The Council of Financial Regulators – a non statutory body which has high-profile members belonging to Treasury, both regulatory bodies and the Reserve Bank – has recommended the Government introduce a “minimalist” financial claims compensation scheme to protect consumers.

The idea of introducing such a scheme was initially raised by HIH Royal Commissioner Justice Neville Owen, and Treasury later commissioned Professor Kevin Davis to produce a study on financial guarantees and the pros and cons of introducing such a scheme.

While the Davis review endorsed many of the current arrangements in place for dealing with distressed institutions, the council identified “a number of areas where some improvements could be made to existing arrangements”.

The insurance industry has made it clear in the past that it’s open to the idea of a policyholder protection scheme, but is sceptical about how it would be funded. The good news is the proposed scheme wouldn’t be funded by insurers, but through the sale of the failed company’s assets. It would only be if those funds fell short that the industry would need to step in.

The council is concerned there is no mechanism available for giving policyholders first claim on the assets of a failed company. It also says there is no provision of timely payments of claims.

It says the long amount of time policyholders may have to wait to receive compensation if their insurer goes belly-up is “an inappropriate outcome both for the more vulnerable members of society and the Government”.

The federal Treasury said in a statement that it wants to remedy this shortfall in Australia’s failure management arrangements, but the council is “not attracted to the cumbersome pre-funded deposit insurance and financial system guarantee schemes found in many other countries”.

The council has proposed the “minimalist” scheme would be administered by the Australian Prudential Regulation Authority, and would apply to retail deposits in authorised deposit-taking institutions and the policyholder claims of life and general insurers.

It would provide policyholders with access to 90% of their funds in a closed institution up to a maximum limit (for example $50,000), and compensation would only apply to the failed financial institution’s liabilities in Australia.

“In the council’s view, there is much to commend these proposals which would assist in a more expeditious and orderly closure of a financial institution and, by doing do, help the overall stability and efficiency of the Australian financial system.”

An Insurance Council of Australia spokesman told Sunrise Exchange News it looks forward to examining the council’s recommendations in detail and working with the Government on the issue in due course.