Dormant Assets Scheme to cover investment assets and client money

On 22 May 2023, the FCA published a consultation paper, CP23/12, “Expansion of the Dormant Assets scheme – second phase” (the CP).

The consultation period closes on 10 July 2023 and the FCA hopes to have final rules ready in Q4 2023.

What’s the background?

The Dormant Assets Act 2022 (the Act) came into force on Monday 6 June 2022 and expanded the existing Dormant Assets Scheme (DAS) to include assets from the insurance and pensions, investment and wealth management, and securities sectors.

Note that the DAS does not apply to unregulated collective investment schemes (CIS), for example, hedge funds or other AIFs.

In the context of a CIS, a dormant asset is one where the firm regards the person to whom the proceeds are payable as having been gone-away for the preceding 12 years (in respect of share or unit conversion proceeds) or 6 years (in respect of other amounts).

The principal aim of the DAS is to return financial assets to their owner but, where this isn't possible, the dormant money is paid to an authorised reclaim fund (ARF), which then puts this money towards funding good causes across the UK. It has been estimated that the expansion would release up to £880 million additional funds.

Participation in the DAS is voluntary.

See our previous articles here and here.

The expansion has been in two phases – the first covered insurance, pensions and securities assets and has been effective since 1 August 2022.

It’s now the turn of investment assets and client money to be included in the DAS.

What has the FCA published?

The CP applies to managers and depositaries of authorised CIS as well as to firms which hold client money.

It proposes changes to a number of sections of the FCA rules, among them COLL and CASS, including (but not limited to) the following:

COLL proposals

Current rules don’t permit AFMs or depositaries to make payments from scheme assets to third parties except where expressly permitted by the fund’s constitution (or required by law). So, customers’ money could not currently be paid to the DAS.

An AFM wanting to participate in the DAS would, then, need to amend the instrument constituting the fund and the prospectus to enable the AFM and the depositary to make payments to the DAS of money attributable to its customers.

The CP proposes amendments to COLL 3.2.6R and 4.2.5R, specifying what statements and information need to be set out in these documents. As such a change to the prospectus is likely to constitute a significant change under COLL 4.3.6R, at least 60 days’ written notice to unitholders would be needed.

The FCA also proposes that, where the AFM uses the power to transfer dormant assets, it should do so in preference to any other available power for disposing of unclaimed assets.

COLL 6.8 would also be amended to allow unclaimed distributions of income to be classed as dormant and paid into the DAS, as an alternative to the existing power to return the unclaimed amounts into the capital property of the scheme.

Amendments are also proposed to COLL 7 in relation to the winding-up of the different types of authorised fund structure (including termination of a sub-fund of an umbrella) in order to allow the AFM to transfer residual orphan monies to the ARF after a scheme has been substantially wound up, provided that the monies are attributable to unitholders who can be regarded as ‘gone away’ (i.e., there has been no contact with the unitholder for at least six years).

COLL 6.6.6R requires an AFM to keep certain records for a period of six years. This, though, would not be sufficient to cover assets transferred to the ARF as the former unitholder’s right to repayment exists in perpetuity. Accordingly, COLL 6.6.6R would be amended by the addition of new provisions where the AFM or the depositary are participants in the DAS, specifying the types of information that should be retained so any future repayment claims can be verified and the amount can be accurately calculated.

CASS proposals

Under the CASS rules, a firm discharges its client money responsibilities to a client when it has returned the client money to the client or to another party in accordance with the client’s instruction of the client. The CP proposes an amendment to the current rules so money would cease to be client money for the purposes of CASS if it is paid to an ARF in accordance with the relevant provisions in the Act

Firms participating in the DAS must attempt to reunite dormant clients with their assets before a transfer can be made to an ARF and the arrangements between the firm and the ARF must include provisions on tracing and verifying the identity of the asset owner.

The CP proposes to require firms to take reasonable steps to trace a client prior to transferring client money balances to the ARF, with evidential provisions being introduced to set out what reasonable steps the firm could take in order to comply with the rule.