Upcoming Mallesons seminarsAll persons who deal with Australian deposit-taking institutions.
What do you need to do?Review their position in the context of the changes to the protection of depositors with Australian deposit-taking institutions.
Scott Farrell
Partner
Martin James
Partner
Scott Farrell
Partner
T +61 2 9296 2142
Martin James
Partner
T +61 2 9296 2198
Sydney
Greg Hammond
Rowan Russell
Melbourne
Ian Paterson
Perth
John Naughton
Brisbane
Berkeley Cox
Hong Kong
Richard Mazzochi
(馬紹基)
The Australian government has today introduced legislation into the Australian parliament to implement the Financial Claims Scheme. This is to be the legislation under which the Government’s announced 100 per cent protection of deposits with Australian Authorised Deposit-taking Institutions (ADIs) is to be implemented.
The Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill, would implement the Scheme primarily by amending provisions of the Banking Act. The Bill would also amend other Acts such as the Insurance Act and the Life Insurance Act.
In this Alert, we provide a short summary of key amendments to the Banking Act relating to the Scheme in a question and answer format.
How does the protection of deposits work?
The Scheme provides additional depositor protection by the provision of a new “Early Access Facility for Depositors”. Under this, if:
- the Australian Prudential Regulation Authority (APRA) has applied for an ADI to be wound up, and
- the Treasurer makes a declaration that the scheme applies to that ADI,
then each account-holder of a “protected account” with that ADI is entitled to be paid by APRA an amount equal to the balance of the protected account plus accrued interest which has not been credited to that account (subject to adjustments described in the Bill). The Bill allows for a maximum amount of such payment to be prescribed by regulations but it is understood that the Government does not intend to prescribe a limit for the next three years.
What sort of deposit accounts are protected?
The Scheme applies to defined “protected accounts”. These are:
- accounts prescribed by regulations (it is not expected that any such regulations will be passed at this stage), or
- accounts or “covered financial products” kept under an agreement between the account-holder and the ADI requiring the ADI to pay the account-holder, on demand by the account-holder or at a time agreed by them, the net credit balance of the account at the time of the demand or the agreed time.
A “covered financial product” is a financial product declared by the Australian Treasurer to be covered by the Scheme. It is intended to permit protection to be given to a broad range of deposits.
Do account holders have to be Australian individuals?
No. There is no requirement that they are individuals or Australian residents.
How are payments to depositors made?
Payments may be made by APRA in several ways including a single amount or in instalments determined by APRA, or by APRA applying the amount or amounts for the benefit of the account-holder.
Is APRA entitled to be repaid the amount which it pays to depositors?
Yes. The Bill provides that the rights of the depositor in connection with the amount paid by APRA, automatically become rights of APRA.
Has the priority of repayment of depositors been changed?
The priority given to depositors over other creditors, if an ADI becomes unable to meet its obligations or suspends payment under the Banking Act, has been changed. Priority now goes to APRA, first for repayment for the amounts which it has paid to that ADI’s depositors under the Scheme and then in reimbursement of APRA’s costs on running the Scheme for that ADI. After this, next priority is given to repayment of outstanding deposits of the ADI.
Does the Bill cover the guarantee of term wholesale funding?
Not expressly, no.
How long does the Scheme last?
The Scheme does not have a “sunset clause”. However, from 12 October 2011 the Scheme is to apply to Australian dollar deposits only. Also, it is expected that the Government will impose a monetary limit on the protection provided by the Scheme at this time.
Does the Bill make other amendments to the Banking Act?
Yes. Other amendments are to be made to the provisions of the Banking Act addressing the manner of dealing with distressed or failing financial institutions, including the process of statutory management of an ADI. For example:
- The circumstances in which APRA can appoint a statutory manager are to be broadened to include where APRA considers that “it is likely that the ADI will be unable to carry on banking business in Australia consistently with the interests of its depositors and financial system stability in Australia”.
- Statutory managers are to be given additional strong and flexible powers to facilitate a recapitalisation of an ADI.
- A statutory manager is to be empowered to alter an ADI’s constitution, rules or other arrangements for governance if the alteration is necessary or convenient for enabling or facilitating the performance of the ADI statutory manager’s functions and duties, or the exercise of the ADI’s statutory manager’s other powers and it promotes the protection of depositors of the ADI and financial system stability in Australia.
A link to the website of the Australian parliament from which a copy of the Bill and its Explanatory Memorandum can be found here.