An estimated R88.56 billion unclaimed assets are held by financial institutions across the financial sector. For the purposes of this discussion paper, any reference to unclaimed asset refers specifically to unclaimed assets in the financial sector i.e. held by financial institutions.
Inconsistencies in the approach to the identification and treatment of unclaimed assets (including reunification efforts) both within market segments and across the financial sector overall contributes to the high amount of unclaimed assets, have been observed.
The purpose of this paper is to build on the work conducted by National Treasury in respect of unclaimed retirement benefits. It seeks to contribute towards the debate on unlocking unclaimed assets across all industries within the financial sector for social, environmental and/or developmental initiatives and aims to foster a conversation on how lost accounts and unclaimed assets should be treated.
The FSCA recognises that consultation with industry is critical in understanding where and how potential dormancy and unclaimed assets may arise, the criteria that should be applied in the classification of dormant accounts and unclaimed assets across the various sectors and financial products, and the practical challenges in identifying and reuniting these assets with customers.
The FSCA makes 13 recommendations in support of a holistic and consistent approach to the treatment of lost accounts and unclaimed assets across financial institutions within the financial sector.
The FSCA is proposing the establishment of a single central unclaimed assets fund into which all unclaimed assets, once identified as such, should be transferred. The main objectives of such a central fund will be to accept and manage unclaimed assets, prioritise the reunification of those assets with their beneficial owners, pay valid claims and distribute funds that are not reserved for valid claims for the benefit of positive impact. Achieving the correct governance structure will be a critical success factor because the Board of the central fund will be responsible for taking operational decisions, including the levels of reserves that must be held to meet future claims and the level and purpose of any distributions.
An alternative option that may be considered is to require financial institutions to directly transfer the unclaimed assets to the National Revenue Fund instead of creating a new structure with the associated costs. The recommendations regarding the identification, reporting, treatment, and reunification of unclaimed assets apply equally to both options.
The following recommendations (for comment) are made in the paper:
Recommendation 1
It is stated in the discussion paper that unclaimed assets are not unique to the retirement fund industry. It is therefore proposed that the following financial products and instruments be subject to the proposed Unclaimed Assets Framework:
(a) Retirement fund benefits
(b) Bank deposits
(c) Participatory interests in collective investment schemes
(d) Life and Non-Life Insurance policies
(e) Securities
Recommendation 2
It is recommended that the law prescribes what is meant by dormancy, lost accounts and unclaimed assets. In general, it is proposed that the definition of unclaimed asset, as far as possible, be aligned to the definition of an unclaimed benefit in the Pension Funds Act. In other words, an asset becomes unclaimed if the asset has not been paid by a financial institution to a beneficial owner or has not been claimed by a beneficial owner, within 24 months of the date on which it becomes legally due, payable or claimable.
It is further proposed that the FSCA develops a consistent approach towards the identification, monitoring and responding to cases of possible unclaimed assets, by financial institutions. The proposed approach is set out in detail in the discussion paper.
Recommendation 3
A Central Unclaimed Assets Fund (Central Fund) should be established to receive and manage unclaimed assets, and financial institutions should be compelled to transfer unclaimed assets, whether deriving from a retirement fund or another source, into the Central Fund.
The FSCA proposes to leverage from the work currently being conducted on the establishment of a central unclaimed retirement benefit fund by engaging National Treasury on a proposal to transfer the establishment of the central unclaimed retirement benefit fund from the Pension Funds Act to the Financial Sector Regulation Act, to rename it to the Central Unclaimed Assets Fund, and to enable the expansion of the scope of the fund to accommodate other assets. It is further proposed that as a first step, the fund should only accept unclaimed retirement benefits and once it is sufficiently operationalised it can, on an incremental basis, be expanded to receive other types of unclaimed assets.
Should complexities surrounding a Central Fund be considered insurmountable, an alternative approach is to require the transfer of unclaimed assets to the National Revenue Fund.
Recommendation 4
Beneficial owners should continue to be able to reclaim, in perpetuity, the value of the assets at the point of transfer into the Central Fund (or other fund as may be determined), as well as any accrued interest between the date of transfer and the date of reclaim.
Recommendation 5
It is proposed that assets be taxed on date of reclaim by the beneficial owner. It is further proposed that the beneficial owner must be treated in a tax-neutral manner. In other words, the beneficial owner must be put in a tax position as if the transfer to the Central Fund had not occurred.
Recommendation 6
All financial institutions should be required to keep records of dormant accounts, lost accounts, and unclaimed assets identified, including the number of accounts and beneficial owners, asset type, individual asset value, age of asset, where available age and race of the beneficial owner, how the institution has responded to tracing and verifying beneficial owners, and the effectiveness of such responses. These records should routinely be submitted in a prescribed format to the FSCA for monitoring purposes.
Recommendation 7
A centralised data base should be established to assist in the tracing of persons in respect of all industry segments across the financial sector. This data base will initially only apply to retirement fund benefits. It is however proposed that it will, ultimately, be expanded to include beneficiaries of all unclaimed assets.
Recommendation 8
Given the costs involved in tracing financial customers, it is proposed that when an asset is confirmed by a financial institution as an unclaimed asset, an asset below a prescribed threshold be immediately considered “untraceable” and revert into the Central Fund. At this stage it is proposed that the threshold amount be prescribed by Conduct Standard and be set initially at R1000 for unclaimed assets older than 20 years deriving from a retirement fund, and R100 for all other assets.
Recommendation 9
Given the high concentration of unclaimed benefits in a few retirement funds, it is proposed that the FSCA more closely monitors the tracing of beneficiaries in these funds. Additional specialist resources may be required, like forensic investigators. In the first phase it is proposed that funds with more than R500 million total unclaimed assets, or funds with average unclaimed assets per beneficiary exceeding R45 000, be prioritised.
Recommendation 10
It is not possible at this stage to determine the extent to which there are concentrations of unclaimed assets sitting in other industry segments or entities. Should such concentrations however be detected, it is proposed that the FSCA considers further prioritisation approaches, guided by the experience of prioritising certain retirement funds.
Recommendation 11
It is proposed to actuarially estimate a sustainable unclaimed assets pool that can satisfy expected claims, and that the surplus funds be invested into initiatives that will have a positive systemic impact, e.g. social, environmental and developmental initiatives.
Recommendation 12
Financial customers should share responsibility with financial institutions for ensuring that their product and service providers have updated contact information. The FSCA proposes an ongoing awareness campaign, working together with financial institutions and relevant employers, to explain the importance of keeping personal details up to date, and the consequences of failing to do so.
Recommendation 13
There are various concerns with regard to tracing agents. It is therefore proposed that consideration be given how best to regulate the activities of tracing agents.
Next Steps
This Discussion Paper is intended to support the debate on how to effectively address the challenge of unclaimed assets in the financial sector, especially to locate beneficiaries from many years back, and to take steps to minimise the risk of sizable unclaimed assets accumulating in future. The FSCA supports government initiatives to strengthen infrastructure development in support of fair and sustainable economic growth.
Feedback received will be reviewed and used to strengthen the proposals, for submission to National Treasury. Commentators are invited to comment on this paper and, in particular, to respond to the key questions. Comments are due on 30 November 2022.