Posted: 25 May 2023 5 min. read

Awakening Dormant Assets: Navigating the Expansion of the UK's Dormant Assets Scheme

Key matters raised in Consultation Paper CP 23/12 and the Second Phase of the Dormant Assets Scheme - What Does it Mean for Financial Services Firms?

Summary

The Dormant Assets Act 2022 received Royal Assent in February 2022 and amended the previous Dormant Bank and Building Society Accounts Act 2008 which established the Dormant Asset Scheme (“DAS”), which is designed for firms of different types across the financial services spectrum to pay dormant, or unclaimed, money into the Authorised Reclaim Fund (ARF). There is one ARF in the UK – Reclaim Fund Ltd (RFL) which commenced operations in 2011. The RFL administers the DAS and since 2011, over £745m has been made available  through the DAS to social and environmental initiatives. RFL puts the money towards funding good causes, via the National Lottery Community Fund, and will guarantee to pay any valid claims subsequently made by clients.  

In CP 23/12 Expansion of the Dormant Assets scheme – second phase (CP) published on 22 May 2023, the FCA is consulting on amendments to the Client Assets (CASS), Dispute Resolution: Complaints (DISP), and Collective Investment Schemes (COLL) Sourcebooks to reflect the expansion of DAS to managers of authorised collective investment schemes and firms holding client money.

Dormant client money

Currently, the only mechanism to pay allocated but unclaimed monies out of the client money pool is to pay the amounts away to a registered charity under CASS 7.11.50R, with the firm undertaking to make good any valid claim from a client in the event they re-establish contact with the firm. The CP introduces an option for allocated but unclaimed money to be paid into the DAS, rather than to a registered charity.  Once the firm has transferred client money to the DAS, the firm’s liability to the client is extinguished and replaced by a right to claim against the ARF. This is because the RFL guarantees to repay the customer if they seek to recover the amounts paid away, which is the primary difference for firms deciding whether to pay money away to a charity or to DAS under CASS.

The DAS scheme requires the same contact and tracing mechanisms and similar 6-year dormancy period, required before making payments to a registered charity. The overriding obligation, for both registered charity and DAS payments, is for the firm to attempt to reunify clients with their money in the first instance, before any payment out to DAS or charity is made.

Firms should be aware that, under the proposed rules, once a firm has a contractual relationship with an ARF, it cannot pay any money away to a registered charity unless it is has first attempted to pay the money to the DAS.

Notably, the scheme does not currently extend to unclaimed assets held under CASS 6, and as such firms holding unclaimed custody assets will not be able to transfer them to the DAS. No amendments are planned to be made to CASS 6 under CP 23/12.  Additionally, there is no mention of dormant unallocated client money balances which currently can neither be paid to a registered charity or DAS.

Dormant assets / money in respect of collective investment schemes (“CIS”) 

The proposed rules for authorised fund managers of CIS are more complex but follow similar principles.  The CP identifies four types of assets / money that may be eligible to pay away to DAS, as follows:

  1. money arising from unit redemptions that have been instructed by the client but not paid away;
  2. money arising from unit income distributions;
  3. orphan monies on the wind up of a fund; and
  4. unit assets where the registered holding of units has become dormant (powers will be granted to the authorised fund manager (AFM) to cancel the units to convert to cash).

To be eligible for payment to DAS, the assets types a) to c) must have been dormant for 6 years whereas assets in d) must have been dormant for 12 years.  This requirement of dormancy duration aligns with current CASS rules.

There are a number of matters that AFM’s must be aware of prior to paying funds to DAS, as follows:

  • The ability for AFMs to utilise DAS is through changes to COLL rules, not CASS. 
  • Qualified investor schemes are excluded from scope as the FCA does not expect dormant assets/monies to arise in respect of these funds.
  • Scheme documents must be amended to authorise payments to DAS from customer funds.
  • The fund prospectus should clearly explain the conditions for classifying assets as dormant, and the process for former unitholders to make repayment claims and any conditions on the rights of the client to reinvest in the fund.
  • AFMs must maintain proper records to allow rightful owners to reclaim dormant assets.
  • If a fund's management changes, outgoing AFMs are responsible for ensuring successor firms continue to uphold DAS participation and protect records of dormant assets.
Changes for CASS 5, 11 and 13 firms

There is currently no mechanism in CASS 5, 11 or 13 to pay dormant client money away to charity, the DAS will therefore offer insurance distribution, claims management and debt management firms the ability to pay away dormant unclaimed client money for the first time.  These firms will also have to follow appropriate contact and trace steps to reunify clients with their money prior to utilising DAS.

Unwanted Assets

Unwanted assets, as defined in section 21 of the  Dormant Assets Act (DAA), arise where customers have requested the transfer of any assets or monies they own to an ARF, such as balances from bank or building society accounts, eligible insurance proceeds, pension benefits, amounts owing from collective scheme investments, client money, and certain proceeds or distributions. Under the proposed rules, firms participating in the DAS will be allowed to transfer these unwanted assets along with dormant investment assets and client money.

Current draft amendments indicate this is permissible under existing client money rules. However, for the transfer of unwanted assets to an ARF, the ARF must have the FCA permission to deal with unwanted asset money. Currently, no firm holds this permission, and none are expected to apply for it before the launch of the expanded scheme.

Next steps

Please note current CASS, DISP & COLL rules have not been updated yet; therefore, firms cannot use DAS until the consultation is complete and the relevant source books have been updated. The consultation closes on 10 July 2023 with expected rule changes to be implemented Q4 2023.  Firms should consider whether they wish to participate in the consultation and those that wish to participate in DAS should review their dormant client monies / assets for eligibility.

Please contact Suzanne Tailor, Arthur Kolesnickis, Anna Dawson or Jack Biss to discuss your next steps further.

 

Key contacts

Suzanne Tailor

Suzanne Tailor

Partner

Suzanne leads Deloitte’s Client Assets & Safeguarding team in the UK. Her team brings together subject matter expertise across the Banking & Capital Markets, Investment Management & Private Equity; and Insurance industries. Suzanne has specialised in working with the Investment Management and Private Equity industry for 15 years. She is responsible for both the client asset reporting for her audit clients and for delivering Client Assets & Safeguarding controls and governance reviews.

Arthur Kolesnickis

Arthur Kolesnickis

Senior Manager

Arthur is a Senior Manager in our Client Assets & Safeguarding team in London. Over his 12 years working at financial and professional services firms, he has gained significant experience in performing client asset specialist work, with a focus on both CASS assurance reviews and CASS advisory.

Key contacts

Anna Dawson

Anna Dawson

Director

Anna is a chartered accountant and dedicated CASS specialist, with over 30 years experience of working in an industry, audit, assurance and advisory capacity. She has extensive experience of working in the investment management and platform sectors and leads a number of CASS audits and advisory engagements including supporting firms that are migrating to new CASS systems, changing their CASS operating model (including outsource provider) and launching new products. She has an in-depth knowledge of operational processes and is skilled at supporting firms in designing and assessing the effectiveness of operational and regulatory controls.

Jack Biss

Jack Biss

Senior Manager

Jack Biss is a Senior Manager in Deloitte’s Client Assets and Safeguarding team with nine years experience working in client asset roles, five of which consisted of leading client assets audit and advisory engagements at Deloitte across a broad range of clients including wealth managers, fund managers, stockbrokers, investment banks, custody banks, prime brokers, and platforms. Jack’s industry work experience consists of working in house at a platform and in the central CASS team at a global bank.