The Commonwealth Treasury


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

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Chapter 9: Subsidiary issues relating to statutory schemes

The purpose of this Chapter is to discuss a number of issues that would be relevant to the construction of a broad statutory scheme. These include who should operate the scheme and its funding. (A number of these issues apply equally to exchange-related compensation funds.)

The inclusion of this section should not be viewed as indicating that the Government has decided that any statutory scheme is warranted. If that decision were reached, then each of these issues would have to be examined in greater detail.

A: Who would operate the scheme?

242. The possibilities considered in the CASAC Consultation Paper63 are:

243. The SEGC has also been suggested, again with the aim of avoiding the need to create a new apparatus. However, it is a wholly owned subsidiary of the Australian Stock Exchange with a very specific current role.

Secondary issue 12

If a statutory scheme were warranted, who should operate the scheme?

B: Reporting and governance issues

244. If a statutory scheme is considered warranted, there are obviously a large number of reporting and governance issues. Their treatment will, in part, depend on the nature of the scheme operator. They include:

Secondary issue 13

If a statutory scheme were warranted, what special governance and accounting requirements would be appropriate?

C: Would the one scheme cover all financial services and all financial products?

245. The aim of the Financial Services Reform regime is to provide a harmonised regulatory regime across the range of the financial services.

246. Whether the compensation regime should apply to all financial services is a separate issue and is discussed at paragraphs 124 and 125.

247. Whatever the range of financial services decided on, this does not mean that there should not be variations within the scheme to accommodate the different ways that business is done across the financial services industry, the different risks involved, or the recognised segments of the industry.

248. Issues in this context include:

249. However, any proposal relating to sub-schemes needs to recognise that:

Secondary issue 14

If a statutory scheme were warranted, could the one scheme cover financial services in relation to all financial products and sectors of the industry?

D: How would it be funded?64

Initial funding

250. How would the scheme initially be funded?

251. The CASAC Consultation Paper65 stated: `Transitional arrangements could deal with the transfer of appropriate funds currently held by the National Guarantee Fund and the SFE to the new Scheme. A substantial transfer could benefit intermediaries by reducing their immediate or foreseeable levies, as well as providing immediately available funds on commencement of the Scheme.'

252. In response to the CASAC suggestion, various concerns were raised in two submissions about applying the National Guarantee Fund to support the scheme during the transitional period :

253. A different view may be taken if the statutory scheme were limited to market transactions or market participants.

254. Another submission to CASAC expressed the view that the transitional arrangements should cover transfer of technology, personnel, procedures and expertise as well as funds, to ensure a seamless and reliable handover.

Secondary issue 15

If market licensees were no longer required to make compensation arrangements, what should happen to the funds in the National Guarantee Fund and the exchange fidelity funds?

Ongoing funding

255. Ongoing funding could be provided by some combination of the following:

256. In the case of levies, further issues arise:

257. Licensees could be levied as and when required, or on a more regular basis with the purpose of creating a reserve and minimising unexpected calls.

258. One submission to CASAC suggested that it may be appropriate to use some or all of the levies collected to purchase insurance rather than being invested by the Scheme operator. This would `outsource' the funding of the Scheme and may obviate the need for the Scheme to build up sufficient funds to cover a `one year in fifty claim' on the financial failure of a major intermediary or to unduly cap claims in a period of stress.

259. Note that the Government expects any such scheme to be totally industry-funded.

Secondary issue 16

If a statutory scheme were warranted, how should it be funded initially and in the longer run?

E: What should be its statutory powers?67

260. Should the operator have any prudential powers? The CASAC Consultation Paper discussed this possibility, and came to the conclusion that it was not appropriate.

261. Further, submissions to CASAC made the following points:

262. There is also the question of the non-prudential powers of the scheme operator.

263. CASAC expressed the view that the scheme operator would need:

264. While the first two dot points above appear unexceptional, the power in the third would need careful consideration before adoption. The current roles of clearing houses, external administrators and receivers need to be respected.

Secondary issue 17

If a statutory scheme were warranted, what would be the appropriate powers of the operator?

63 See CASAC Consultation Paper, pages 8-9.

64 See CASAC Consultation Paper, pages 17-20.

65 See CASAC Consultation Paper, page 20.

66 Corporations Regulations 7.8.02(7) and 7.8.05(3).

67 See CASAC Consultation Paper, page 16.