---

Peter Stockdale  
Partner
T +61 2 9296 2330

---

Philip Ward  
Partner
T +61 2 9296 2213

---

Brisbane
Justin McDonnell  
Consider whether the issues and developments referred to in this publication may impact on your business. We can help.

Canberra
John Topfer  
Consider whether the issues and developments referred to in this publication may impact on your business. We can help.

Hong Kong
Stuart Valentine  (萬思陶)
Consider whether the issues and developments referred to in this publication may impact on your business. We can help.

---

In June 2008, the Federal Government announced the introduction of a Financial Claims Scheme (FCS). The initiative is the Rudd Government’s response to recommendations by the Council of Financial Regulators, the HIH Royal Commission, and the global Financial Stability Forum in the wake of the collapse of the HIH group.

The stated aim of the FCS is to enhance the stability of the Australian financial system by providing depositors timely access to at least some of their funds in banks, credit unions and building societies, and compensation to general insurance policyholders who have valid claims in the event that a financial institution fails.

Upon collapse of a financial institution, the scheme will be funded by taxpayers’ contributions; that funding to later be recouped through the liquidation of the failed institution. This means that for the most part, the scheme should be self-funding. However in the event of a shortfall, surviving institutions will be levied. The FCS will be administered by APRA and activated by the Treasurer on the advice of APRA, the RBA and the Treasury. The precise circumstances when such a levy will apply to taxpayers and also to the relevant financial institutions, will be specified in legislation which establishes the scheme.

The Treasurer has noted that the risk of financial institutions failing is a very small one; however, reforms regulated by APRA would be put in place to minimise the likelihood of regulated financial institutions making a loss which is substantially bigger than its capital reserves or its capacity to replenish those reserves. The key reforms include:

• The regulation of non-operating holding companies (NOHCs) of prudentially regulated life insurers.
• Coordinating court injunction powers across prudential legislation so that either APRA or any other affected person can seek injunctions for conduct relating to the financial health of an institution.
• Arranging consistent transfers of business in banking, general and life insurance, with appropriate oversight by APRA.
• In the event of a failure, providing for the judicial management of a general insurer, overriding external management under the Corporations Act 2001 (Cth).
• Removing any potential legal barriers to allow for the recapitalisation of failing entities.

Eligibility for compensation is limited to individuals, small businesses and not-for-profit organisations. Investment products, such as superannuation, life insurance and managed funds will not be compensated.