The Commonwealth Treasury


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

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Overview

Background

The purpose of this review is to consider compensation arrangements in the financial services sector, with the aim of ensuring that Australia has a comprehensible and efficient compensation regime, which provides appropriate protection for investors and does not impose an unjustified burden on participants in the sector. Any proposed changes arising from this review will need to meet with a broad consensus, and be consistent with the Australian regulatory regime, while taking due account of international models. Any such arrangements will need to be industry funded, not Government-funded.

The review is about losses suffered by clients as a consequence of the wrongdoing of financial services licensees (or their representatives) in the course of providing financial services. It is not about losses suffered as a result of changes in the value of financial products through, for example, market fluctuations or loss caused by the insolvency of the issuer.

It thus opens for debate the ground covered by Part 7.5 and section 912B of the Corporations Act, as amended by the Financial Services Reform Act. Other aspects of the new Chapter 7 are not opened for discussion by this paper.

The review has been triggered by disquiet, expressed at a late stage of the consultation process on the Financial Services Reform Bill, with the currently required arrangements. However, its purpose is to consider the issues from first principles, not merely to focus on the problems that were then brought to our attention.

Structure of the paper

Introduction

The Introduction (Chapter 1) provides further background to the review (including the Corporate Law Economic Reform Program and the Companies and Securities Advisory Committee (CASAC) Consultation Paper).

The problem and `Is requiring compensation arrangements the way to address it?'

Chapter 2 addresses the following preliminary issues:

The current compensation arrangements

Chapter 3 addresses briefly:

How should the requirements for compensation arrangements be reformed?

Chapter 4 addresses the purpose and some issues connected with the design of compensation arrangements.

Chapters 5 to 10 address the following:

Options and conclusion

High-level options and a conclusion are provided in Chapters 11 and 12 respectively.

Attachments

The financial services licensing regime is summarised in Attachment A, and the current compensation requirements on market operators and financial service providers in Australia are outlined in Attachment B.

Attachment C provides a brief description of the ancestry of the National Guarantee Fund. Attachment D summarises six international compensation schemes and a relevant European Community directive. Some background about the professional indemnity insurance market is provided in Attachment E.

The issues, spread throughout the paper, are reproduced together immediately after this summary, divided into principal issues (1-11) and secondary issues (12-25).

Procedure

It is likely that, in the light of the comments and submissions received during the exposure period of this paper, a more detailed proposal will be formulated and that this, in turn, will be exposed for public comment.

It is desirable that any legislative reform necessary to give effect to the outcome of this review be in place in good time before March 2004, the end of the Financial Services Reform transition period.