The latest piece of the Federal Government's response to the credit crunch has been released: a regulation establishing the $1 million threshold limit on the Government Guarantee, and the declaration of a list of covered financial products that will comprise protected accounts for the purposes of the Government Guarantee.

The limit for the Scheme

Last month the Federal Government announced that a $1 million threshold limit will apply in respect of guaranteed deposits from 28 November 2008. Up until that date, all deposits eligible for the Guarantee will be guaranteed without charge. After that date, deposits of over $1 million will only be guaranteed if the relevant fee is paid.

The Banking Amendment Regulations 2008 (No. 1), which comes into effect on 28 November 2008, prescribes a $1 million threshold limit for the purposes of the Government Guarantee.

Covered financial products under the Scheme

As mentioned in previous Alerts, the Government Guarantee of deposits only applies to protected accounts with ADIs. The Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 defines a protected account as an account that is kept by an account-holder with an ADI that is either :

  • prescribed by regulation; or
  • 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.

Pursuant to subsection 5(8) of the Banking Act 1959, the Minister may declare that a specific financial product is a covered financial product for the purposes of the Government Guarantee. A declaration has since been made, the Banking Act 1959 - Declaration of Covered Financial Products.

Under the Declaration, various deposit accounts such as saving, call, current, debit card, transactions, or mortgage offset accounts that are separate deposit accounts are declared to be covered financial products. It is interesting that this declaration has been made in respect of retail deposit products that would ordinarily fall within the definition of "protected account", without the need to be declared a covered financial product. This is because many of the product types specified in the Declaration involve an account between an account-holder and an ADI requiring the ADI to pay the account-holder on demand or at an agreed time the net credit balance of the deposit account.

What is expected to come

It now appears that the scheme will be legislative for deposits of under $1 million and contractual for deposits over $1 million and the guarantee of wholesale funding.

Although these latest developments do clarify some aspects of the Scheme, there are still a number of pieces missing.

For example, Scheme rules, deeds and procedures for determining the threshold and to flesh out the Scheme even further would be welcomed. They might cover such matters as the rules to be applied by ADIs for the purpose of aggregating accounts in order to determine whether the $1 million threshold limit has been met and prescribed disclosures ADIs must make in relation to the operation of the guarantee scheme in relation to their accounts. We assume that Treasury is working on drafting these and consulting with relevant agencies and industry bodies in order to release this material shortly.

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