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Table of Contents

Foreword

Table of contents

Abbreviations and terms used

Overview

Background

Structure of the paper

    Introduction

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

    The current compensation arrangements

    How should the requirements for compensation arrangements be reformed?

    Options and conclusion

    Attachments

Procedure

Principal issues

    Financial services licensees

    Market licensees

    A broad statutory scheme?

Secondary issues

    If a statutory scheme were warranted

    Other issues

Chapter 1: Introduction

A: The compensation review

    What is the purpose of this review?

    What triggered the review?

    What is the purpose of this paper?

    What does this review address and what is outside its ambit?

B: Origins of the review

    The Corporate Law Economic Reform Program, CLERP 6 and the Financial Services Reform Act 2001

    Request to the Companies and Securities Advisory Committee (CASAC)

    CASAC's Consultation Paper

    Responses to CASAC's Consultation Paper

    CASAC's interim report

    Senator Campbell's announcement

C: This issues and options paper

D: The consultation process

Chapter 2: The problem and objective

A: What is the problem to be addressed?

    Concepts: Financial services licensees, financial service, financial products

    What is the nature and size of the problem? — Evidence of wrongdoing and losses

B: Why is government action needed to correct the problem?

    What protection and redress is available (apart from compensation arrangements)?

    Current avenues for redress — some limitations

C: What is the objective of government action?

D: Will compensation arrangements help to achieve this objective?

E: Should compensation arrangements be required by legislation?

    Reasons for compensation arrangements

    Is mandating compensation arrangements consistent with the role of regulation?

    What about the `moral hazard' involved in requiring compensation arrangements?

F: Conclusion

Chapter 3: Current Australian compensation requirements

A: Description

B: Problems

Chapter 4: The purpose and design of compensation arrangements

A: What is the purpose of a compensation regime?

B: Designing a compensation regime

    Ease of access

    Simplicity for consumers

    Administrative simplicity

Chapter 5: Coverage

A: The conduct

    Financial service

    Licensed/unlicensed

    Possible acts or omissions causing loss

B: The cause of the loss

    (i) Defalcation and fraud

    (ii) Loss of property (including funds) entrusted to the licensee

    (iii) Deficiency (on insolvency/inability to pay) in funds and financial products held on trust

    (iv) Failure to enter into and complete transactions according to instructions

    (v) All the specific obligations of the financial services licensee imposed by new Chapter 7

    (vi) All the actions you could have taken against the licensee in his capacity as a licensee (on insolvency/inability to pay)

C: The claimants

    Retail clients

    Wholesale claimants?

    Referral business and excluded claimants

D: Measure and nature of compensation

E: Mechanisms to provide compensation

Chapter 6: Financial services licensees

A: Responsibility

B: Mechanisms

    Surety bonds

    Professional indemnity insurance

    Other mechanisms?

    Should all licensees be treated the same way in any requirement for compensation arrangements?

    The current professional indemnity insurance market

C: What should the mechanism adopted be required to cover?

    All the obligations of the financial service provider under new Chapter 7

    Other possibilities

D: Conclusion

Chapter 7: Market licensees

A: Should market licensees be required to make compensation arrangements?

    History

    An assessment of the general features of current Australian compensation funds

    CASAC's view

    Questioning the current requirements

B: If market licensees continue to be required to make compensation arrangements

C: A consolidated market scheme?

D: CS (clearing and settlement) facility licensees

Chapter 8: Is a broad statutory scheme warranted?

A: Is a broad statutory scheme warranted?

B: In what circumstances should a broad statutory scheme apply?

    Solvency/insolvency/inability to pay

    The grounds on which it would pay claims

C: The CASAC proposal

    Responses to CASAC's Consultation Paper

D: Overseas schemes

Chapter 9: Subsidiary issues relating to statutory schemes

A: Who would operate the scheme?

B: Reporting and governance issues

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

D: How would it be funded?

    Initial funding

    Ongoing funding

E: What should be its statutory powers?

Chapter 10: Other issues

A: Treatment of APRA-regulated bodies and those with high financial requirements

B: Measure and nature of compensation

    Consequential loss

    Accounting for profits

    Interest, costs, contributory negligence

C: Should there be capping of payments?

D: What form of capping is appropriate?

E: Subrogation

    What will not be recovered through subrogation

    Actions which prejudice subrogation

F: Connection with Australia

G: Relationship with external dispute resolution schemes

    Requirement for licensees to be members of external dispute resolution schemes

    Features of external dispute resolution schemes

    Roles of external dispute resolution schemes and compensation arrangements

H: Excess funds

I: Should there be time limits for claiming?

J: Level of detail in the legislation

Chapter 11: Options

Option A

Option B

Option C

Option D

Option E

Option F

Option G

Option H

Chapter 12: Conclusion

Attachment A: Outline of financial services licensing regime

A: Licensing of financial service providers

B: Financial service provider conduct and disclosure

Attachment B: Current compensation mechanisms in the financial services sector in Australia

A: Requirements imposed on exchanges/financial markets

    (i) Before the Financial Services Reform Act 2001

    (ii) After the Financial Services Reform Act 2001

B: Requirements imposed on financial services providers

    (i) Requirements before the Financial Services Reform Act 2001

    (ii) Requirements after the Financial Services Reform Act 2001

Attachment C: The origins of the National Guarantee Fund

    Sydney Stock Exchange

    Melbourne Stock Exchange

    The Securities Industry Act 1975

    National Guarantee Fund - establishment

    National Guarantee Fund - operation

Attachment D: Comparison of international compensation schemes

Attachment E: The current professional indemnity insurance market