The Commonwealth Treasury


COMPENSATION FOR LOSS IN THE FINANCIAL SERVICES SECTOR ISSUES AND OPTIONS September 2002

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Abbreviations and terms used

APRA

Australian Prudential Regulation Authority

ASIC

Australian Securities and Investments Commission

ASIC Act

Australian Securities and Investments Commission Act 2001

ASX

Australian Stock Exchange Limited

broad statutory scheme

A compensation scheme established by statute in relation to a wide range of financial products, as distinct from the exchange fidelity funds/National Guarantee Fund

CASAC

Companies and Securities Advisory Committee (now renamed the Corporations and Markets Advisory Committee)

CASAC Consultation Paper

The Consultation Paper entitled Retail Client Compensation in Financial Markets dated Sept 2001 of the Companies and Securities Advisory Committee, available on www.camac.gov.au

client

The term `client' is used in this paper to mean the client of an intermediary and a person acquiring a financial product from a product issuer where the circumstances are such as to require the issuer to be a financial services licensee

Corporations Act

Corporations Act 2001

defalcation

This is wider than dishonest dealings — see footnote 91

fidelity fund

In this context, a fund established by an exchange to pay claims arising from the conduct (for example, fraudulent conduct) of members/participants of the exchange and their staff.

financial product

This term includes securities, derivatives, units in managed investment schemes, superannuation and life and general insurance products, but does not include credit products. It is defined broadly in Division 3 of Part 7.1 of the new Chapter 7 of the Corporations Act, with specific inclusions and exclusions.

financial service

In brief, a person provides a financial service if they provide financial product advice, deal in a financial product, make a market for a financial product, operate a registered scheme or provide a custodial and depository service.1

financial service provider

A provider of financial services (whether licensed or not)

financial services licensee

A provider of financial services licensed under Part 7.6 of the new Chapter 7 of the Corporations Act

Financial Services Reform Act

Financial Services Reform Act 2001

Financial Services Reform regime

The regime for the licensing of financial markets, clearing and settlement facilities and financial service providers, product disclosure and other matters included in the new Chapter 7 of the Corporations Act which was substituted by the Financial Services Reform Act.

Insurance (Agents and Brokers) Act

Insurance (Agents and Brokers) Act 1984

intermediary

A person performing an intermediate role between the consumer and the product issuer. The person may be licensed in his own right or be an authorised representative.

market licensee

An entity licensed under Part 7.2 to operate a financial market

market operator

The operator of a financial market - for example, the Australian Stock Exchange Limited

National Guarantee Fund (NGF)

The National Guarantee Fund which performs investor protection and clearing guarantee functions for certain transactions by participating organisations of the Australian Stock Exchange

new Chapter 7

Chapter 7 of the Corporations Act 1 inserted by the Financial Services Reform Act

prescribed CS (clearing and settlement) facility

A licensed CS (clearing and settlement) facility (that is, licensed under Part 7.3 of the new Chapter 7) which is prescribed for the purpose of Division 4 of Part 7.11 (which facilitates electronic transfer of legal title to financial products)

retail client

This term is defined in section 761G by reference to particular financial products, price paid and asset/income tests. Small businesses, as defined in that section, are also retail clients.

run-off cover

Professional indemnity policies commonly provide cover only in relation to claims made or notified during the year for which the premium is paid. `Run-off cover' is additional and provides cover in relation to events occurring during the year for which the premium is paid but where the claims are made or notified in later years, when the licensee has ceased to carry on financial services business (and therefore does not hold a professional indemnity insurance policy).

SEGC

Securities Exchanges Guarantee Corporation Limited which administers the National Guarantee Fund

subrogation

The substitution of one person or entity for another ¾ the substituted person `stands in the shoes of' the first person and gains the same rights as belonged to that person (for example, against a fraudulent financial services licensee)

surety bond

A guarantee by a person to pay an amount if another person fails to satisfy their own obligations

wholesale client

A person who is not a retail client (see above)

Note: references to particular sections and Parts in this paper are to sections and Parts of the Corporations Act, as amended by the Financial Services Reform Act, unless otherwise indicated.

1 Further details are to be found in Division 4 of Part 7.1 of the new Chapter 7.