Financial Claims Scheme

The Financial Claims Scheme (FCS) is an Australian Government protection scheme for eligible deposits with covered authorised deposit-taking institutions and for eligible claims against APRA-regulated general insurers. Administered by the Australian Prudential Regulation Authority, it is designed to provide prompt access to protected funds and support confidence during institutional failure.^[1]

Overview

The Financial Claims Scheme is Australia’s statutory safety net for two distinct areas of household and business finance: deposits at covered banks, building societies and credit unions, and claims under eligible general insurance policies. APRA describes the scheme as having been established during the 2008 global financial crisis to provide financial protection for consumers in the unlikely event that a covered institution fails.^[1]

For deposits, the scheme applies to Australian-incorporated banks, building societies and credit unions that are authorised by APRA as authorised deposit-taking institutions, commonly called ADIs. The headline protection is A$250,000 per account holder per ADI. The limit is not per account and not per brand name; it is applied to the account holder’s protected deposits with the relevant ADI, subject to the scheme rules.^[2][4]

For general insurance, the FCS covers claims against APRA-regulated general insurers. It does not operate as a deposit guarantee in that context; rather, it is an insurance policyholder and claimant protection mechanism that can pay, assess or facilitate eligible claims after an insurer failure.^[1][5]

The scheme is not normally operating in the background as a routine reimbursement process. It can be activated by the Australian Government in the event of the failure of a covered ADI or general insurer, after which APRA administers the scheme.^[1] This distinguishes the FCS from ordinary prudential supervision, where APRA seeks to reduce the probability of institutional failure through licensing, capital, liquidity, governance and risk-management requirements.

Legal and institutional basis

The FCS for deposits is set out in Division 2AA of the Banking Act 1959, which deals with a financial claims scheme for account holders with insolvent ADIs.^[8] The legislation provides that a Minister may make a declaration in relation to a specified ADI where APRA has applied for the ADI to be wound up or a Banking Act statutory manager is in control of the ADI’s business.^[8]

The Banking Act states that the purpose of the division includes allowing the Minister to make a declaration about an ADI, entitling account holders with certain protected accounts to be paid certain amounts before they would receive payment in a winding up, substituting APRA as creditor to the extent of the entitlements, and facilitating a transfer of business to a receiving body in relation to protected accounts.^[8]

Once an ADI is declared, eligible account holders with protected accounts and a net credit balance at the declaration time become entitled to payment by APRA, subject to statutory and regulatory limits.^[8] The Act provides that the amount may include the account balance and accrued but uncredited interest, adjusted for clearing of relevant transactions according to regulations.^[8]

The legislation also gives APRA flexibility in how entitlements are met. Payment can be made as a single amount or in instalments, or applied for the account holder’s benefit, including by establishing an account with another ADI on the account holder’s behalf.^[8] This feature reflects the scheme’s objective of preserving liquidity and access to funds, not merely calculating a liquidation dividend.

Deposit coverage

The deposit component of the FCS protects deposits up to A$250,000 for each account holder at each covered bank, building society or credit union incorporated in Australia and authorised by APRA.^[2] APRA states that the scheme aims to return protected deposits to account holders within seven days of activation.^[1]

The coverage is applied by account holder and by ADI. A person with A$250,000 or less in protected deposits at one covered ADI would generally be within the cap for that ADI. A person with protected deposits at multiple separate ADIs may have separate coverage at each ADI, subject to the rules. Conversely, where multiple accounts are held with the same ADI, the balances are aggregated before the A$250,000 cap is applied.^[4]

APRA gives the example of an account holder with three protected accounts at one bank, each containing A$100,000. The aggregate balance is A$300,000, but the FCS protects only A$250,000 for that account holder at that bank; the remaining A$50,000 would not be protected by the FCS, although the depositor may have a claim in the liquidation depending on available assets.^[4]

A further complication is the use of brands and trading names. Some ADIs market products under more than one brand or through subsidiaries or third-party brands. APRA notes, for example, that Bankwest is part of Commonwealth Bank of Australia and St.George is part of Westpac Banking Corporation, and that deposits under such brands may be deposits with the same underlying ADI.^[4] The practical consequence is that account holders must identify the licensed ADI, not only the retail brand name, when assessing coverage.

Covered and excluded deposit accounts

The FCS applies to a wide range of deposit accounts held with covered banks, building societies and credit unions, but only where the funds are in Australian dollars.^[3] APRA lists covered account types including savings accounts, call accounts, term deposits, current accounts, cheque accounts, debit card accounts, transaction accounts, personal basic accounts, cash management accounts, farm management deposit accounts, pensioner deeming accounts, trustee accounts and retirement savings accounts.^[3]

Mortgage offset accounts can be covered where they are separate deposit accounts, whether 100 per cent or partial offset accounts.^[3] This is important because an offset account may be linked economically to a home loan while still being legally structured as a deposit account. By contrast, a redraw facility or a credit balance on a loan is not necessarily a separate deposit account; APRA lists credit balances on credit card facilities or other loans as excluded.^[3]

The FCS does not apply to accounts holding funds that are not in Australian dollars, accounts kept at overseas branches of Australian banks, prepaid card facilities or similar products, and certain nostro and vostro accounts of foreign corporations carrying on banking or other financial services business in a foreign country.^[3]

APRA’s guidance also identifies who can be an account holder for FCS purposes. Account holders can include individuals, companies, bodies politic, partnerships, unincorporated associations, trustees of trusts, trustees of superannuation funds including self-managed superannuation funds, and trustees of approved deposit funds.^[3] Residency or citizenship does not determine eligibility for deposit coverage: APRA states that an account holder may be an Australian resident or citizen, or a non-resident or non-citizen.^[3]

Joint accounts, trusts and superannuation accounts

Joint accounts are treated by splitting the deposit equally among the account holders, then aggregating each person’s share with their other protected deposits at the same ADI before applying the A$250,000 limit.^[4] For example, if two individuals jointly hold A$300,000 and one of them also holds A$50,000 individually at the same credit union, APRA’s illustration treats the joint balance as A$150,000 for each person and then adds the individual account to the relevant person’s total.^[4]

For trusts, APRA states that the trustee of a trust fund can be an account holder and may receive up to the A$250,000 FCS limit for the trust. Where a trust has multiple individual trustees, the group of trustees is treated as a single account holder for this purpose, not as multiple separate account holders each with a separate cap.^[4]

Superannuation has a specific treatment. An ADI deposit account held by the trustee of a superannuation fund on behalf of members is covered up to A$250,000, but APRA states that in most cases the limit applies to the whole fund, not to each individual member.^[3] This distinction is relevant for superannuation funds and self-managed superannuation funds that place cash in bank deposits.

General insurance coverage

The FCS also covers eligible policyholders and claimants of APRA-regulated general insurers. APRA’s overview states that the scheme covers claims of up to A$5,000 from policyholders and claimants against general insurers in Australia, and also provides protection for eligible claimants for claims above that amount.^[1]

The general insurance component is different from the deposit component because insurance claims require eligibility and validity assessment. APRA states that, once eligibility is confirmed, it will determine the validity of each claim and the amount payable through a claims assessment process.^[5] In most cases, the amount paid by APRA is the amount that the policyholder or claimant would have been entitled to under the insurance policy, assuming the claim is valid and the claimant is eligible under the FCS.^[5]

The scheme may also operate by transferring eligible policyholder claims to a third party, such as another general insurer, which then becomes responsible for transferred claims including payment of valid claims.^[5] This mechanism resembles a resolution tool, because it can support continuity of claims handling rather than relying solely on direct payment to claimants.

The FCS does not provide indefinite replacement insurance cover. APRA states that the FCS will continue to cover existing eligible policyholders and certain other claimants for claimable losses occurring for 28 days after activation of the FCS for a general insurer.^[5] Policyholders may therefore need to arrange alternative cover if they wish to remain insured after that period.

Claims under the general insurance FCS normally need to be lodged within 12 months of the FCS declaration, unless APRA specifies otherwise or extends the period in some circumstances.^[5] APRA also states that unexpired premiums are not covered by the FCS; policyholders may instead be entitled to claim some or all of those premiums in the liquidation of the failed insurer.^[5]

Activation and administration

The FCS can be activated by the Australian Government in the unlikely event that a covered ADI or general insurer fails, and APRA administers it once activated.^[1] In the ADI context, the Banking Act framework requires a declaration for a specified ADI. The legislation provides that the Minister may make a declaration where APRA has applied for the ADI to be wound up or where a Banking Act statutory manager is in control of the ADI’s business.^[8]

Before making a declaration under section 16AD of the Banking Act, the Minister may request advice or information from APRA, Australian Securities and Investments Commission or the Reserve Bank of Australia about matters relevant to the decision, including the affairs of an ADI. The Minister must take account of advice and information received before making the decision, although this does not limit what may be considered.^[8]

For ADI failures, the declaration must specify the amount to be credited to the Financial Claims Scheme Special Account for meeting entitlements. If APRA’s winding-up application was made on or after 12 October 2011, that amount must not exceed A$20 billion. The declaration must also specify any amount to be credited to the APRA Special Account for administration, subject to a A$100 million limit.^[8]

Operational preparedness is a significant part of the scheme. APRA’s information paper on the FCS for ADIs explains that Prudential Standard APS 910 sets minimum requirements for ADIs to be prepared should they become a declared ADI for FCS purposes.^[7] The requirements include a single customer view, payment pre-positioning and reporting arrangements for account holders, the Australian Taxation Office and APRA.^[7]

Historical development

The FCS was created in the policy environment of the global financial crisis. Treasury records that the Australian Government’s deposit and wholesale funding guarantees were announced on 12 October 2008, with further design and operational parameters announced on 24 October 2008.^[6] APRA’s overview similarly identifies the FCS as having been established during the 2008 global financial crisis.^[1]

Treasury states that on 11 September 2011 the Treasurer announced changes to the FCS, including a new permanent cap of A$250,000 per person, per ADI, effective from 1 February 2012.^[6] That cap remains the central public reference point for the deposit component of the scheme.

The FCS should be distinguished from the Government’s separate 2008 guarantee arrangements for large deposits and wholesale funding. Treasury notes that the Guarantee Scheme commenced on 28 November 2008 and was closed to new guaranteed liabilities from 31 March 2010, while also recording that the relevant program closed in 2011.^[6] The FCS, by contrast, remains part of Australia’s financial safety-net architecture.

Role in the Australian financial system

The FCS has three main policy objectives in APRA’s description: protecting depositors of ADIs and claimants of general insurers from potential loss after failure; providing depositors with prompt access to protected deposits; and supporting stability in the Australian financial system.^[1] These objectives place the scheme within the broader Australian framework of prudential regulation, crisis management and depositor confidence.

The scheme complements, rather than replaces, prudential regulation. APRA supervises covered ADIs and general insurers before any failure occurs, while the FCS is a mechanism for managing outcomes if failure nevertheless occurs. Other institutions in the Australian financial system, including the Council of Financial Regulators, the Australian Treasury, the RBA and ASIC, may be relevant to crisis coordination, market conduct, payments and policy advice, but APRA is the FCS administrator.^[1][8]

The FCS is also narrower than a general guarantee of all financial products. It does not cover securities, managed funds, shares, bonds, non-Australian-dollar deposit accounts, overseas branch accounts, life insurance policies or private health insurance policies unless another legal mechanism applies. Its coverage is defined by statute, regulation and APRA guidance, and depends on the institution, account or policy type, account holder status and activation of the scheme.

For depositors, the central practical issues are the identity of the licensed ADI, the aggregate balance held by the account holder at that ADI, the currency and type of account, and whether accounts are held individually, jointly, by a trust, by a company or by a superannuation trustee. For insurance claimants, the central issues are whether the insurer is APRA-regulated, whether the policy and claimant are eligible, whether the claim is valid, and whether time limits after declaration are met.^[3][4][5]