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As part of the second phase of the proposed expansion of the Dormant Assets Scheme (DAS), the FCA has issued consultation paper CP23/12 to consult on proposed changes to the handbook. This phase of the expansion involves bringing a further five asset classes into scope of the scheme, including client money. Therefore, the proposed changes include amendments to the CASS rules.
What is the Dormant Assets Scheme?
The DAS was initially created to allow banks and building societies to pay dormant monies into an authorised reclaim fund. The authorised reclaim fund is then responsible for meeting any subsequent reclaims received from individuals and also for redistributing the dormant funds to good causes.
In 2022, the Dormant Assets Act was amended to expand the list of dormant assets included within the scheme. In a phased approach to introduce these changes, phase 1 was completed in August 2022, with the FCA now consulting on the changes in respect of phase 2.
Upon completion of the consultation and finalisation of proposed rule changes, firms will be able to pay dormant client money to an authorised reclaim fund, where the requirements of the new rules are satisfied.
What are the current CASS rules regarding unclaimed client money?
CASS 7 rules place onerous requirements on investment firms holding client money, resulting in significant operational costs. In the case of unclaimed client money, firms must continue to treat this as client money and therefore comply with the rules as set out in the CASS handbook. As such, there is no reduction in regulatory obligation simply due to client money being unclaimed.
The current CASS 7 rules include provisions for firms to pass an amount of unclaimed client money to charity, providing certain criteria are met (CASS 7.11.50 R). Following a six-year period of inactivity on a client’s account, a firm may pay unclaimed client money to charity providing reasonable steps are taken to trace the client. The steps required depend on whether the value of client money is greater than £25 or not.
Where an amount of client money is paid to charity, the firm retains responsibility for meeting any valid future claims from clients and therefore may incur a future loss as a result. Records must also be retained to ensure such future claims can be met.
What proposed changes are included in the consultation?
The expansion of the DAS to include client money will result in several changes to the CASS rulebook. Most importantly, it will mean that unclaimed client money is considered dormant where it meets the criteria as set out in Section 13 of the Dormant Assets Act 2022. A client must be considered “gone away” for a period of six years, therefore agreeing with the current period of six years’ inactivity required to pay unclaimed client money to charity.
Discharge of fiduciary duty
CASS 7.11.34 R will be extended to include payments to a dormant account fund operator as an acceptable discharge of fiduciary duties for firms – in other words, money will no longer be treated as client money where it has been paid to the DAS.
Included within the FCA’s consultation is the proposal that firms must attempt to pay dormant client money to the DAS prior to making a payment to charity. Reclaiming from the DAS is viewed as beneficial to clients as it avoids the risk of businesses ceasing to trade in the future, therefore impacting their ability to reclaim from the firm where funds have been paid to charity.
De minimis thresholds
Proposed new rules will include the same de minimis thresholds of £25 for retail clients and £100 for professional clients. Where the value of client money is below the de minimis threshold, firms should make at least one attempt to contact the client to return the funds and allow a period of 28 days to pass before payment is made to the DAS.
Where the value of client money is greater than the de minimis threshold, firms should make additional attempts to trace the client. As far as possible, they should try to attain the correct contact details for the client, attempt to contact them in writing up to three times and allow at least 28 days between attempts. The final correspondence should advise of the firm’s intention to pay the sum to the DAS should there be no response for 28 days, providing details of the dormant account provider.
Should the firm receive confirmation that contact details are incorrect, or that the client no longer resides at the last known address, they should not proceed with attempts to contact the client using those details. Only once a period of 28 days has passed from the last attempted contact can the firm proceed to make payment to the DAS.
Similar changes are also being made to the provisions for insurance businesses, Debt Management Companies (DMCs) and Claims Management Companies (CMCs) to make similar payments to the DAS under CASS 5, CASS 11, and CASS 13, respectively.
The consultation is open until 10 July 2023. Therefore, firms should take time to review the proposals and provide response where they feel it is required. Pending feedback, the FCA expects to finalise the new rules in Q4 of 2023. Once finalised, this will provide firms with the opportunity to pass dormant client money onto the scheme and therefore reduce the balance of unclaimed client money they are currently required to service.