to a reclaim fund. Following a transfer, the bank or building society’s liability to repay the account holder is extinguished. Instead, the customer gains a legally enforceable right to repayment from the reclaim fund. Money that the reclaim fund does not require to meet reclaims or cover its own reasonable costs will then be passed on for reinvestment in society. The Big Lottery Fund will distribute the money for social or environmental purposes. Finally, there is an optional scheme for small and locally based institutions, allowing them to focus on the needs of their communities, in which they often play such an important role.
Since the purpose of this draft order is to extend the scope of FSA regulation to cover reclaim funds, I turn now to explain how we envisage the reclaim fund will operate, according to requirements set out in legislation. The Act itself sets out what a reclaim fund is. A reclaim fund must be a company incorporated under the Companies Act 2006. The industry is committed to leading on selecting or setting up a reclaim fund. The reclaim fund, once established, will be entirely independent of government, the banking industry and the distribution mechanism. The Act also requires the activities of a reclaim fund to be restricted by its articles of association to: the meeting of repayment claims; the management of dormant account funds to meet whatever repayment claims it is prudent to anticipate; and the transfer of money to the Big Lottery Fund or to any other bodies charged with distribution of the unclaimed funds for social or for environmental purposes.
The Government’s approach to developing the scheme has focused on three key principles: first, consumer protection, by ensuring an ongoing legal right for account holders to reclaim their money at any time; secondly, reuniting, by encouraging account holders to be reunited with the assets that are rightfully theirs; and thirdly, better regulation, by adopting a proportionate regulatory approach. Although the draft order before us is largely technical in nature, it contributes significantly to these objectives by extending the scope of FSA regulation to include reclaim funds. FSA regulation will help to ensure that the reclaim fund manages dormant account funds prudently and can meet repayment risk, and that consumers continue to receive the same protections should their dormant funds be transferred into the scheme.
The FSA has already consulted separately on its proposals for regulating reclaim funds. In order for the FSA to bring forward its final rules and regulations, the Government must legislate to enable the FSA to regulate reclaim funds, and that is the purpose of the order. In preparation for this secondary legislation, the Act itself amended the Financial Services and Markets Act 2000 to enable the activities of a reclaim fund to be specified in secondary legislation as regulated activities, and thus for a reclaim fund to be regulated by the FSA.
Following the passage of the Bill, the Government consulted on consequential secondary legislation. All respondents to that consultation firmly supported the Government’s proposals for secondary legislation, including the order. The Government now wish to pass the order to allow the FSA to oversee the activities of a reclaim fund by amending the regulated activities order of the Financial Services and Markets Act 2000 to specify as regulated activities the meeting of repayment claims by a reclaim fund and the management of dormant account funds by a reclaim fund.
In addition to the benefits I have already mentioned, FSA regulation will ensure that consumers have access to the Financial Services Compensation Scheme in the unlikely event that the reclaim fund becomes insolvent. In the event of any disputes, consumers would, subject to the usual qualifying conditions, have recourse to the Financial Ombudsman Service and could resort ultimately to the courts to enforce their legal rights.
In conclusion, I emphasise that the order was entirely anticipated during the passage of the Dormant Bank and Building Society Accounts Bill. It is a technical but necessary part of the scheme to ensure that the reclaim fund is properly regulated. The principle of consumer protection that motivates this instrument is common to us all and has been agreed in previous debates on the scheme. Should concerns about any aspect of its operation remain, the Government have committed to undertake a post-implementation review of the UK dormant accounts scheme within three years of the date when a reclaim fund is first authorised.
I hope that noble Lords will agree with this order and I beg to move.
I thank the Minister for introducing the order, which was of course anticipated when we passed the dormant accounts Bill, and we have no problem with it. However, the order provides him with an opportunity to update us on the progress of the dormant accounts scheme.
The order is drafted, as the Act is, in terms of reclaim funds in the plural, but it was the intention of the Bill at the time that there would be one reclaim fund. The Minister’s opening remarks effectively repeated that. Will there be one reclaim fund? If so, what progress has been made on forming it—that is to say, when will we see one in existence?
More importantly, when will the reclaim fund start to gather in money from the banks and building societies? The whole purpose of the Act was to liberate money from the dormant accounts held in the banks’ balance sheets and put it to good use. When can we expect money to start to flow through the system? Do the Government have any up-to-date information on the size of the flows of money to be expected? A number of estimates were provided during the Bill’s passage through both Houses of Parliament, with some wide variations between those put forward by the BBA, the Building Societies Association and some other parties.
Of course, some of us suspected that the Government engineered the timing of the dormant accounts scheme to align with the timing of the next general election. The Minister might like to say whether the Prime Minister is on track to achieve his aim.
I am grateful to the Minister for setting out the provisions of the order and, like the noble Baroness, we are content with it. I, too, have one or two questions about how it will work in practice. Picking up the point made by the noble Baroness, it is now six months since the Bill received Royal Assent and, as far as I can tell from the documentation, which is silent on the point, no real progress has been made in establishing a reclaim fund. Some had doubts about how enthusiastic the banks really were about that initiative. One can imagine that, especially at the moment, they would prefer to hang on to as much money as they can for as long as possible. Anything that the Minister can say about the timetable for the establishment of the reclaim fund will be extremely welcome.
One provision of the regulation is that the Financial Services Compensation Scheme will come into play in the unlikely event of the reclaim fund becoming insolvent. When we discussed that as the Bill was passing, we raised that possibility. The Government's response at that point was that the fund could borrow to make up any short-term shortfall—because, of course, there will be a constant flow of funds into the reclaim fund. Even if the reclaim fund had been overgenerous in passing money across to the lottery, it would be naturally replenishing its resources over a period, as more funding came in. I wonder why we need that belt-and-braces approach. I have a sense that if we reached the situation where the Financial Services Compensation Scheme was called into play, the whole basis of the scheme would be so fatally undermined that we would have almost to start again. I thought that the way that the reclaim fund had been established meant that that just was not a possibility and that it could borrow to deal with any short-term shortfall.
I greatly enjoyed reading the assessment of the effect of the fund, because on virtually every piece of information that could have been given, the answer is either “no” or “not applicable”. However, there was some information about costs, and I would be grateful if the Minister could explain a couple of things. It states that,
“the FSA proposes to meet its set up costs through an increase of 0.4% in the annual fees paid by banks and building societies eligible to participate in the scheme”.
How much is that? It seems to me that the cost to the FSA of setting up its regulatory function under the order should be extremely small. I do not know what 0.4 per cent amounts to be, but it could be quite a significant sum. The FSA then plans to charge a £25,000 authorisation fee on top of that. I wonder why that is necessary if it is meeting the costs through the levy. It then estimates incremental compliance costs as being up to 5 per cent of the total cost of running the scheme. That seems to me to be quite a lot, because this is a simple scheme. Anything that the Minister could say to explain those costs would be gratefully received.
However, subject to those comments we support the order.
On the timetable, the scheme is conditional on this secondary legislation taking effect. If that is achieved, the FSA needs to bring forward details of its proportional, prudential framework for the scheme. The reclaim fund will need to apply to the FSA for authorisation once the necessary legislation and FSA rules are in place. We are looking for the scheme to be operational as soon as possible following authorisation of a reclaim fund. The Government hope that the scheme will be launched as soon as possible this year. From that, the noble Baroness should draw no conclusions as to the timing of a general election; the two matters are clearly totally unrelated.
When will the fund get money? The industry is publicly committed to the scheme. As soon as the reclaim fund is set up and authorised by the FSA, we expect dormant accounts to run through the scheme. Great preparation has been carried out by the industry in that respect. The noble Baroness also asked whether there could be more than one reclaim fund. In theory there could be more than one, but we do not envisage it.
The industry’s willingness throughout—I include here the building societies and the banks—to support this initiative has been very clear. I have engaged frequently with leaders of the industry at chief executive and chief operations officer level to discuss their support for the scheme. There is still important work to be done in establishing the reclaim fund and I shall be emphasising tomorrow at the British Bankers’ Association annual conference the importance that society will place on banks being seen to play an effective role in supporting community programmes and initiatives, if not least of all in response to and recognition of the significant support that the banking industry has received from the state over the past 12 months.
The amount of money that will flow into the scheme is still a matter for considerable conjecture and I am not sure that a great deal can be added to earlier estimates given when the House discussed the matter. The figure given at that time was somewhere north of £400 million but, quite frankly, it could be a great deal more. We shall simply have to wait and see. However, whatever happens, it is money that will no longer remain dormant in the deposits of banks but will be used for good purposes as Parliament intends.
The noble Lord, Lord Newby, inquired about regulation costs. The FSA levies are a matter for the FSA, but I shall pass on the noble Lord’s comments to the FSA and add my own emphasis by saying that this is a simple scheme which should therefore be reflected in a low cost of regulation and supervision, and that the FSA can make its own contribution to ensuring that the purpose of the Act is recognised by the way that it supports and supervises the fund.
The FSA has already consulted on the draft rules for its prudential regulatory framework for the reclaim fund. Publication of its final rules and regulations, as well as setting up a reclaim fund, is contingent on passing this secondary legislation. The Government believe that the FSA will publish its final rules and regulations shortly. It is already available to engage with candidate reclaim funds on a pre-application basis in order to expedite the process of setting up a UK dormant accounts scheme once the legislative process is completed.
The BBA and BSA are committed to leading on selecting a reclaim fund. Overall, the Government intend that a UK dormant accounts scheme should be operational as soon as possible. I believe that we all eagerly anticipate the launch of a UK dormant accounts scheme and I commend the order to the Committee.