House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan Mp

Chapter 1

Early access facility for depositors

Outline of chapter

1.1 Schedule 1 of the Bill implements the Early Access Facility for Depositors (EAFD) through legislative amendments to the Banking Act 1959 (Banking Act). The purpose of the EAFD is to ensure that depositors in a failed authorised deposit-taking institution (ADI) have timely access to their deposit funds, which they would otherwise receive through the liquidation process under the depositor preference arrangements.

Context of amendments

1.2 Australia's crisis management arrangements have been subject to a number of assessments in recent years, including the Study of Financial System Guarantees (Davis Report), the International Monetary Fund's Financial Sector Assessment Program , and a review by the Council of Financial Regulators. These assessments have identified scope to enhance the existing arrangements for protecting depositors' interests in the event of the failure of an ADI.

1.3 More recently the ongoing dislocation in global financial markets has heightened the need for effective arrangements to deal with financial institutions in distress. The Financial Stability Forum's report on Enhancing Market and Institutional Resilience also encouraged jurisdictions to review and, where necessary, strengthen deposit insurance arrangements.

1.4 Currently, in the event of the failure of an ADI, depositors' claims are pursued in the liquidation process. The depositor preference arrangements give depositors a priority claim to assets over all other creditors in liquidation. However, no arrangements are in place to ensure that depositors have timely access to their funds in the event of the failure of an ADI. As a result it could take a number of months (or years) for the liquidation process to be completed and for depositors to receive any funds.

1.5 As deposit products are considered critical to participation in the economy, there is benefit in having formal, targeted and efficient arrangements to ensure that depositors have timely access to their funds in the event of the failure of an ADI.

1.6 There is also benefit in formalising arrangements for responding to the failure of an ADI to provide clarity and certainty to depositors and other stakeholders in all ADIs.

1.7 The EAFD is targeted at meeting liquidity needs of depositors through an advance payment of funds that depositors would otherwise be able to receive from their ADI. The Bill establishes the parameters of the scheme and ensures depositors, particularly small retail depositors, are more likely to receive all of their deposits.

Summary of new law

1.8 The amendments establish the EAFD and provide the framework for determining and making payments to eligible depositors.

1.9 The Australian Prudential Regulation Authority (APRA) is the scheme administrator.

1.10 The depositor preference arrangements are adjusted to reflect the introduction of the scheme.

Comparison of key features of new law and current law

Detailed explanation of new law

1.11 Activation of the EAFD provides depositors in a failed ADI with more timely access to their funds than they would have under the normal liquidation process. APRA substitutes for those depositors as a creditor of the declared ADI in liquidation to the extent of their EAFD entitlements. [Schedule 1, item 15, section 16AB]

1.12 The EAFD is administered by APRA. Administration of the scheme involves calculating and making payments to depositors. [Schedule 1, item 15, Section 16AC]

1.13 The EAFD will be activated by a declaration by the Minister. This declaration will stipulate the failed ADI, the amounts available to make payments to depositors and the amounts to administer the EAFD. [Schedule 1, item 15, Section 16AD]

1.14 APRA will need to provide the Minister with information necessary to activate the EAFD in a timely manner following the failure of an ADI. [Schedule 1, item 15, Section 16AC]

1.15 In order that it can administer the Scheme and advise the Minister, APRA is provided with powers to obtain information.

1.16 APRA will have first priority in liquidation to the extent of the payments to depositors under the EAFD.

Activation of the EAFD

1.17 The EAFD can only be activated in relation to an ADI that has failed, because it is insolvent and is unlikely to be returned to solvency in a reasonable period of time, and APRA has applied for it to be wound up. In this respect, APRA is required to notify the Minister if it makes an application for an ADI to be wound up as soon as possible to ensure timely activation of the scheme [Schedule 1, item 14, subsection 14F(3) and item 15, section 16AD] .

1.18 The circumstances in which APRA can apply for an ADI to be wound up are established in legislation. Section 14F of the Banking Act allows APRA to apply for an ADI to be wound up providing that a statutory manager is in control of an ADI's business and APRA considers it is insolvent. Allowing the scheme to be activated at this time ensures that there is sufficient certainty that an ADI will be wound up and that payments to depositors under the scheme are required.

1.19 The EAFD is to be activated at the discretion of the Government via a Ministerial declaration. An ADI specified in a declaration made by the Treasurer to activate the Scheme is a declared ADI [Schedule 1, item 6, subsection 5(1)] . A declaration activates the scheme. [Schedule 1, item 15, section 16AD]

1.20 A declaration outlines the total amount available to make payments to depositors of a declared ADI. For the first three years of the scheme, the amount that can be appropriated for the purposes of meeting depositors' entitlements is unlimited. After three years, the maximum that can be appropriated is $20 billion. The declaration must also outline the amount available for the administration costs for implementing the scheme up to a maximum of $100 million. [Schedule 1, item 15, section 16AD]

1.21 Prior to making a declaration, the Minister may seek advice from APRA, ASIC or the RBA. This advice will assist the Minister in making a decision about whether to activate the Scheme and evaluating the expected costs of making payments to depositors and administering the scheme for the purpose of appropriating funds. However, the Minister's decision is not restricted in any way by the content of any information provided by the agencies. Further, it is not necessary that the Minister, before making a declaration, receive such advice from the agencies. Also, the non-provision of information does not prevent the Minister from making a declaration. [Schedule 1, item 15, section 16AE]

1.22 Activating the EAFD via a single Ministerial declaration, which outlines the amounts to be made available to make payments to depositors and administer the scheme, will assist in its timely implementation.

1.23 The amount made available to make payments to depositors will be automatically credited to the Financial Claims Scheme Special Account upon activation of the Scheme. The Financial Claims Scheme Special Account is defined by reference to the APRA Act [Schedule 1, item 7, subsection 5(1)] .

1.24 There is a $100 million limit on the amount that can be made available to administer the scheme. The amount made available for administration costs will be automatically credited to the APRA Special Account upon activation of the Scheme. The APRA Special Account is defined by reference to the APRA Act [Schedule 1, item 2, subsection 5(1)] .

1.25 Flexibility is provided in the legislation to make amendments to the declaration. However, in order to provide certainty to depositors, a declaration cannot be revoked.

1.26 This declaration is a legislative instrument. However, it is neither a disallowable instrument nor subject to sun-setting clauses under the Legislative Instruments Act 2003 . It comes into effect on the day it is made [Schedule 1, item 15, subsections 16AD(6) and 16AD(7)] . This ensures that the disallowance process does not create uncertainty around the operation of the Scheme and avoids any potential for the scheme to be activated and then be disallowed, which would cause significant disruption. [Schedule 1, item 15, section 16AD] .

Eligible accounts

1.27 The types of deposits eligible for the EAFD are defined to clarify the scope of the Scheme. The concept of a protected account is introduced to describe the types of deposits eligible for the Scheme. It also describes the accounts eligible for priority in liquidation. [Schedule 1, item 11, subsection 5(1)]

1.28 The scheme will cover products which are protected accounts . There are three ways a product can be covered by the Scheme. First is that it is an account prescribed under Regulations. [Schedule 1, item 15, subparagraph 5(4)(a)] It is not intended that any products be prescribed at this stage.

1.29 Secondly, it can be an account 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. [Schedule 1, item 15, subparagraph 5(4)(b)]

1.30 Thirdly, it can be a 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. [Schedule 1, item 15, subparagraph 5(4)(b)]

1.31 A covered financial product is one that is specified in a Ministerial declaration. This mechanism is intended to give effect to the Government's decision to provide a broad guarantee of deposits. The products specified in the Ministerial declaration will be covered by the 100 percent guarantee up until 12 October 2011. The deposits subject to the broad guarantee will also include deposits which fall within the concept of account. A covered financial product will no longer be a protected account and will no longer be part of the FCS if an application for winding up of the ADI under section 14F of the Banking Act is made after this date. The Bill also ensures that for the first three years of the scheme's operation, the scheme will apply to accounts kept in any currency.

1.32 Following 12 October 2011, regulations may be made outlining the coverage of the Scheme. In addition, after this date the Scheme will continue to cover an account 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.

1.33 Further detail on calculating amounts payable to depositors and payment methods are discussed below.

Calculation of amounts payable to depositors

1.34 To calculate the amounts payable to depositors, the Scheme Administrator will aggregate net credit balances [Schedule 1, item 8, subsection 5(1)] in protected accounts due to each account - holder .

1.35 An account-holder can be an individual or an entity (such as a company) as defined by the Income Tax Assessment Act 1997 (ITAA) [Schedule 1, item 1, subsection 5(1)] . This means that an account-holder can be: an individual, a body corporate, a body politic, a partnership, any other unincorporated association or body of persons, a trust, a superannuation fund, or an approved deposit fund for the purposes of the ITAA.

1.36 The Scheme is not restricted to individuals and will apply to all account holders including businesses. This approach also ensures the facility can be implemented efficiently.

1.37 There may be transactions which have been authorised but not yet cleared at the time the ADI fails and the Scheme is activated. In recognition of this, a period of time will be allowed for clearance of funds. The period of time will be set in Regulations. In determining the length of time that will be allowed to clear funds, a balance needs to be struck between allowing the maximum amount of transactions to be cleared and ensuring that amounts owing to depositors under the scheme can be calculated and paid as quickly as possible. [Schedule 1, item 15, paragraphs 16AF(1)]

1.38 A cheque drawn on the failed ADI and lodged with another ADI, but not cleared, before the first ADI fails is deemed under section 70A of the Cheques Act 1986 to be dishonoured. In this case, the cheque will not reduce the entitlement under the Scheme of the depositor who drew the cheque (although he presumably will need to make in some other way the payment intended to be met through the cheque).

1.39 A cheque drawn on another institution and deposited with the failed ADI, but not cleared, before the failure would be subject to the normal clearance processes. Unless it fails to clear for some other reason (such as insufficient funds in the drawer's account), the cheque amount should be taken into account in determining the account-holder's entitlement under the Scheme. The clearance process for most cheques normally is completed within three business days, and in virtually every case is completed within five business days.

1.40 Interest that has accrued, but has not been credited, to a protected account at the time the scheme is activated via a Ministerial declaration, will be included in the balance of an account in calculating the amount due to the depositor by the failed ADI. [Schedule 1, item 15, paragraph 16AF(1)(b)]

1.41 For the first three years of the scheme's operation there will be no cap on the payments made to depositors. That is, depositors will receive the full amount of their deposits. The Government has indicated that it will consider a cap on the scheme at that stage.

1.42 The Bill provides a facility to put in place a cap via Regulations. [Schedule 1, item 15, subsection 16AG(1)]

1.43 If a situation arises where it is required, Regulations can be made to establish different caps for payments in relation to different types of accounts eligible for the EAFD. [Schedule 1, item 15, subsection 16AG(2)]

1.44 If a cap is put in place, and a depositor has a number of accounts with the ADI, the Bill gives APRA the ability to determine which accounts should be considered first in making up the depositor's entitlement up to the capped amount. This allows APRA to determine the order in which accounts will be aggregated and the order in which accounts will be paid under the scheme where the total value of a depositor's accounts with a failed ADI exceeds any cap.

1.45 APRA could develop 'ordering rules', as part of the guidelines it develops as part of its role as Scheme Administrator, which could be placed on its website.

1.46 There are a number of factors which may influence the order in which protected accounts are aggregated for the purpose of calculating payments to be made under the EAFD. These factors include the size and the level of liquidity of the accounts involved. For instance, it would be desirable to aggregate accounts with small balances first, before accounts with large account balances, to minimise the number of very small claims that remain in the liquidation process. It would also be desirable to aggregate more liquid accounts first, such as transaction accounts, before less liquid accounts, such as term deposits, in light of the liquidity objective of the EAFD.

1.47 In relation to joint accounts (that is, where the account is in more than one name), the Bill provides that individual depositors are treated as separate depositors for the purposes of the EAFD. This means that the account will be split equally among the individual depositors. [Schedule 1, item 15, subsection 16AF(2)]

1.48 The way in which a business account is treated will depend on the name(s) that the account is held in. If the account is held in the name of the business entity, then it will be treated as a single depositor. This is because APRA as the scheme administrator should not be expected to look through to the owners of the business at the time of the failure.

1.49 However, if the deposit account used by the business is held in individual names, akin to a typical joint account, then it will be treated as a joint account as outlined above.

1.50 APRA's declaration under section 16AG is not a legislative instrument.

Making payments to depositors

Method of payment

1.51 The Bill provides for how an account-holder's entitlement may be paid. This may be by paying an amount to an account holder in a single amount or by instalments. [Schedule 1, item 15, paragraph 16AH(1)(a)]

1.52 An account holder may also be paid by applying an amount for the account holder's benefit by establishing an account into which payments will be made. [Schedule 1, item 15, paragraph 16AH(1)(b)]

1.53 A combination of the methods in paragraphs (a) and (b) may also be used. [Schedule 1, item 15, paragraph 16AH(1)(c)]

1.54 If APRA establishes an account on an account-holder's behalf for the purposes of meeting an entitlement, it may do so regardless of other laws that relate to opening accounts at an ADI and whether the depositor has consented to the account being established. [Schedule 1, item 15, subsections 16AH(3) and (4)]

1.55 A Regulation making power may make provision for how an account holder's entitlement may be met. [Schedule 1, item 15, subsection 16AH(2)]

1.56 The method of payment that APRA chooses to pay depositors will depend on the circumstances, taking into account factors including the type of accounts involved, costs, ability to minimise fraud, timeliness and logistics, as well as options that may be available in the light of innovation and technological changes that occur in this area over time. The method of payment could be by:

•

cash, for example, via automatic teller machines;

•

a cash substitute, for example, by cheque or debit card; or

•

establishment of a like account at another ADI.

1.57 There are some specific accounts that must be paid by APRA via the opening of an account. These will be specified in the Regulations for the purposes of subsection 16AH(5). It is proposed that the Regulations prescribe accounts such as Retirement Savings Accounts or Farm Management Deposits as a way of preserving certain tax treatments or other policy objectives such as retirement incomes policy. [Schedule 1, item 15, subsection 16AH(5)]

Anti - Money Laundering Rules

1.58 Actions taken by APRA or the RBA for the purposes of meeting an account-holder's entitlement under the scheme may be taken to be the provision of designated services for the purposes of the Anti-Money Laundering and Counter-Terrorism Act 2006 (AML-CTF Act). The Bill provides that the AML/CTF Act does not apply to the exercise of APRA's powers to pay out depositors under the scheme. This avoids any potential for the anti-money laundering requirements to unduly constrain APRA or RBA actions to meeting an account-holder's entitlement under the scheme, including through the imposition of reporting requirements. [Schedule 1, item 15, subsection 16AH(6)]

1.59 Where APRA establishes, on behalf of an account holder who has an entitlement under the scheme, an account with an ADI for the purposes of wholly or partly meeting that entitlement, the ADI is not required to undertake the customer identification procedure that would otherwise be required under section 32 of the AML-CTF Act before commencing to provide a designated service to the customer. [Schedule 1, item 15, subsection 16AH(7)]

Incorrect payments

1.60 The capacity to make payments in instalments [Schedule 1, item 15, subsection 16AH(1)] provides a convenient mechanism for any underpayments to be corrected.

1.61 The recovery by APRA of any overpayments can be provided for in Regulations. [Schedule 1, item 15, section 16AM] .

1.62 It is expected that methods used to recover an overpayment might include:

•

making it a debt due to APRA;

•

withholding the amount of the overpayment from another payment that would otherwise have been paid to the same depositor under the scheme;

•

withholding the amount of the overpayment from a payment that would have been made to the same depositor as a result of the liquidation process.

1.63 APRA would take into account factors such as timing relative to the liquidation process and the costs of recovering any amounts overpaid before determining whether to pursue recovering an overpayment and the appropriate method for doing so.

Administration

1.64 APRA may require a person to provide assistance in the performance of its functions and in the exercise of its powers. [Schedule 1, item 15, section 16AJ]

1.65 Such assistance may be sought from an ADI whether or not it is a declared ADI, an administrator or a liquidator.

1.66 APRA requires certain information from a failed ADI (or an administrator or liquidator if one has been appointed) to be able identify, calculate and make payments to depositors under the EAFD. [Schedule 1, item 15, subsection 16AK(1)] Specifically, APRA requires information for purposes including:

•

identify account-holders that may be eligible for a payment under the scheme;

•

calculate the amounts payable to depositors; and

•

make payments to or open accounts for eligible account-holders. [Schedule 1, item 15, subsection 16AK(4)]

1.67 APRA can also obtain information from an ADI for preparatory purposes. For example, APRA may seek information to determine if an ADI would be able to provide information in a timely manner that APRA would require to administer the EAFD, if it were activated. APRA may also seek information to develop its own systems to be able to administer the EAFD if it were activated. [Schedule 1, item 15, paragraph 16AK(4)(g)]

1.68 Information necessary to administer the EAFD may include personal information and tax file numbers. Access to and the use of personal information and tax file numbers is restricted by the Privacy Act 1988 and the Taxation Administration Act 1953 . An explicit exemption is provided so that APRA can obtain personal information, which includes 'information or an opinion (including information or an opinion forming part of a database), whether true or not, and whether recorded in a material form or not, about an individual whose identity is apparent, or can reasonably be ascertained, from the information or opinion'. [Schedule 1, item 10, subsection 5(1) and item 15, subsection 16AK(3)]

1.69 Only APRA, an APRA member, an APRA staff member, a person (or officer or employee of such a person) to whom APRA has delegated the relevant power in relation to the FCS can obtain this information for the purposes of implementing the EAFD. This includes a person appointed, seconded or engaged by APRA to perform a role or provide services under Part 4 of the APRA Act. [Schedule 1, item 15, subsection 16AK(2)]

1.70 Given that this information is essential to the effective implementation of the Scheme, penalties apply if an ADI, relevant officer of the ADI or the liquidator do not comply with a request for information. [Schedule 1, item 16, section 16AL]

1.71 A civil penalty may apply if an individual does not take all reasonable steps to comply with the request for information. However, if the contravention is dishonest, then a criminal penalty may apply. The two tiered approach reflects the circumstances in which the information is being sought, in particular, that APRA will be seeking information from a failed ADI. In this respect, there may be problems with the failed ADI's systems, records and staff. A civil penalty regime better suits the types of breaches to which they apply and standard of proof will more easily assist in compliance. [Schedule 1, item 15, section 16AL]

1.72 The offences that apply to officers of an ADI or an ADI are continuous offences to encourage the provision of information necessary to implement the scheme in a timely manner. The offences are indictable offences due to the serious nature of non-compliance. As indictable offences this will ensure that any charge against a person will be a relevant fact when considering a persons ability to act on a request. [Schedule 1, item 15, section 16AL]

1.73 A liquidator is subject to the regime for non-compliance under the Corporations Act. [Schedule 1, item 15, subsection 16AL(7)]

Assignment of rights

1.74 The EAFD will bring forward the payment of some claims on protected accounts to which depositors would otherwise be entitled in the liquidation of a failed ADI.

1.75 To the extent that payments have been made to depositors under the scheme, their rights to claim these amounts in the liquidation will be transferred to APRA. [Schedule 1, item 15, section 16AI] This enables the Scheme Administrator to recover these amounts in liquidation to recoup the amount paid to depositors with protected accounts.

1.76 The assignment of rights to APRA takes place automatically upon activation of the scheme.

1.77 The assignment is limited to the amounts to which depositors are eligible for under the scheme. If a cap is imposed post 12 October 2011, any right to claim above what a depositor is eligible for under the scheme remains with that depositor to be claimed in the liquidation process.

1.78 APRA is able to exercise or assign a right that it acquired upon the activation of the scheme.

Priority and claims in liquidation

1.79 The priorities of claims in liquidation of an ADI are adjusted to accommodate the introduction of the scheme. That is, the amounts paid out to depositors under the scheme receive first priority and the administration costs receive second priority. Other deposit liabilities of the ADI are ranked third, followed by the ADI's other liabilities. [Schedule 1, item 13, subsection 13A(3)]

APRA's claims in liquidation

1.80 The costs of the scheme in terms of payments to depositors will in the first instance be recovered through the liquidation of the ADI.

1.81 The costs incurred by APRA in the administration of the EAFD are a debt due by the ADI to APRA. The debt is admissible to proof against the declared ADI in the winding up. [Schedule 1, item 15, section 16AO]

Account - holders' claims in liquidation

1.82 Depositors cannot claim in the liquidation amounts they have been paid under the scheme because their rights to these amounts have been assigned to APRA. APRA can recover these amounts in the liquidation.

1.83 If a cap is imposed post 12 October 2011, some account-holders may have amounts in deposits in excess of what they were eligible for under the scheme. Any residual amounts in protected accounts will be recoverable in the liquidation and account-holders do not have to lodge a proof of debt for these claims. [Schedule 1, item 15, section 16AP and section 16AQ]

1.84 This is designed to streamline the liquidation process and relieve most retail consumers from actively having to take steps to recover any remaining amounts in the liquidation process.

Claims and payments under liquidation

1.85 Where depositors have an account of a type specified in Regulations for the purposes of subsection 16AR(1), the liquidator must pay the distribution to the depositor by opening an account of the same nature. [Schedule 1, item 15, subsection 16AR(2)] The liquidator can open an account on the account holder's behalf. [Schedule 1, item 15, subsections 16AR(3) and (4)]

1.86 A liquidator can establish accounts for these purposes regardless of other laws that relate to opening accounts at an ADI and whether the depositor has consented to the account being established. [Schedule 1, item 15, subsection 16AR(4)]

1.87 APRA is able to provide information to a liquidator for the purpose of assessing claims and determining and paying remaining amounts owed to account-holders in the liquidation process. It is also able to provide information to a liquidator to enable it to decide whether a distribution it is to make is attributable to an account of a particular type that requires the distribution to be made to an account of the same type. [Schedule 1, item 15, section 16AS]

1.88 To allow payments to be made via the opening of accounts, APRA and the liquidator are given the power to pass on personal information to an ADI about the depositor. [Schedule 1, item 15, section 16AT] APRA has the ability to obtain the information it needs to pass to the liquidator. Reflecting the different requirements that might apply to different types of accounts, including if the special tax status of particular types of accounts is to be preserved, the Regulations may prescribe different information for disclosure in relation to different circumstances. [Schedule 1, item 15, Section 16AT]

Exclusion from Trade Practices Act Requirements

1.89 The meeting of a depositor's entitlement under the EAFD is specifically excluded from the requirements of the restrictive trade practices provisions in Part IV of the Trade Practices Act 1974 . This exclusion does not extend to account-holders' claims against the ADI in liquidation that remain after EAFD entitlements. [Schedule 1, item 15, section 16AU]

Penalties

1.90 A civil penalty regime is introduced into the Banking Act. [Schedule 1, item B13, section 65B]

1.91 The penalty regime in the Banking Act has not been updated for some time and currently only includes criminal penalties. A civil penalty is more appropriate than a criminal penalty in some circumstances. In addition, the introduction of a civil penalty regime improves consistency between corporations, financial sector and competition laws.

1.92 The regime introduced into the Banking Act is consistent with best practice Commonwealth model and many of the recommendations made by the Australian Law Reform Commission (ALRC) in the Principled Regulation Report.

1.93 A penalty unit is defined for the purposes of the Banking Act to make it clear that its meaning is the same as outlined in the Crimes Act 1914 . [Schedule 1, item 9, subsection 5(1)]