WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Date Introduced: 8 April 1998
House: House of Representatives
Portfolio: Treasury
Commencement: The Act cited as the
Cheques and Payments Orders Amendment Act 1998 commences
on the day on which it receives Royal Assent. However,
proposed section 2 covers the
commencement of the amendments proposed in Schedules 1, 2 and 3
which will commence on Proclamation. If Schedules 1, 2 and 3 are
not proclaimed to commence within 6 months of Royal Assent they
will automatically commence after the end of that period.
Purpose
The object of the
Bill is to amend the Cheques and Payment Orders Act 1986
(the CPOA):
- to allow building societies, credit unions and their industry
Special Service Providers (SSPs) to issue cheques in their own
name; and
- to repeal the provisions of the CPOA that relate to payment
orders that may currently be issued by building societies, credit
unions and other non-bank financial institutions.
The policy objective is to ensure that products
offered by building societies and credit unions will be more
comparable with those offered by banks. Consumers will have greater
freedom of choice in deciding on the use of a financial institution
which offers similar products.
The Bill will also make a number of
miscellaneous amendments to the CPOA to improve the effectiveness
of the CPOA and to clarify its operation.
A separate Bill - the Cheques and Payment
Orders Amendment (Turnback of Cheques) Bill 1998 - introduced
on the same date, clarifies a number of legal uncertainties in the
interpretation of the CPOA that could attach to the payment system
in the event, however remote, a participant in that system were to
become insolvent. These uncertainties are overcome by deeming
unsettled cheques to be dishonoured, so that collecting
institutions could reverse the provisional credits made to their
customers' accounts, and allow the 'turnback' of the unsettled
cheques to the depositing customers. In consequence, holders of
affected cheques could be able to turn for payment to the person
who wrote the cheque (the customer of the failed institution), the
person liable to the cheque.
Background
The Financial System Inquiry
The Wallis Committee was set up to stocktake the
results of financial deregulation of the Australian financial
system since the early 1980's, to establish a common regulatory
framework for overlapping financial products and to propose ways of
dealing with further financial innovation.
The Final Report of the Financial System Inquiry
(FSI), chaired by Mr Stan Wallis (President of the Business Council
of Australia), was released in April 1997.(1)
A number of recommendations were made to
intensify competition and efficiency in the financial system,
including recommendations for substantially streamlined regulatory
arrangements.
In response to the FSI Report, the Treasurer
announced that the Government intends to institute a wide-ranging
set of financial system reforms. A package of Bills(2) to implement
the Government's response to the recommendations of the Financial
System Inquiry (the FSI) in its report the FSI report was
introduced on 26 March 1998. Among these Bills was the Payments
Systems (Regulation) Bill 1998 to regulate the payments system,
which covers the system of payment instruments (cash, cheques,
smart cards among others).
With respect to the payments system, the
Government accepted the Committees' recommendations. Of special
relevance to banking law, the Committee recommended the formation
of a Payments System Board under the control of the Reserve Bank of
Australia (RBA) to regulate the payments system; liberalisation of
access to the clearing system; regulation of stored value cards;
and laws to allow for electronic commerce. The Payment Systems
(Regulation) Bill 1998 details the proposed new regulatory
framework for the payments system, which is being introduced
consistent with the recommendations of the FSI.
A key recommendation of the FSI was that the
existing institutionally based system of prudential regulation
should be combined in a single agency at the Commonwealth level to
be called the Australian Prudential Regulation Commission (APRC).
The Australian Prudential Regulation Authority Bill 1998, which was
introduced at the same time as this Bill and which seeks to
establish the Australian Prudential Regulation Authority (APRA),
implements this recommendation.(3)
Amendments to the Reserve Bank Act
1959, as provided for in the Financial Sector Reform
(Amendments and Transitional Provisions) Bill 1998, provide for the
creation of the Payments System Board (PSB) within the RBA to
provide for policy making in relation to the payments system and to
increase the accountability of the RBA in relation to its role in
the payments system.
Recommendation that Building Societies and Credit Unions be
permitted to issue their own cheques
At present customers of building societies and
credit unions draw cheques on a bank through agency cheque
arrangements where two institutions are represented on a cheque. As
for the overall cost of the payments system the FSI Report noted
that as in other English speaking countries, cheque usage in
Australia is high by international comparison and this has
implications for the overall cost of the payments system.(4)
In July 1995, the former Commonwealth Government
had announced that it would amend the CPOA to allow building
societies, credit unions and their industry SSPs to issue cheques
in their own right. The FSI Report recommended that in the interest
of encouraging competition in the provision of financial services
to the community, the amendments foreshadowed by the former
Government should be enacted.(5)
The FSI Report whilst supporting the extension
of own cheque issuing rights to building societies and credit
unions on grounds of competitive neutrality, also felt the need to
weigh the benefits of new entry against efficiency criteria given
that cheques represent as much as 70 per cent of the total non-cash
cost of the payments system. It therefore recommended that issuers
of cheques should meet objective performance benchmarks.
The FSI Report therefore recommended that other
financial institutions should be allowed to issue cheques in agency
arrangements with deposit taking institutions (DTIs) or their SSPs,
subject to the approval of the APRA. (6)
Abolition of Payment Orders
All building societies and credit unions,
together with five non-bank financial institutions prescribed for
the purpose are entitled to issue payment orders. About a further
approximately 400 other financial institutions registered with the
Reserve Bank under Financial Corporations Act 1974 (Cth)
also have a statutory right to apply to be prescribed as 'non-bank
financial institutions'.
Although payment orders have the same rights and
obligations as cheques, non-banks have come to regard payment
orders as second class instruments and hardly use them in practice.
The Regulation Impact Statement states that with the exception of
two non-banks currently issuing payment orders, building societies
and credit unions have preferred to access the payment system
through agency cheque arrangements with banks.(7)
The Explanatory Memorandum also adds that the
abolition of payment orders and the repeal of the provisions
relating to them will greatly simplify the structure of the CPOA
and assist in its interpretation.(8)
The measures proposed by this Bill complement
those proposed by the Payment Systems and Netting Bill 1998 and the
Cheques and Payment Orders Amendment Bill 1998, to enhance the
effectiveness of arrangements within Australia's payments
system.
Main
Provisions
The principal reforms proposed by the Bill are
in the Schedules to the Bill.
Cheques to be drawn on Financial Institutions
Part 1 of Schedule 1 of the Bill sets out the
main amendments to the CPOA to enable financial institutions to
draw cheques. Proposed subsection 3(1) defines
financial institution to include banks as well as
building societies, credit unions and their SSPs. The Bill repeals
the definition of bank in subsection 3(1) of the
CPOA and replaces it with the definition of financial
institution in Item 9 of Schedule 1. Subsection 10(1) of
the CPOA currently restricts the ability to issue cheques to a
bank. This subsection is repealed and substituted by
proposed subsection 10(1) in Item 14 of Schedule 1
which extends cheque issuing rights to financial institutions.
Repeal of Part VIII of the CPOA relating to Payment Orders
Part VIII of the CPOA which makes provision for
payment orders will be repealed by Item 15 of Schedule 1. Item 16
of Schedule 1 will repeal the current Schedule to the CPOA that
modifies and applies relevant provisions of the CPOA to payment
orders.
Miscellaneous amendments to the CPOA
Schedule 2 of the Bill sets out a number of
miscellaneous amendments proposed to be made to the CPOA to improve
its effectiveness and clarify its operation. A summary of the more
significant amendments proposed in the Bill, succinctly outlined in
the Explanatory Memorandum, is set out below.(9) The Bill will:
- amend the external presentment provisions of the CPOA to
provide that external presentment of cheques by exhibition to the
'proper place' is subject to a 'reasonable hour' test (Items 12 and
13 of Schedule 2);
- provide a mechanism for requests for further particulars in
relation to a cheque, or for the exhibition of a cheque, where an
internal presentment of a cheque has been made to the 'proper
place' or to the 'notified place' by means other than exhibition
(Items 14 to 17 of Schedule 2);
- remove the requirement that an order cheque be expressed 'to or
to the order of'. Proposed subsection 3(1A) gives
examples of what is meant by 'to or the order of" (Item 2, 3 and 4
of Schedule 2);
- remove the capacity to convert a bearer cheque into an order
cheque (Items 5 and 6 of Schedule 2);
- provide that where a payee or indorsee on an order cheque is
misdescribed, the payee or indorsee may indorse the bill as
described, adding the person's proper signature at the person's
discretion (Item 8 of Schedule 2);
- replace the expression 'prior indorsers' and the expression
'the drawer and prior indorsers' with the expression 'prior
parties' (Item 9 and 10 of Schedule 2);
- provide that the obligation to pay imposed by subsection 67(1)
is without any prejudice to such, if any, contractual, statutory or
common law rights that the drawee institution may have to debit its
customer's account with the amount of the cheque (Item 18 of
Schedule 2); and
- require a drawee institution to retain only originals or copies
of paid cheques (Items 19 to 23, 25 and 26 of Schedule 2).(10)
Schedule 3 of the Bill proposes consequential
amendments to the Bills of Exchange Act 1909 and the
Debits Tax Administration Act 1982 (Cth).
Concluding Comments
The Explanatory Memorandum to the Bill states
that the proposals in the Bill have adopted some comments and
suggestions made on a draft bill which was released for public
comment on 12 February 1998.
The Bill whilst implementing the recommendation
of the Wallis Report to extend the range of institutions on which
cheques may be drawn, also advances the principles of competitive
neutrality under the national competition policy proposed by the
Hilmer Report and supported by the Competition Principles
Agreement.
It remains to be seen whether the proposed
measures will accelerate cheque processing times and accessing of
funds credited by cheque. The current problems in regard to these
matters were highlighted in the Wallis Report as follows:
Since 1994, Australian Payments Clearing
Association (ACPA) has pursued a project to accelerate the cheque
clearing process. The objective is to improve the efficiency of
paper clearings by replacing the physical presentment and dishonour
of cheques with electronic messaging. Under current arrangements,
cheques can take up to eight days to clear, with an average of four
to five days. APCA expects that electronic transmission of details
of cheques will reduce the clearing cycle to an average of three
days. Most DTIs have arbitrary rules preventing retail and small
business customers from accessing funds credited by cheque for a
number of days (usually four or five) regardless of whether funds
have actually been cleared. The Inquiry considered that customers
should have immediate access to funds which have been actually
cleared.(11)
The Regulation Impact Statement proposes that a
joint review of the measures in the Bill if enacted, by the
Treasury and the Reserve Bank of Australia, be undertaken 5 years
after its commencement.(12) Such a review will meet the
Commonwealth's obligations under the Competition Principles
Agreement to review and reform regulations that restrict
competition. It may also be the occasion to examine whether the
physical movement of cheques between institutions could be obviated
by new technology and whether more could be done to accelerate the
accessing of funds.
Endnotes
- Financial System Inquiry - Final Report (March 1997) - Chairman
Mr Stan Wallis. The FSI and the FSI Report are popularly referred
to as the Wallis Inquiry and Wallis Report.
- The package of Bills is as follows:
Australian Prudential Regulation Authority Bill
1998
Authorised Deposit -Taking Institutions
Supervisory Levy Imposition Bill 1998
Authorised Non-Operating Holding Companies
Supervisory Levy Imposition Bill 1998
Financial Institutions Supervisory Levies
Collection Bill 1998
Financial Sector Reform (Amendments and
Transitional Provisions) Bill 1998
Financial Sector (Shareholdings) Bill 1998
General Insurance Supervisory Levy Imposition
Bill 1998
Life Insurance Supervisory Levy Imposition Bill
1998
Payment Systems (Regulation) Bill 1998
Retirement Savings Account Providers Supervisory
Levy Imposition Bill 1998
Superannuation Supervisory Levy Imposition Bill
1998.
- Bills Digest on the Australian Prudential Regulation Authority
Bill 1998.
- Ibid., paragraph 9.3.3, 391.
- Ibid., Recommendation 66, 393.
- Ibid., Recommendation 66, 393.
- Explanatory Memorandum to the Bill; paragraph 2.2; 3 and
paragraph 7.14; 19.
- Ibid., paragraph 7.15; 19.
- Ibid., 25-30.
- Ibid., paragraph 5.1; 13-14.
- Financial System Inquiry - Final Report (March 1997);
391-392.
- Ibid., paragraph 2.23; 7.
Bernard Pulle
6 May 1998
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 1998
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