An unclaimed assets free-for-all?

If you or any of your clients have any ‘skin’ in the unclaimed benefits ‘game’, then you best prepare for some heavy afterhours reading, to assimilate the Financial Sector Conduct Authority’s (FSCA) recently published discussion paper on the treatment of South Africa's growing unclaimed assets stockpile. The September 2022 discussion paper, titled ‘A framework for unclaimed financial assets in South Africa’, runs to 70-pages covering unclaimed assets held by retirement funds; the Collective Investment Scheme (CIS) and life insurance sectors; the banking sector; and financial markets.

An all-encompassing and comprehensive solution

The last time we covered the topic, in a piece titled ‘Introducing the unclaimed benefits super fund’, we reported that National Treasury was eyeing the then approximately ZAR45 billion sitting in unclaimed retirement fund benefits. Today we can confirm that their interest has expanded to place a combined, estimated ZAR90 billion in play, with the usual central fund and state-appointed management / supervision framework built around it. It took a team from the FSCA around two hours to explain the proposed framework during a virtual media roundtable event, with industry stakeholders given until 30 November 2022 to submit their comment. This newsletter focuses on the 13 recommendations contained in the discussion paper, interspersed with some of the writer’s thoughts. 

“Today’s conversation comes after a lot of talk about unclaimed benefits specific to the retirement sector; we are broadening the conversation [by sharing] a discussion paper containing recommendations on what the regulator thinks should be done with [a broad cross section of] unclaimed assets,” said Tembisa Marele, Head of Communications at the FSCA, before vacating the podium for FSCA Commissioner, Unathi Kamlana. The Commissioner started his brief introduction by acknowledging the progress made by certain financial sector stakeholders in the unclaimed benefits space; but lamenting the uneven progress across financial sectors. “As a market conduct regulator concerned with customers being treated fairly by the financial sector, this [estimated ZAR90 billion in unclaimed assets] remains an area of strategic focus for the FSCA,” he said, advocating for an “all-encompassing and comprehensive” solution. 

The broad brushstrokes…

The commissioner summarised the broad brushstrokes intention of the framework as being to significantly reduce the value of unclaimed assets and improve customer outcomes across the financial sector by, among other interventions, introducing a common taxonomy amongst financial institutions; implementing ongoing monitoring across the financial sector; and enhanced tracing. The adequacy of data and recordkeeping and poor financial literacy were singled out as major causes of the current situation. Kamlana noted that accurate “data and records remain central to resolving the unclaimed assets [dilemma] in South Africa” before acknowledging that many beneficiaries were for all intents and purposes “untraceable”. It is these assets that the regulators, and National Treasury, hope to repurpose to the benefit of broader society. 

Detailing the 13 specific recommendations 

Here follows an executive summary of the 13 recommendations, with more detail on offer in the FSCA paper… 

• Recommendation 1: Is that the types of assets to be included within the scope of the framework include retirement fund benefits; bank deposits, irrespective the term and including foreign currency deposits; participatory interests in CIS and life and non-life insurance policies; and securities. Investments, returns, income, dividends or other proceeds in respect of or derived from these assets are also deemed payable or due to customers or their beneficiaries by financial institutions, and thus included in the framework. 

• Recommendation 2: Is that an aligned approach [be taken] to the treatment of unclaimed assets across all industry segments, alongside the adoption of a common escalation system for the identification of unclaimed assets. Industry would have to agree key definitions for dormant account; lost account; and unclaimed asset [as well as] understand the impact and extent of unclaimed assets across the financial sector. 

• Recommendation 3: Is to establish a Central Unclaimed Assets Fund to receive and manage unclaimed assets, or alternatively transfer unclaimed assets to the National Revenue Fund… This writer supports a managed repurposing of the affected funds and would love to hear from readers as to which of these suggestions you prefer. 

• Recommendation 4,5: The framework should provide for (4) “restitution in perpetuity” and (5) “tax neutrality”. Point four seems a trifle moot, given the likelihood of today’s untraceable beneficiary being ‘traced’ 10, 15 or 20-years hence, and perhaps there is an argument for a lengthy prescription period on such assets, especially for small balances. 

• Recommendation 6: Financial institutions that will already be snowed under by the looming Omni Conduct of Business Report (Omni CBR) are going to hate the sixth suggestion, being that unclaimed asset reporting by financial institutions be standardised in terms of regularity and form. It seems that compliance officers can add ‘death by regulatory reporting’ alongside life’s other certainties, death and taxes. 

• Recommendation 7,8: These are a pair of common-sense proposals to (7) “establish a centralised data base to assist in the tracing of persons in respect of all industry segments across the financial sector” and (8) “identify a minimum threshold for unclaimed assets below which a financial customer will not be actively traced”. This writer reckons that cleaning up the unclaimed assets dilemma could be massively expedited by simply declaring assets with balances below this threshold as ‘forfeit to the state’! 

• Recommendation 9,10: These proposals set out to “prioritise the tracing of members in high impact retirement funds and other providers”, which the FSCA describes as financial institutions with a high concentration of unclaimed assets. 

• Recommendation 11: Aligns nicely with the environmental, social and governance (ESG) theme by requiring that a portion of unclaimed assets be set aside for projects with ESG benefits. The first preference remains to return unclaimed assets to their rightful owners, failing which they should be repurposed for public good. 

• Recommendation 12, 13: Twelfth in the list is to undertake “coordinated consumer awareness campaigns regarding unclaimed assets, including to promote keeping personal details updated” and thirteenth is “the regulation of tracing agents”. These points will fall upon product providers and regulators respectively and will undoubtedly add costs at each. 

Many unanswered questions

The discussion paper sets out to answer some of the many unanswered questions around unclaimed assets, which Kamlana said include: Do you create a central fund or allocate funds to Treasury? And how do you implement governance structures around a central fund? “We approach the unclaimed assets debate with a clear appreciation and understanding that it is a complex problem; there are a lot of moving parts and various stakeholders are affected … there are no easy and straightforward answers,” he concluded. 

Writer’s thoughts:
The commissioner of the FSCA correctly identifies many unanswered questions in the unclaimed assets debate, starting with whether the assets be managed from a central fund or integrated into National Treasury. Before we tackle the specifics: Do you, as stakeholder in the financial services sector, agree in principle that unclaimed assets be reallocated to projects that offer benefits to broader society? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.