The Financial Claims Scheme: Protecting depositors and policyholders

Australia has one of the most secure and stable financial systems in the world. As the prudential regulator, APRA plays an essential role in keeping it that way by setting and enforcing legally binding standards of governance, risk management and financial strength that banks, insurers and superannuation licensees must meet. In doing so, APRA aims to ensure these institutions can meet the financial promises they make to their customers under all reasonable circumstances.

Financial failures in Australia are extremely rare, but APRA does not and cannot guarantee a zero per cent failure rate. For that reason, the Australian Parliament established an extra layer of security for consumers at the height of the global financial crisis in 2008.

The Financial Claims Scheme (FCS) provides additional protection and prompt access to funds for depositors with Australian incorporated authorised deposit-taking institutions (ADIs) such as banks, credit unions and building societies, and for general insurance policyholders.

The FCS is a government-backed safety net for ADI deposits of up to $250,000 per account holder per ADI.

It also covers most general insurance policies for claims up to $5,000, with claims above $5,000 eligible if they fulfil certain criteria.

In the unlikely event that an ADI or general insurer can no longer meet its financial obligations, the Government may activate the FCS which APRA would then administer.

Although the FCS has only been activated once, its existence helps to support public confidence in the stability of the financial system.

Am I covered?

The FCS covers all Australian-incorporated ADIs and all APRA-regulated general insurers.

• A list of covered ADIs can be found here.
• A list of covered general insurers can be found here.

The FCS does not cover life insurers, private health insurers or superannuation funds.

For ADIs, the FCS provides cover of up to $250,000 per account holder per ADI. It covers a wide range of accounts held in Australian dollars, including transaction, savings and cheque accounts, term deposits and mortgage offset accounts (where the offset account is a separate deposit account).

An account holder can be an individual, but it can also be an entity such as a body corporate (i.e. a company), a trust or a self-managed superannuation fund.

The FCS limit of $250,000 applies to the sum of an account holder's deposits under the one banking licence. Therefore, all deposits held by an account holder with a single banking institution, including any banking businesses operated by that institution, must be added together before the $250,000 FCS limit is applied.

Some ADIs market themselves under more than one brand. For example, BankWest is part of the Commonwealth Bank, and St George is part of Westpac. Some banks also offer accounts through third parties: for example, deposit accounts offered by RAMS are actually Westpac accounts.

In some situations, a depositor might think they have accounts with two different banks, when in fact both accounts are with the same institution. This may have an impact on a depositor’s total FCS coverage in the unlikely event that the FCS is activated. It is recommended you contact your institution directly if you have any questions around your level of cover under the scheme.  

For general insurers most claims by policyholders are covered up to $5,000. Claims above $5,000 are also covered for eligible policyholders and certain third parties.

For further information on coverage and exclusions please see here.

How is the scheme funded?

If the Government activates the FCS, initial FCS funding will be provided by the Government in order to facilitate timely payments to account holders.

Amounts paid under the FCS and associated administration costs would then be recovered through the liquidation process through a priority claim. Any shortfalls through the liquidation would subsequently be recovered by the Government through an industry special levy.

Has the FCS ever been activated?

The only time the FCS has been activated to date was for the failed general insurer Australian Family Assurance Limited in 2009.  As a result, 29 payments were made to affected policyholders and third party claimants covered by the FCS.

What does APRA do to prepare for activation of the FCS?

Given the important role that the FCS plays in supporting the stability of the Australian financial system, APRA continues to take steps to ensure an appropriate level of ongoing FCS readiness with industry and other stakeholders.   This includes the development of procedural guidelines, ongoing ADI self-assessments and APRA-led preparedness reviews, crisis planning exercises and the commencement of the formal semi-annual collection of FCS data and systems information.

What should I do in the unlikely event that my ADI or general insurer fails?

In the unlikely event that the FCS is activated by the Australian Government, APRA has plans and protocols in place to ensure the timely payment of depositor funds or policyholder claims. For example, APRA will endeavour to make payments to the majority of deposit account holders within seven calendar days. In most cases FCS payment would be made by either cheque or electronically to an alternate account nominated by the account holder. If the FCS is declared, APRA and the entity will be communicating directly with depositors or policy holders on any steps that need to be taken in order to access their FCS payment. 

If you have any further questions or wish to determine your coverage under the scheme please visit the FCS website. 

The article was first published in APRA Insight – Issue 2 2019. Information was correct at time of publication.