Australia: Government Guarantee Of Deposits

The Australian Government introduced legislation on 15 October 2008 that, if enacted, will enable depositors to gain early access to funds in the event of insolvency of an authorised deposit-taking institution (ADI). This is the means by which the Government aims to achieve its guarantee of deposits.

The current regime

Under current legislation depositors have priority in the liquidation process. However, their deposits are not guaranteed and they must participate in the potentially lengthy liquidation process.

The new Financial Claims Scheme

The proposed Financial Claims Scheme (FCS) provides for an 'Early Access Facility for Depositors'. This facility is invoked if and when the Australian Prudential Regulatory Authority (APRA) applies for the winding up of an ADI and the Minister declares that the ADI is a 'declared ADI'.

This declaration must include the total amount to be set aside for the meeting of claims as well as the amount to be set aside for APRA's administration costs. The Minister is entitled to amend such a declaration but it cannot be revoked. This is intended to provide depositors and other stakeholders with a level of certainty.

After a declaration is made APRA will promptly administer early access to funds for depositors. They will be entitled to be paid the net credit balance of their accounts or other financial product, including any interest accrued but not yet credited to the account.

Recoupment of payments by APRA from the declared ADI

To the extent that payments are made to depositors under the FCS, their rights to claim these amounts in the liquidation will be transferred to APRA. This enables
APRA to recover these amounts in the liquidation and recoup the money paid to depositors.

Limits on payments

Although the legislation provides a mechanism for the introduction of limits on payments the Government has indicated that there will be no such cap to the FCS for the first three years. At the end of this period the Government will reconsider this issue. However, the legislation does provide for the FCS to be limited to Australian denominated currency deposits at the end of three years.

Accounts covered by the FCS

The proposed legislation provides that 'protected accounts' will obtain the benefit of the FCS. These are:

  • accounts prescribed by legislation (although the Government does not intend to make use of this provision at this time)
  • an account or covered financial product that is kept under an agreement between the account holder and the ADI requiring the ADI to pay the account-holder on demand or at an agreed time the net credit balance.

A covered financial product is one that is specified in a Ministerial declaration.

Depositors covered by the FCS

An account-holder can be an individual or an entity as defined in tax legislation. This is a broad definition and encompasses an individual, a body corporate, a body politic, a partnership, any other unincorporated association or body of persons, a trust, a superannuation fund and an approved deposit fund.

Method of payment

Payments may be made by lump sum or by instalments. APRA may also choose to establish an account for a depositor and deposit the money there. This may be beneficial in preserving certain tax treatment and does not require the consent of the depositor.

Changes to priority arrangements on liquidation

The priority arrangement on liquidation of a declared ADI will be amended so that:

  • APRA receives first priority for payments made to depositors under the FCS
  • APRA receives second priority for administration costs associated with the FCS
  • Third priority is given to other deposit claims (e.g. any residual claims of depositors after caps are introduced)
  • Fourth priority is given to other liabilities of declared ADIs.

Any residual amounts claimed by depositor's will be recoverable in the liquidation and depositor's are not required to lodge a proof of debt for these claims.

Obligations imposed on ADIs, administrators and liquidators - what does this mean to you?

The proposed legislation enables APRA to issue notices requiring persons to give reasonable assistance and provide specified information. The persons obligated to comply with such a notice include:

  • an ADI (whether or not it is a declared ADI)
  • an administrator
  • a liquidator.

Civil and criminal penalties apply to ADIs and officers of ADIs for failure to comply with such notices.


Access the following links for a copy of the Bill and its Explanatory Memorandum and covered financial products.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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