The purpose of this Chapter is to provide an outline of the current compensation requirements and problems with them.
A more detailed description of the requirements for compensation arrangements before and after the commencement of the Financial Services Reform Act is to be found in Attachment B.
100. The requirements for compensation arrangements included in the new Chapter 7 are:
- financial services licensees which provide financial services to persons as retail clients must have arrangements for compensating them for loss suffered because of breaches of the relevant obligations under new Chapter 7 by the licensee or its representatives;30
- The Australian Stock Exchange's National Guarantee Fund will continue to pay claims made by clients of participating organisations of the Exchange in the same circumstances as before the commencement of the Financial Services Reform Act;31
- these circumstances are breach of the `contract guarantee', unauthorised transfer, incorrect certificate cancellation and insolvency;
- other market licensees will, when they transition fully into the new regime, have access to the more flexible requirements for compensation arrangements provided in the new Chapter 7;32
- these compensation arrangements are required to cover defalcation and fraud.
101. A more complete description of the requirements on financial service providers and market operators, both before and after the commencement of the Financial Services Reform Act, is provided in Attachment B.
102. As indicated in paragraph 4, the criticisms made during the exposure period of the Financial Services Reform Bill related particularly to the continuing requirement for market licensees to have compensation arrangements and the perceived overlap between this requirement and the requirement in section 912B for financial services licensees to have compensation arrangements.
103. The circumstances were not such that any comprehensive criticism of the regime was provided.
104. In brief, some of the problems with the compensation requirements in the new Chapter 7 are:
- how does the cover required by section 912B fit with the market compensation arrangements?
- the market compensation arrangements tend to be concerned with the protection of assets entrusted to the licensee, while section 912B focuses on breach of an obligation under the new Chapter 7;
- should market licensees be required to continue to have compensation arrangements?
- if so:
- what circumstances should such compensation arrangements be required to cover?
- should the arrangements cover the entirety of the financial services business of market participants, or should they allocate responsibility between markets, and be limited to on-market transactions?
- should the same requirements apply to all market licensees? (currently the National Guarantee Fund provisions are significantly different);
- if not, what should be done with the existing compensation funds?
- is the current ambit of section 912B appropriate?
105. However, the purpose of this review is not just to address the identified problems, but to revisit the whole compensation regime. The following chapters therefore take a wider approach than simply trying to cure identified problems.