The Financial Claims Scheme introduced in 2008 currently protects depositors for up to $1 million per depositor, per institution in the event that a bank, building society or credit union becomes insolvent.

The Council of Financial Regulators (CFR), comprised of the Reserve Bank of Australia, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and Treasury, has reviewed the FCS and has issued a consultation paper for comment.

The CFR has advised that the FCS in its current form is largely appropriate to the post-Global Financial Crisis environment.

The most significant recommendation of the CFR is that the cap should be lowered to between $100,000 and $250,000 per depositor per ADI from October 2011, which will mean the FCS will continue to cover 97 to 99 per cent of Australian deposit accounts.

The CFR has also recommended the following changes to the FCS:
• FCS coverage of foreign currency accounts should be allowed to expire in line with existing legislation (scheduled for 12 October 2011);
• the FCS should no longer apply to deposit accounts of ADIs that are held in their foreign branches;
• the scheme should ‘look‐through’ certain pooled trust accounts (PTAs), so that the cap applies to individual beneficiaries rather than the account as a whole;
• the scheme should be able to be activated by the Treasurer when APRA appoints a statutory manager to an ADI, before APRA applies to wind‐up an ADI;
• the scheme should automatically be activated either at the time APRA applies to the Federal Court for an ADI to be wound up or when the Court makes the winding up
order; and
• there should be an additional payment mechanism available, to enable APRA to make FCS payments by transfer of deposit funds.

The FCS also applies to general insurance policyholders, but this aspect of the scheme is not part of this review.