Why you should care about returning funds to dormant clients.

Perhaps oddly, for FCA regulated firms that handle client money there is no direct obligation to return those funds as soon as there is no longer any proper reason to hold them. This has led to an industry that in general sits on its hands when it comes to attempting to re-engage with its gone-away population. Here we look at why that needs to change.

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A convergence of factors exist today that when pointed out, make any responsible management team acknowledge a need to look after their dormant client population. These take the form of the ethical obligations within Consumer Duty, the ethos of the Dormant Assets Act 2022, and the underlying expectations within CASS,

Ethical obligations within Consumer Duty

The Consumer Principle, Principle 12, reflects the positive and proactive expectations the FCA have of a firm's conduct. In the FCA's own words from their "Final non-Handbook for firms on the Consumer Duty";

It should prompt firms to ask themselves questions such as, "Am I treating my customers as I would expect to be treated in their circumstances?" or, "Are my customers getting the outcomes from my products and services that they would expect?".

The cross-cutting rules articulate the standards of conduct that the FCA expect under Principle 12. They have within them a requirement for firms to act prudently and proactively to avoid causing foreseeable harm to customers. Examples of harm such as consumers incurring overly high charges where they have a lack of understanding of charging structure.

Firms should proactively consider how consumers' behavioural biases, such as inertia, might lead to their products or services causing harm. There is an element of inertia within all dormant clients. Their behaviour can cause direct harm where firms are charging inactivity fees that are eroding the value of client money, and indirect harm where idle cash balances represent an opportunity cost in terms of alternative investment or lost interest.

It is the duty of firms to now recognise this behavioural trait and evolve their services to mitigate the harmful effects of it. They can do this by implementing processes that seek to re-engage the dormant population with clear and consistent communications across multiple channels and means of verifying whether the communications are being received. To not implement such processes could be tantamount to a "sludge practice" especially in the cases of firms that charge inactivity fees, where there is a commercial incentive to deter customers from taking action.

Our Maintaining Active Client Relationship (MACR) services are easy and cost effective to implement, and ensure that your customers can achieve the right outcomes.

Ethos of the Dormant Assets Act 2022

Described as "a new awakening", the Dormant Assets Act 2022 has expanded the range of sectors that can access the Dormant Asset Scheme (DAS) from its original base of banks and building societies, to now include insurance, pensions, investment and wealth management, and securities. Importantly, this now explicitly includes client money.

The FCA consultation paper titled Expansion of the Dormant Assets Scheme - second phase outlines 3 underpinning principles to the DAS:

• Reunification first : a firm's first priority being to trace and reunite people with their assets.

• Full restitution : asset owners are able, at any point, to reclaim the amount that would have been due to them had a transfer into the scheme not occurred

• Voluntary participation : participants can choose whether to contribute to the scheme and to what extent

It should be noted that the third principle refers to voluntary participation in the DAS, with the alternative (for client money at least) being a payment to a registered charity. However Principles 1 and 2 represent the statutory and regulatory expectations of firms when dealing with dormant assets. Therefore firms should now be sitting up and reviewing how it is that they are pursuing reunification of dormant clients with their client money, and how they are conducting their financial risk management with regards to funds paid away to charity that may still be claimed by a client at any point in the future.

Our service suite is specifically tailored to resolving these challenges with simple integration and clear pricing.

Underlying expectations within CASS

Whilst there exists no direct obligation within CASS for firms to actively seek out dormant clients in order to return funds to them, the industry would do well to take its cue from another regulator who has made it crystal clear.

Under the Solicitors Regulation Authority's Accounts Rules 2.5 firms are required to return client money promptly, as soon as there is no longer any proper reason to hold those funds. And they mean in too. In October 2023 the SRA fined a firm who had failed to deal with residual client money properly.

Solicitors are therefore held to a higher standard than their FCA regulated brethren. However the changes that the FCA are seeking to make to CASS and other rules, as alluded to within the CP23/12 Consultation Paper, may see a formalisation of a need to conduct proactive outreach by FCA regulated firms to those clients that have become unresponsive.

We recommend getting ahead of the curve and exploring the services that we offer that will help your business take action now.

If you want to discuss an aspect of this blog post, our services, or any other related queries, then please contact us and we will be happy to help.