08 December 2005
Key Points:
Small depositors or policyholders should be covered by a compensation scheme in the event of their institution failing, according to a new report.
A financial claims compensation scheme for depositors / policyholders of failed financial institutions has been proposed by a new report.
Currently depositors or policyholders have first claim on the assets of the failed institution, but no certainty as to when they'll get any money. A review by the Council of Financial Regulators has concluded that while many of the arrangements currently in place for dealing with distressed financial institutions are sound, the Government should look at a minimalist compensation scheme to benefit retail depositors in a failed ADI, who'd get immediate access to at least some of their funds; and retail policyholders in insurance companies. Not all depositors or policyholders would be covered; the scheme is intended to protect the more vulnerable customer, such as individuals, small business and community organisations.
APRA would be in charge of the scheme, which would apply to retail deposits in ADIs and the policyholder claims of life insurers and general insurers, and cover the financial institution’s liabilities in Australia.
Depositors would get 90 per cent of their funds in a closed institution up to a maximum limit (for example, $50,000). They could apply for further moneys up to a predetermined amount, but only in limited and specified circumstances (for example, if the ADI failed just after the proceeds of a house sale were deposited);
The money for this scheme would be repaid from the sale of assets of the failed institution. If the sale doesn't cover it, other financial intermediaries would be levied, but the plan is to keep it in the industry via separate cost pools, so ADIs wouldn't be bailing out insurers and vice versa. The levy base for each pool would correspond to the value of covered liabilities (for deposits and annuities) or to the value of premiums for covered products (for risk products) - in effect, your market share would dictate your contribution.
Apart from the legislative changes required to bring this into effect, disclosure requirements for financial products would be amended to ensure consumers know a product is covered by the scheme.
The Treasurer has asked the Governor of the Reserve Bank to consult with industry, and interested parties have been invited to get further information on that process from the Bank.
Further changes to prudential oversight of ADIs- IFRS implementation
In related news, APRA has issued another draft of its proposed framework for the implementation of IFRS, scheduled to begin in July 2006. Despite the criticism of some aspects of the earlier draft prudential standards, APRA has made no substantial changes
Written submissions on the draft prudential standards and guidance notes must be in by Monday 16 January 2006.
