The Treasurer has announced the Government’s intention to introduce legislation to establish a Financial Claims  Scheme (FCS)to assist depositors and policyholders in the event that an authorised deposit‑taking institution (ADI) or general insurer fails. Wayne Swan’s Ministerial Statement

The Government has also accepted recommendations of the Council of Financial Regulators that a number of changes be made to the regulatory framework to allow better management of failing financial institutions.

Depositors in ADIs (banks, building societies, credit unions) already receive preference in any liquidation, which means they will almost certainly recover all of their funds eventually. However there is currently no mechanism to provide depositors or general insurance policyholders with timely access to at least some of their funds in the event of a failure. 

In light of the potential for delays to cause real hardship, and to further assist the management of a failing institution, the FCS will allow customers to quickly recover money in deposit accounts. Customers will be able to recover monies up to a specified cap (up to a limit per  person of $20,000), with the remainder likely to be recovered when the ADI is liquidated.

To avoid the need for ad hoc arrangements of the sort established in the wake of the HIH failure, the FCS will also provide compensation to policyholders who have valid claims with a failed general insurer.

The Commonwealth Government, through APRA, will fund payments under the FCS, with the costs to be recovered through the liquidation of the failed entity. In the event that the liquidation does not provide full recovery of the Government’s costs, a levy may be applied to relevant financial institutions.

The FCS will be administered by APRA and will make early payments to eligible depositors or general insurance policyholders using Government funds in the first instance. APRA would then take the place of the depositors/policyholders in the liquidation of the failed institution. If APRA was unable to recover the full costs of the scheme in the liquidation, relevant financial institutions could be levied to recover the costs of the FCS.

Access to the FCS would be focussed on providing timely access to funds for those least able to effectively assess the risk of dealing with a particular institution.

• In relation to banks, building societies and credit unions, payments to individual depositors will be capped at a set amount per depositor. The cap will be set to ensure that most depositors will receive their deposits in full under the FCS.
• Those with deposits which exceed the cap will have access to the amount up to the cap under the FCS, and will recover the remainder of their funds from the liquidation of the institution in most circumstances.
• In the case of a general insurance failure, eligible policyholders with a valid claim against the failed insurer will receive a payment under the scheme equivalent to the value of their claims, less any excess or deductible amounts.
• Eligibility for coverage for general insurance policyholders will be limited to individuals, small businesses and not-for-profit organisations.

Investment products, such as superannuation, life insurance, and managed funds will not be covered by the FCS or products offered by institutions which are not regulated by APRA.

Other products offered by life insurers or friendly societies will be excluded from the FCS, as the statutory fund structure imposed on life insurers already provides significant protection to policyholders, and the likelihood of failure leading to loss is very low.

UPDATE 12 October 2008: Australian government guarantees Australian bank, building society and credit union deposits

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