Part A - Banking, FHSAs and Life Insurance (Schedule 1, 2 & 3)

Schedule 1, 2 and 3 of the Bill amend the Banking Act, FHSAs Act and LI Act. The changes reduce the period of inactivity before bank accounts and life insurance moneys are treated as unclaimed from seven years to three, and pay interest equivalent to CPI inflation on unclaimed moneys from 1 July 2013.

Current arrangements

Authorised deposit-taking institutions (ADIs) are required to transfer accounts to ASIC where there has not been a deposit or withdrawal other than bank fees and interest for seven years¹. For FHSAs, if there has not been a contribution or payment for seven years, they are required to be transferred to ASIC. There is a similar requirement for life insurers except that the seven year period is from when an amount becomes payable, such as when a policy matures².

To help reunite people with their unclaimed moneys, details of all unclaimed bank accounts and life insurance amounts are published on the ASIC website. People can reclaim these bank accounts and life insurance amounts at any time. However, currently no form of interest is paid when they are reclaimed.

ASIC performs a range of activities to reunite unclaimed moneys with their owners. In particular, it:

maintains the unclaimed moneys database;
publishes annually the Gazette containing the bank and life insurance unclaimed moneys provided to ASIC for that year;
makes available the records for an online search through the MoneySmart website, including maintaining the search facility;
has people available as part of ASIC’s client contact centre to answer calls from the public about unclaimed money and searching for unclaimed money;
runs a yearly promotion, including appearances on shows such as Sunrise on Channel 7, to promote people using the online search facility;
where resourcing permits, seeks to locate persons with large amounts of bank unclaimed money owed to them and inform them of the ability to make a claim;
promotes the online search facility when it attends exhibitions; and
limitedly uses Twitter to let people know about unclaimed banking and life insurance moneys.

Amendments under the Bill

Under the amendments, the period of inactivity before bank accounts and life insurance policies are transferred to ASIC will be shortened from seven years to three years. In addition, interest will be paid at a rate equivalent to CPI inflation from 1 July 2013.

These changes will allow the earlier identification of lost bank accounts and life insurance amounts, thus enabling the details of these amounts to be published (and available to be searched) sooner.

Impact on depositors and beneficiaries

Reducing the period of inactivity before bank accounts and life insurance policies are transferred to ASIC will help reunite people with their unclaimed money sooner. An account owner (or their descendants) has no easy way of searching for old accounts until the account is transferred to ASIC and entered into ASIC’s online database as unclaimed money. Once an unclaimed account is transferred to ASIC, people can easily search for it online at ASIC’s website and can reclaim it at any time by contacting the relevant ADI, FHSA provider or life insurer. This includes descendants of the individual, in the unfortunate cases where the individual has passed away³.

Furthermore, current claims data for the existing unclaimed bank accounts scheme shows that it becomes increasingly unlikely that lost moneys will be reunited with their owners, the longer it has been since the last transaction on the account. Therefore, listing unclaimed amounts after three years should reduce the proportion of unclaimed moneys which are never reunited with their owners.

In addition, to ensure these unclaimed moneys maintain their real value over time, the Government will pay interest on these unclaimed bank accounts and life insurance policies at the rate of CPI inflation, and will make this interest payment tax exempt. This will maintain the real value of unclaimed moneys for the benefit of the owners of these moneys. Currently, no interest is payable and the compounding effects of inflation can significantly erode the value of unclaimed bank accounts and life insurance moneys.

The following examples, taken from ASIC’s online database, illustrate the impact of inflation.

Last year a person reclaimed a bank account of $113 that was transferred as unclaimed money in 1973, after being inactive since 1966. If interest had been paid at the rate of CPI inflation since 1973, the owner would have received $935. Instead, because no form of interest is currently paid, the owner only received $113 when it was reclaimed – a loss of $882 in 2011 dollars.
Mr Kenny from Cremorne had his $4,779 Commonwealth Bank account transferred as unclaimed money in 1971, after being inactive since 1964. If interest had been paid at the rate of CPI inflation since 1971, he (or a descendent) would receive $46,892 if he reclaimed the money today. Instead, because no form of interest is currently paid, if he (or a descendent) were to claim the money today, he would only receive $4,779 – a loss of $42,113 in today’s dollars.
Ms Hill from Glebe had her $947 Commonwealth Bank account transferred as unclaimed money in 1977, after being inactive since 1970. If interest had been paid at the rate of CPI inflation since 1977, she (or a descendant) would receive $4,749 if she reclaimed the money today. Instead, because no form of interest is currently paid, if she (or a descendent) were to claim the money today, she would only receive $947 – a loss of $3,802 in today’s dollars.
JS Douglas had his $402 NAB account transferred as unclaimed money in 1990, after being inactive since 1983. If interest had been paid at the rate of CPI inflation since 1990, he (or a descendent) would receive $712 if he reclaimed the money today. Instead, because no form of interest is currently paid, if he (or a descendent) were to claim the money today, he would only receive $402 – a loss of $310 in today’s dollars.
Henry Baulch of Stony Crossing had his $776 AMP Life Limited insurance policy transferred as unclaimed money in 1953, after being inactive since 1946. If interest had been paid at the rate of CPI inflation since 1953, he (or a descendent) would receive $12,343 if he reclaimed the money today. Instead, because no form of interest is currently paid, if he (or a descendent) were to claim the money today, he would only receive $776 – a loss of $11,567 in today’s dollars.

Shortening the period of inactivity before bank accounts and life insurance policies are transferred to ASIC also helps to protect the real value of lost amounts for their owners.

The low balances in most unclaimed bank accounts suggest that many of these accounts are likely to be transaction accounts⁴. A survey by Treasury of the four major banks found that interest rates on their transaction accounts currently range from nothing to 0.01 per cent. In addition, life insurers do not provide interest on insurance policies.

For example, if inflation were to average 2.5 per cent, the extra four years before these inactive amounts are transferred to ASIC would allow their real value to be eroded by more than 10 per cent (four years x 2.5 per cent). For the median unclaimed bank account transferred in 2011 of $1,200, this means a value loss of more than $120.

The real life examples above show how much of a difference four years can make where a bank account or life insurance policy is earning no interest.

The owner of the $113 bank account that was reclaimed last year after being inactive since 1966, would have received $935 if interest had been paid at the rate of CPI inflation since 1973, when it was transferred as unclaimed moneys. This would have increased further to $1,074 if the account had been transferred after three years instead of seven.
If Mr Kenny from Cremorne (or a descendant) today reclaimed his $4,779 Commonwealth Bank account that became inactive in 1964, they would have received $46,892 if interest had been paid at the rate of CPI inflation since 1971. This would have increased further to $54,510 if the account had been transferred after three years instead of seven.
If Ms Hill from Glebe (or a descendant) today reclaimed her $947 Commonwealth Bank account that became inactive in 1970, they would have received $4,749 if interest had been paid at the rate of CPI inflation since 1977. This would have increased further to $8,033 if the account had been transferred after three years instead of seven.
If JS Douglas (or a descendant) today reclaimed his $402 NAB account that became inactive in 1983, they would have received $712 if interest had been paid at the rate of CPI inflation since 1990. This would have increased further to $956 if the account had been transferred after three years instead of seven.
If Henry Baulch (or a descendent) today reclaimed his $776 AMP Life Limited insurance policy that became inactive in 1946, they would have received $12,343 if interest had been paid at the rate of CPI inflation since 1953. This would have increased further to $19,627 if the account had been transferred after three years instead of seven.

Even if unclaimed bank accounts are earning interest, this interest is likely to be insufficient to keep up with inflation in many cases, and is normally subject to tax. Even though interest rates on savings accounts can be higher, quoted rates often include time limited special offers that may only last for a few months before reverting to a lower rate.

Another factor that can significantly erode bank accounts the longer they are left untouched before becoming unclaimed moneys is fees. Many bank accounts have fees of between $2 and $6 per month.

Although some accounts provide higher interest or fee waivers if certain amounts are deposited each month, unclaimed bank accounts will not qualify because, by definition, they have not had any recent deposits or withdrawals. Treasury reviewed terms and conditions of some bank accounts. For example:

Commonwealth Bank’s GoalSaver account offers 4.90 per cent interest. However, this drops to just 1.25 per cent if there is not a deposit of at least $200 each month. An unclaimed account will, by definition not qualify. Further, any interest earned would be taxable.
A standard Westpac Choice account has no monthly fees, but only if at least $2,000 is deposited each month, otherwise there is a $5/month monthly service fee. Therefore an inactive account would lose an extra $240 in monthly fees if left in the bank for seven years instead of three years.

In contrast, if unclaimed moneys are transferred to ASIC after three years, they will be listed on ASIC’s online database, making it easier for their owners to find them, and they will be protected from inflation and bank fees sooner.

Once the owner of an unclaimed bank account finds the account using ASIC’s online search facility, all they need to do to reclaim their account is to approach the relevant financial institution. The ADI will then assess whether the claimant is the rightful owner of the account and notify ASIC. ASIC will then release the funds to the ADI. The process for unclaimed life insurance moneys is the same, except that the claimant must approach the relevant life insurer.

Impact on financial institutions

ADIs and life insurers already have systems in place to identify and transfer unclaimed moneys to ASIC based on the current definition of seven years of inactivity. The amendments will simply change the relevant time period from seven years to three years.

The Bill also contains transitional provisions that extend the date by which ADIs and life insurers must report on and transfer unclaimed moneys to ASIC next year by one month, from 31 March 2013 to 30 April 2013.

Other issues

Although the legislation governing FHSAs and Farm Management Deposits require providers (for example, ADIs) to make reasonable efforts to contact account owners, the current definition of an unclaimed bank account is longstanding and has never included a requirement for ADIs to attempt to contact customers. However, in practice, the majority of ADIs seek to contact customers whose accounts are at risk of becoming unclaimed moneys through letters, phone calls, and messages on monthly statements.

The unclaimed moneys provisions have existed for many decades and have never contained an exclusion for large accounts. This Bill does not change that. Where a large account balance has been lost due to the death of its owner it is extremely unlikely that the owner would have wished to bequeath their account to their bank, which would be the practical effect of imposing a size limit on which account balances may be treated as unclaimed moneys. Furthermore, the real value of large accounts is just as likely to be eroded by inflation as smaller account balances.

¹ In the case of bank accounts, there is also a $500 threshold in recognition of the costs to an ADI and the government associated with processing the transfer of small amounts. This threshold, which is set via regulation, was last determined in 1993, when many banks and government were still using paper based systems.

² Life insurers have advised that the majority of unclaimed life insurance moneys relate to legacy insurance products and premium refunds.

³ Anecdotal reports suggest that relatives may search the unclaimed moneys register soon after a person dies. However, if the deceased person was using their account, it will currently not be recognised as unclaimed and listed in the ASIC database until at least seven years after their death.

⁴ Of the bank account balances transferred to ASIC in the most recent (2011) returns, half were less than $1275.

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