EXPLANATORY STATEMENT
Issued by authority of the Treasurer
Banking Act 1959
Declaration of covered financial products
Subsection 5(8) of the Banking Act 1959 (the Act) provides that the Treasurer may declare that a specified financial product is a covered financial product.
The Act regulates banking in Australia and was recently amended by the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 (the Amendment Act) to put in place the Financial Claims Scheme (FCS).
If the FCS is activated by the Treasurer, account-holders in an ADI are covered by the FCS for amounts in protected accounts subject to any threshold. Separate Regulations are to set a threshold on payments made under the FCS of $1 million. This puts in place the Government’s free deposit guarantee for deposits up to A$1 million (or its foreign currency equivalent) per account-holder.
The definition of protected account is important in determining the coverage of the FCS. Under subsection 5(4) of the Act protected accounts include accounts and covered financial products kept under an agreement between the account-holder and the ADI requiring the ADI to pay the account-holder, on demand or at a time agreed, the net credit balance of the account or covered financial product at the time of demand or the agreed time.
The declaration specifies the products that are covered financial products in order to provide the coverage of the FCS for the first three years of its operation. The definition will apply in any instance where APRA applies to wind up an ADI prior to 12 October 2011. After this, the ordinary meaning of account and the ability to prescribe accounts by regulation would provide the definition of protected account.
Treasury, the Reserve Bank of Australia, the Australian Prudential Regulation Authority and industry were consulted on the coverage of the FCS.
The declaration is a legislative instrument for the purposes of the Legislative Instruments Act 2003 (LI Act). However, subsection 5(9) of the Act provides that neither section 42 (disallowance) nor Part 6 (sunsetting) of the LI Act applies to the declaration.
The declaration commenced on 27 October 2008. Subsection 5(10) of the Act provides that the declaration takes effect from the time that it is made, despite subsections 12(1) and (2) of the LI Act.