House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Minister for Financial Services, Superannuation and Corporate Law, the Hon Chris Bowen MP

Chapter 6 - Amendments to the Financial Claims Scheme

Outline of chapter

6.1 Schedules 1 and 2 of the Bill contain amendments relating to the FCS provided for in the Banking Act and the Insurance Act.

Context of amendments

6.2 The FCS was introduced by the FCS Act.

6.3 The FCS is administered by APRA and provides depositors in Australian-incorporated ADIs with a guarantee of their deposits to a threshold prescribed by regulations. The threshold is currently set at $1 million per account-holder per ADI. In addition, the FCS provides compensation to eligible policyholders with claims against a failed general insurer.

Amendments to the scheme provided for in the Banking Act

6.4 While the FCS provided for in the Banking Act has operated effectively to achieve its objectives, its operation would benefit from clarifying:

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the rate of interest that applies to protected accounts for the purposes of determining entitlements under the scheme, where the rate is not clear from the terms and conditions of the protected account itself;

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how the scheme operates in relation to pooled trust accounts; and

•

APRA's power to require a liquidator to assist it in paying account-holders their entitlements under the FCS.

Amendments to the scheme provided for in the Insurance Act

6.5 Similarly, the FCS provided for in the Insurance Act would benefit from:

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clarifying that the scheme may apply to policies that are transferred to a declared general insurer, in addition to policies issued by the insurer itself;

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enhancing APRA's ability to administer the scheme by enabling it to issue approved forms in respect of common administrative matters and enabling it to settle claims in appropriate circumstances;

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enabling the scheme to operate in relation to claims made under section 601AG (Claims against insurers of deregistered company) of the Corporations Act;

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ensuring that entitlements paid under the FCS are treated as if paid by the failed general insurer under the terms and conditions of its policy, for all relevant purposes;

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enabling it to be declared in relation to any insolvent insurer, not just insurers under judicial management; and

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enabling APRA to seek reasonable assistance, and specified information, from a judicial manager of a general insurer, where doing so would would enable APRA to perform its duties and functions in relation to the FCS.

Summary of new law

6.6 Schedules 1 and 2 contain amendments relating to the FCS.

6.7 Schedule 1 of the Bill amends the Banking Act to:

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enable APRA to determine the rate of interest that applies to protected accounts for the purposes of determining entitlements under the FCS, where APRA considers that the rate of interest is not certain;

•

clarify the operation of the FCS in relation to pooled trust accounts; and

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clarify that APRA may require a liquidator to assist it in paying account-holders their entitlements under the FCS.

6.8 Schedule 2 of the Bill amends the Insurance Act to:

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clarify that the FCS applies to policies that were transferred to the declared general insurer, as well as policies that were issued by the declared general insurer;

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enhance APRA's ability to administer the scheme by enabling it to issue approved forms in respect of common administrative matters and enabling it to settle claims under the scheme;

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enable the scheme to operate in relation to claims against insurers of deregistered companies under section 601AG of the Corporations Act;

•

ensure entitlements paid under the FCS are treated as if paid by the failed general insurer under the terms and conditions of its policy, for all relevant purposes;

•

enable the Minister to declare that the FCS applies to an insolvent insurer under external administration or judicial management; and

•

enable APRA to seek reasonable assistance, and specified information, from a judicial manager of a general insurer, where doing so would enable APRA to perform its duties and functions in relation to the FCS.

Comparison of key features of new law and current law

Detailed explanation of new law

Determining the applicable rate of interest

6.9 The Bill amends section 16AF of the Banking Act to clarify the calculation of interest payable on protected accounts for the purposes of determining entitlements under the FCS. Interest is payable at the rate of interest that is payable according to the terms and conditions of the protected account unless APRA considers that rate is not certain. In that case, the rate of interest is that which APRA declares in writing to be payable . [Schedule 1, item 29, section 16AF(1A) of the Banking Act 1959]

6.10 This amendment ensures that, where there is uncertainty about the rate of interest that applies to a protected account, APRA has the power to issue a determination to provide certainty.

6.11 The Bill also provides that such a declaration is not a legislative instrument . [Schedule 1, item 29, section 16AF(1B) of the Banking Act 1959]. This provision is included only to inform readers that the notice is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003.

Pooled Trust Accounts

6.12 Sections 16AF to 16AI of the Banking Act currently provide for the payment of account-holders under the FCS. To calculate the amounts payable to depositors the scheme administrator aggregates the net credit balance in each protected account the account-holder has with the declared ADI. The account-holder is not, however, entitled to be paid any amounts totalling more than the limit on payments prescribed by the regulations (currently $1 million).

6.13 An account-holder can be an individual or an entity as defined by the Income Tax Assessment Act 1997 ( ITAA). This means that an account-holder can include 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.

6.14 The Bill clarifies the rules relating to pooled trust accounts (PTAs). These are accounts in which a trustee is permitted to hold the funds of two or more trusts. The Bill provides that a PTA constitutes a single protected account for purposes of paying account-holders of a declared ADI under the FCS. This is achieved by:

•

amending section 16AF of the Banking Act to clarify that if: one person holds a protected account; and the person is the trustee of 2 or more trusts; and the net credit balance of the account consists of the trust funds of 2 or more of those trusts; then the person is entitled to be paid the amount worked out under subsection 16AF(1); and [Schedule 1, item 30, section 16AF of the Banking Act 1959]

•

amending the definition of account-holder in subsection 5(1) of the Banking Act to clarify that an account-holder for FCS purposes is the entity that holds in its name, or keeps in its name, the subject account . [Schedule 1, item 1, subsection 5(1) of the Banking Act 1959]

Liquidator of an ADI to assist in making payments under FCS

6.15 The Bill amends section 16AJ of the Banking Act to clarify that APRA may require a liquidator (including a provisional liquidator) to assist APRA in APRA's function of paying account-holders their entitlements under the FCS. This is in addition to the general assistance that APRA may request from a liquidator under subsection 16AJ(1) of the Banking Act . [Schedule 1, item 33, subsections 16AJ(2) to 16AJ(9) of the Banking Act 1959]

6.16 Section 16AJ presently enables APRA to issue a notice on the liquidator of the declared ADI, requiring the liquidator to give APRA reasonable assistance in the performance of its functions, and the exercise of its powers, in relation to the FCS. The amendment clarifies that this provision extends to the liquidator being required to assist APRA in APRA's functions of paying account-holders their FCS entitlements.

6.17 For example, the amendment enables APRA, by notice issued under section 16AJ, to require the liquidator to:

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carry on the business of the ADI insofar as necessary, or do any other things, to facilitate APRA paying account-holders their entitlements under the FCS;

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seek to re-enter the ADI into a payment system; or

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transfer the entitlements of the account-holders to accounts held by the account-holders in another ADI . [Schedule 1, item 33, subsection 16AJ(3) of the Banking Act 1959]

6.18 The requirements of such notices take precedence over the other aspects of the wind up of the ADI, including the duties and functions of the liquidator under the Corporations Act . [Schedule 1, item 33, subsection 16AJ(4) of the Banking Act 1959]. In addition, the amendments ensure that a liquidator has the powers that are necessary or convenient to comply with the notice . [Schedule 1, item 33, subsection 16AJ(6) of the Banking Act 1959]

6.19 The amendments also ensure that the liquidator's costs will be met. The liquidator is not required to comply with a notice issued by APRA unless:

•

there is sufficient property available to meet the costs that are likely to be incurred by the liquidator in complying with the notice; or

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APRA indemnifies the liquidator for those costs . [Schedule 1, item 33, subsection 16AJ(5) of the Banking Act 1959]

6.20 The amendments also specify that a liquidator's costs of complying with such a notice issued by APRA are taken to be expenses properly incurred for the purposes of section 556 (Priority payments) of the Corporations Act. That section relates to the priority for applying the assets of a company during winding up . [Schedule 1, item 33, subsection 16AJ(7) of the Banking Act 1959]

6.21 For the purposes of the above provisions the liquidator's costs include: any remuneration, or fees for services payable to the liquidator for complying with such a notice issued by APRA; and any expenses incurred by a liquidator in complying with such a notice issued by APRA . [Schedule 1, item 33, subsection 16AJ(8) of the Banking Act 1959]

6.22 Finally, the Bill makes two consequential amendments to section 16AJ as a result of the above mentioned amendments. The first changes the numbering of the section. The second omits the words '(including a provisional liquidator)' from the current wording of paragraph 16AJ(c). The words are redundant due to the insertion of the subsection 16AJ(9) which provides that a reference in section 16AJ to a liquidator includes a reference to a provisional liquidator . [Schedule 1, items 31 to 33, section 16AJ, paragraph 16AJ(c), and subsection 16AJ(9) of the Banking Act 1959]

Declaring FCS for a general insurer under external administration

6.23 The Bill amends section 62ZZC of the Insurance Act to enable the Minister to declare that the FCS applies in respect of a general insurer when an external administrator has been appointed to the general insurer under Chapter 5 of the Corporations Act, if APRA also believes that the general insurer is insolvent . [Schedule 2, item 61, paragraph 62ZZC(1)(a) of the Insurance Act 1973]

6.24 The amendment expands the circumstances under which the Minister may declare the FCS in respect of a general insurer. Currently, under section 62ZW of the Insurance Act the Minister may only declare the FCS in respect of a general insurer that is under judicial management and that APRA believes is insolvent.

6.25 There may be circumstances where it is appropriate for the Court to appoint an external administrator, within the meaning of Chapter 5 of the Corporations Act, to a general insurer, rather than a judicial manager. However, such an appointment should not prevent the Minister from declaring the FCS in respect of the general insurer and assisting eligible policyholders where it is appropriate to do so.

6.26 A consequential amendment is also made to section 62ZW of the Insurance Act, which provides an outline of the operations of the FCS . [Schedule 2, item 58, paragraph 62ZW(a) of the Insurance Act 1973]

Eligibility of transferred policies and claims against deregistered companies

6.27 The Bill makes two amendments to the Insurance Act relating to eligibility to make a claim under the FCS.

6.28 The Bill amends section 62ZZF of the Insurance Act to clarify that a policyholder that is entitled to make a claim under a protected policy, and whose policy liability has been accepted by the declared general insurer before the FCS was declared in respect of the general insurer, is eligible to claim under the FCS . [Schedule 2, item 64, paragraph 62ZZF(1)(a) of the Insurance Act 1973]

6.29 The amendment clarifies the law. It not clear whether the current reference to policy issued by a declared general insurer in section 62ZZF includes policies that have been transferred from another general insurer. The amendment clarifies that the FCS provided for in the Insurance Act applies to protected policies issued by the general insurer as well as any protected policy in relation to which liability was accepted by the insurer, before becoming a declared general insurer.

6.30 Consequential amendments are made to sections 62ZZH (Entitlement on basis of notionally extended cover), 62ZZI (APRA must determine insurer's liability in respect of claim) and 62ZZJ (APRA must make a determination relating to eligibility on receiving an application under the Scheme) as a result of the above amendment . [Schedule 2, items 67, 68 and 72, subsection 62ZZH(1), subsection 62ZZI(1), and subsection 62ZZJ(3) of the Insurance Act 1973]

6.31 The Bill also amends section 62ZZJ of the Insurance Act to ensure that claims under section 601AG (Claims against insurers of deregistered company) of the Corporations Act are eligible claims for the purposes of the FCS . [Schedule 2, items 71 and 73, subsections 62ZZJ(3) and paragraph 62ZZJ(4)(a) of the Insurance Act 1973]

6.32 Section 601AG provides that a person may recover from the insurer of a deregistered company the amount that would have been payable to the deregistered company if the following are satisfied:

•

the company had a liability to the person; and

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the insurance contract covered that liability immediately before the company's deregistration.

6.33 The amendment aligns the treatment of claims under section 601AG of the Corporations Act with the treatment of claims under section 51 (Right of third party to recover against insurer) of the Insurance Contracts Act 1984, to which the FCS may currently apply.

Approved forms

6.34 The Bill amends sections 62ZZF and 62ZZG of the Insurance Act to enable APRA to issue approved forms. 'Approved form' is defined in section 3 of the Insurance Act as a form approved in writing by APRA (except in section 62ZZKA, where it refers to an approved form that is issued by the Australian Taxation Office) . [Schedule 2, item 1, subsection 3(1) of the Insurance Act 1973]

6.35 Subsection 62ZZF(1) relates to the entitlement to payment of claimants under a protected policy. Such policyholders are currently required to make a claim under insurance cover provided by a protected policy in order to be entitled to payment under the FCS. The Bill amends subsection 62ZZF(1) to require that the relevant claim be made in the approved form, if such a form has been issued by APRA . [Schedule 2, item 65, paragraph 62ZZF(1)(b) of the Insurance Act 1973]

6.36 Similarly, subsection 62ZZG(1) relates to the entitlement to payment of third parties under the FCS (that is, claims supported by section 601AG of the Corporations Act and section 51 of the Insurance Contracts Act). The Bill amends the section to require such claimants to make their claim in the approved form, if one has been issued by APRA . [Schedule 2, item 66, paragraphs 62ZZG(1)(a) and 62ZZG(1)(aa) of the Insurance Act 1973]

6.37 The Bill also requires a person making a claim under section 62ZZG(1) to do so within the period prescribed by the regulation. This requirement is consistent with that which presently applies to claims under subsection 62ZZF(1). However, as is currently the case with subsection 62ZZF(1), APRA may allow extra time for a claimant to make their claim . [Schedule 2, items 59 and 66, subsection 62ZZA(1) and paragraph 62ZZG(1)(aa) of the Insurance Act 1973]

6.38 Amendments are also made to subsection 62ZZJ(1) and (3) of the Insurance Act. Currently, those subsections refer to 'the form (if any) approved by APRA'. As a result of the insertion of the definition of 'approved form' in subsection 3(1) of the Act, the above references are replaced with references to 'the approved form (if any)' . [Schedule 2, item 70, subsections 62ZZJ(1) and 62ZZJ(3) of the Insurance Act 1973]

6.39 Finally, the Bill repeals section 62ZZB of the Insurance Act. That section currently enables APRA to approve forms for the purposes of subsections 62ZZJ(1) and 62ZZJ(3). The section is redundant as a result of the above mentioned amendments to APRA's form making powers under the Insurance Act . [Schedule 2, item 60, section 62ZZB of the Insurance Act 1973]

Claims settlement

6.40 The Bill amends subsection 62ZZI(1) of the Insurance Act to enable APRA to determine the amount of liability in respect of a protected policy by coming to an agreement (or settlement) with the policyholder or claimant . [Schedule 2, item 69, subsection 62ZZI(1) of the Insurance Act 1973]. The Bill also amends section 62ZZJ of the Insurance Act to enable APRA to do the same to determine the amount of liability in respect of a third party claim supported by section 601AG of the Corporations Act or section 51 of the Insurance Act . [Schedule 2, item 74, subsection 62ZZJ(4) of the Insurance Act 1973]

6.41 This power allows APRA to negotiate a timely and fair settlement with the claimant where it is appropriate to do so. This may assist the claimant by enabling earlier payment under the FCS and may assist APRA in efficiently administering the scheme.

Payments made under the FCS taken to be payments made by general insurer

6.42 The Bill amends section 62ZZM of the Insurance Act to provide that when a person's entitlement under the FCS connected to a general insurer and a protected policy is met, the person is taken to have been paid the amount by the general insurer under the terms and conditions of the policy for all purposes except those prescribed by the regulations . [Schedule 2, items 75 and 76, subsections 62ZZM(1) and 62ZZM(2) of the Insurance Act 1973]

6.43 Currently, section 62ZZM is more limited in relation to when a person is taken to have been paid by the general insurer under the terms and conditions of their policy. The section presently provides that such payments will only be taken to have been paid by the general insurer under the terms and conditions of the policy for the purpose of subrogation or a purpose prescribed by the regulations.

6.44 This amendment provides enhanced clarity and certainty to the scheme administrator and others dealing with the scheme.

APRA may require assistance from a judicial manager

6.45 The Bill amends section 62ZZO of the Insurance Act to enable APRA, by issuing a written notice, to seek reasonable assistance from a judicial manager of a general insurer in the performance of its functions, and the exercise of its powers, under the FCS . [Schedule 2, items 77 and 78, section 62ZZO and paragraph 62ZZO(c) of the Insurance Act 1973]. Currently, under section 62ZZO APRA may require such assistance from a general insurer (whether or not it is a declared general insurer) and a liquidator (including provisional liquidator) or a general insurer.

6.46 Similarly, the Bill amends section 62ZZP of the Insurance Act to enable APRA, by written notice, to require a judicial manager of a general insurer to give a specified person, within a reasonable specified time, specified information relevant to:

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identifying a person who may have an entitlement under the FCS;

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determining whether a person has an entitlement under the FCS;

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determining the amount of an entitlement under the FCS;

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meeting an entitlement under the FCS;

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preparing or giving a statement or report required under applicable taxation laws;

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complying with an obligation under a taxation law; or

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assessing whether and how information could be provided by a general insurer (or its liquidator) to enable one of the above actions to be taken if the general insurer were to become a declared general insurer . [Schedule 2, items 79 and 80, paragraph 62ZZP(1)(b) and subsection 62ZZP(1) of the Insurance Act 1973]

6.47 APRA can presently obtain such information under section 62ZZP from a general insurer (whether or not it is a declared general insurer) or a liquidator of a general insurer, but not a judicial manager.

6.48 The Bill inserts a civil penalty provision and an offence provision to support APRA's new powers in relation to a judicial manager.

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A judicial manager is subject to a civil penalty of 200 penalty units if they do not comply with a requirement made of them under section 62ZZO or subsection 62ZZP(1); and [Schedule 2, item 81, subsection 62ZZQ(8) of the Insurance Act 1973]

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A judicial manager commits an indictable offence (penalty: 100 penalty units) if: they do, or refuse to do, an act; and the doing of the act, or failure to do the act, results in a contravention of a requirement made under section 62ZZO or subsection 62ZZP(1) . [Schedule 2, item 81, subsections 62ZZQ(9) and 62ZZQ(10) of the Insurance Act 1973]

6.49 These amendments recognise that it may be necessary for APRA to receive reasonable assistance and/or specific information from the judicial manager in order to properly perform its functions in relation to the FCS.