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.
Overview
The Banking Act 1959, enacted by the Parliament of Australia, was designed to regulate banking activities within the country. In response to the need for a robust financial safety net, the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 introduced the Financial Claims Scheme (FCS) to provide a free deposit guarantee for account-holders in Authorised Deposit-taking Institutions (ADIs). The FCS ensures that depositors are protected up to a threshold of A$1 million per account-holder. To implement this scheme, the Treasurer has the authority to declare specific financial products as covered financial products under subsection 5(8) of the Banking Act 1959. This declaration aims to clearly define which products are protected under the FCS, thereby offering account-holders peace of mind and financial security. The declaration commenced on 27 October 2008, with specific provisions ensuring it takes immediate effect despite other legislative requirements.
Scope and Application
The Banking Act 1959, as amended by the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008, pertains to the regulation of banking in Australia and includes provisions for the declaration of covered financial products, which are specified to fall under the purview of the Financial Claims Scheme (FCS). The Treasurer, authorised under subsection 5(8) of the Act, has the power to declare certain financial products as covered, thereby ensuring that these products are eligible for the FCS, a government-backed deposit guarantee scheme. This scheme provides protection for depositors in Authorised Deposit-taking Institutions (ADIs) up to a specified threshold, currently set at $1 million or its foreign currency equivalent per account-holder. The declaration of covered financial products is integral to defining the scope of the FCS, particularly during its initial operational phase. It is noteworthy that the declaration does not fall under the disallowance or sunsetting provisions of the Legislative Instruments Act 2003, as stipulated by subsection 5(9) of the Banking Act 1959, and it took effect from the date of its making, notwithstanding other provisions of the Legislative Instruments Act 2003.
Key Provisions
The Banking Act 1959 (the Act) has been amended by the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 to introduce the Financial Claims Scheme (FCS), which provides a government-backed guarantee for deposits up to A$1 million (or its foreign currency equivalent) per account-holder in Authorised Deposit-taking Institutions (ADIs) (subsection 5(8)). The Act's definition of a protected account under subsection 5(4) is crucial to the FCS, as it encompasses accounts and covered financial products held under agreements between account-holders and ADIs that require the ADI to pay the account-holder the net credit balance of the account or covered financial product upon demand or at an agreed time. The declaration specifies the financial products that are covered by the FCS for its first three years of operation. This definition also applies in cases where the Australian Prudential Regulation Authority (APRA) applies to wind up an ADI before 12 October 2011, after which the ordinary meaning of account and the ability to prescribe accounts by regulation would define a protected account. Treasury, the Reserve Bank of Australia, APRA, and industry were all consulted regarding the FCS coverage. This declaration is a legislative instrument under the Legislative Instruments Act 2003 (LI Act), but subsection 5(9) of the Act exempts it from section 42 (disallowance) and Part 6 (sunsetting) of the LI Act. The declaration took effect on 27 October 2008, and subsection 5(10) of the Act ensures that it is effective from the time it was made, despite subsections 12(1) and (2) of the LI Act.
Under the Act, the Treasurer has the authority to declare that a specified financial product is a covered financial product, as stated in subsection 5(8). This declaration is essential for the FCS to provide coverage for the initial three years of its operation. The declaration specifies the products that are covered financial products to ensure the FCS's coverage. 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 a protected account. Treasury, the Reserve Bank of Australia, APRA, and industry were all consulted on the coverage of the FCS. The declaration is a legislative instrument for the purposes of the Legislative Instruments Act 2003 (LI Act), but subsection 5(9) of the Act exempts it from section 42 (disallowance) and Part 6 (sunsetting) of the LI Act. The declaration commenced on 27 October 2008, and subsection 5(10) of the Act ensures that it is effective from the time it was made, despite subsections 12(1) and (2) of the LI Act.
The Act imposes obligations and requirements on the parties and entities it governs. The Treasurer, as the person responsible for the declaration of covered financial products, must consult with Treasury, the Reserve Bank of Australia, APRA, and industry when determining the products that are covered by the FCS. The ADIs, in turn, must ensure that the accounts and covered financial products they hold meet the definition of a protected account under the Act. This means that ADIs must be prepared to pay the account-holder the net credit balance of the account or covered financial product upon demand or at an agreed time. Additionally, APRA is responsible for monitoring the financial health of ADIs and can apply to wind up an ADI if it determines that it is in the best interest of depositors and the financial system. The Act also imposes obligations on the account-holders, who must ensure that their accounts and covered financial products meet the definition of a protected account.
Failure to comply with the obligations and requirements of the Act may result in civil or criminal consequences. However, the explanatory statement does not provide specific details about the offences, penalties, or civil/criminal consequences for breach. It is important to note that the declaration is a legislative instrument for the purposes of the Legislative Instruments Act 2003 (LI Act), but subsection 5(9) of the Act exempts it from section 42 (disallowance) and Part 6 (sunsetting) of the LI Act. The declaration commenced on 27 October 2008, and subsection 5(10) of the Act ensures that it is effective from the time it was made, despite subsections 12(1) and (2) of the LI Act. In summary, while the explanatory statement does not provide specific details about the offences, penalties, or civil/criminal consequences for breach, it is clear that non-compliance with the Act's obligations and requirements may have legal repercussions.