First person: Finding a home for orphan assets
The FCA is turning its attention on fund managers in the hunt for unclaimed accounts, writes The Review columnist Anthony Hilton
January is the month when many of us can be found going through the pockets of clothes not worn for months in the hope that there might be a bit of loose change or a forgotten fiver. It’s when long-neglected handbags are inverted and given a hopeful shake and the coins in the car, supposedly left there to pay for a meter, get hijacked for more urgent uses. When cash is scarce after Christmas, every little helps.
The equivalent of going down the back of the sofa in the world of finance is the liberation of orphan assets, which is the name given to those pools of savings which have been lost or forgotten about. Typically the sums rest in accounts where there has been no activity for years, the original owner has died, moved on, become a recluse or otherwise cannot be traced and no one else has come forward to claim the funds.
Until relatively recently, the administering organisation – the bank, the fund manager or the insurance company where the money was lodged – held on to this cash and often used it as additional capital to support its business. They, of course, never asserted ownership of it, but equally, once early attempts to find an owner had failed, they made no sustained efforts to find out who else might have a claim.
This was the situation for a century or more and, indeed, it is only in recent years that there has been a serious effort made to sort things out. The insurance companies were first off the mark and in the early part of this century, under the increasingly watchful eye of the then regulator the Financial Services Authority (FSA), most of the big firms worked out how these orphan estates should be divided between the current generation of shareholders and policyholders. Some of the early deals were contentious, but subsequently most were done on terms that seemed equitable to both sides.
There is already some resentment in the City that the fines on banks and others that have been levied on rule breakers in financial services are now taken by the Treasury
Then came the banks. Shortly after the year 2000, then Chancellor Gordon Brown launched an initiative to encourage the banking sector to identify and hand over the funds in accounts where there had been no activity for a decade or more. It took a lot of bullying and many years, but eventually upwards of £400m was mobilised. That sounds a lot, but in fact pales against a further £850m which the Money Advice Service reckons is lying in up to half a million lost bank accounts.
Be that as it may, Ed Balls thought it should be used to improve playing fields and sports facilities across the nation, but this idea never caught on. Instead, the money was used in large part to endow what became known as Big Society Capital, which is now a fully-fledged financial institution charged with fostering and promoting social enterprises across the nation. Gordon Brown’s original idea was that the money should be used to benefit society, and that is pretty well what has happened.
Now, however, it is the turn of the fund management industry, which is expected shortly to have to respond to pressure from the FCA to do something about orphan assets. Few asset managers are concerned about this, but there is some concern about what will happen to the money, however many millions this might be.
Funnelling fundsThere is already some resentment in the City that the fines on banks and others that have been levied on rule breakers in financial services are now taken by the Treasury. The official line, dating from George Osborne’s day, is that these funds should be funnelled to good causes, and in particular, charities for the armed services. Not all of it seems to be getting through, however.
So what’s to be done with the funds that might be liberated by asset managers? There are a few ideas around, but one of the better ones, the brainchild of Jaspar Berens, Managing Director, Head of UK Retail at J.P. Morgan Asset Management, is that the funds should be used to fund a national programme of financial education.
In a world where money is scarce, investment returns are hard to come by, trust is at an all-time low, people are expected to make provision for their old age but savings ratios are close to 100-year lows, it is more vital than ever that people understand the basic principles of finance, how the system works and how they should operate within it. But financial education is a Cinderella in this country – it has never been properly tackled in schools and no one has yet worked out how to get through to adults to give them the knowledge. But the need just keeps on growing, potentially storing up huge problems for the future.
Berens’ idea might just be a way to begin to do something about it.
Look out for Anthony Hilton's First Person column in the October 2016 print edition of The Review.