14 May 2019 by Robert Welch
A recent report sets out a blueprint for expanding the dormant assets scheme
Ten to fifteen years ago, meetings with investors were all about financial results and strategy, alongside some discussions on governance. Today, there are often just as many social investment team members present as there are from the portfolio management side.
Investors often ask me about the steps that we are taking to protect and sustain natural environments, encourage people back into work, help the more vulnerable in society and, in general, how we are contributing to the communities in which we operate. The issue of corporate social responsibility is becoming increasingly high profile and with the recent industry proposals for expanding the dormant assets scheme, set out in the report The Dormant Assets Scheme: A Blueprint For Expansion (authored by myself and three other Industry Champions), it is time for us in the securities sector to think seriously about the value that we can add by participating in the scheme.
In a perfect world, I think we would all accept that shares would never become dormant, but, in reality, companies do lose contact with shareholders for a variety of reasons. Sometimes people move house or change their name and forget to pass on their new details; or, unfortunately, they die without leaving a will or beneficiaries.
When people ask me about the dormant assets scheme, the first thing that comes to mind is reunification. Company efforts to reunite shares with their owners vary greatly in their extent and effectiveness; consequently, there remains within a lot of companies a pool of dormant shares. From a public interest perspective, it does not seem right to me that these dormant shares should reside indefinitely with companies or be used for general corporate purposes.
As the behaviour of business comes under increasingly close scrutiny, and as the report sets out, an expanded dormant assets scheme could provide an excellent opportunity for us within the securities sector to further develop best practices for tracing and reunification and, where that is not possible, to enhance our corporate social responsibility by releasing surplus funds for good causes.
The Dormant Bank and Building Society Accounts Act 2008 made it possible for industry to start addressing the issue of dormant assets. Participating banks and building societies have been able to channel funds from dormant bank accounts (after they have made substantial efforts to locate the customer) towards good causes in the United Kingdom through an independent body, Reclaim Fund Ltd. One of the key benefits of the scheme is that account holders, or their beneficiaries, whose assets are classified as dormant are able to reclaim their money at any point.
For this purpose, Reclaim Fund Ltd retains a proportion of the monies from dormant accounts to meet reclaims from customers. The surplus is distributed to the National Lottery Community Fund (formerly, the Big Lottery Fund), which in turn makes these funds available for good causes in England, Scotland, Wales and Northern Ireland.
Since the scheme came into operation in 2011, over £1.2 billion has been transferred to Reclaim Fund Ltd, and over £600 million has been released to good causes. These causes include support for the homeless and helping disadvantaged young people into employment. By participating in an expanded dormant assets scheme, the securities sector would gain both reputational and operational benefits. We can contribute to these causes and, from an operational perspective, we would benefit by being able to transfer dormant assets to Reclaim Fund Ltd that are otherwise administratively burdensome.
One of the main principles of the scheme is full restitution. A customer can reclaim the amount that would have been due to them had a transfer into the scheme not happened. For me, this is one of the key principles for the securities sector, alongside reunification. In practice, this means that, if a customer reclaims, the company would be able to pay him or her the current value of the shares, including any market movements up or down since the share was sold plus any dividends paid and any proceeds from corporate actions. Essentially the shareholder would be put in the same position as if his or her shares had not been sold.
This differs from the current market practice of companies that normally only pay back to the shareholder the value of the shares at the time they were forfeited. With an expanded scheme, Boards of companies could have the confidence that customers will have full restitution of the value of their shares in perpetuity. Again this differs from the approach taken by many companies, which restrict to a few years the time period that shareholders are able to reclaim any monies from forfeited shares. The Office for National Statistics estimates that 12%, equivalent to some £206 billion of UK-listed shares, are held by individual shareholders, with the remaining 88% being held by institutions. As such, if even just 0.1% of those shares belonged to gone-away shareholders that could mean in the region of £200 million going to good causes.
We also have the opportunity to increase our transparency in the securities sector by increasing the reporting around dormant assets. Of course, we recognise that work would need to be done across the securities sector to make the inclusion of shares a possibility.
There are a number of technical and practical considerations. For example, “The Dormant Assets Scheme: A Blueprint For Expansion” report recommends a standardised definition of dormancy based around a 12-year period of no shareholder-initiated contact. In terms of legal and regulatory changes needed to make securities part of an expanded dormant assets scheme, consideration will need to be given to amendments to model articles, legislation, and CASS regulations to ensure funds can be released from corporate sponsored nominees.
It is also vital that we make it as simple and low cost as possible for companies and for those of us in Company Secretarial departments in particular. We are also investigating the feasibility of establishing an industry-wide, standard tracing service, which could include common data platforms by which all sector constituents could share relevant information and reduce costs.
As we all know, the devil is often in the detail in such schemes, so consideration will need to be given to the keeping of shareholder records by companies following the transfer of assets to Reclaim Fund Ltd, as well as any tax and accounting implications, and data protection issues associated with the scheme.
A key driver for me in encouraging participation is the adoption of a simple standardised approach to dealing with dormant securities, which is embedded in the securities market and where any costs are proportionate. Through the dormant securities we have within our companies, we have the potential to make a real difference to the communities in which we operate and to enhance our corporate reputations. This is why we are calling for securities to be included in an expanded dormant assets scheme — we hope to create a simple and low cost way of realising their potential for our companies and benefit good causes across the United Kingdom.