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
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
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
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
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
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
A covered financial product is one that is specified in a
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
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
an ADI (whether or not it is a declared ADI)
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.
When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).