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Date Introduced: 8 April 1998
House: House of Representatives
Commencement: The Act cited as the
Cheques and Payment Orders Amendment (Turnback of Cheques) Act
1998 commences on the day it receives Royal Assent, subject to
- Schedule 1, other than Item 6, commences on a day to be fixed
by Proclamation which shall not be later than 6 months after the
- The commencement of Item 6 is related to the commencement of
the Australian Prudential Regulation Authority Act 1998,
as explained in the Main Provisions.
The object of the
Bill is to clarify certain legal uncertainties in the Cheques
and Payments Orders Act 1986 (CPOA) which relate to the
payments system concerning unsettled cheques drawn on a failed
financial institution. These uncertainties are to be removed
- deeming unsettled cheques drawn on a failed financial
institution to be dishonoured; and
- permitting the collecting financial institutions to reverse the
provisional credit made initially to depositing customers' accounts
of the cheques drawn on the failed institution.
A separate Bill - the Cheques and Payment Orders
Amendment Bill 1998 - was introduced on the same date to allow
building societies and credit unions as well as their industry
Special Service Providers (SSPs) to issue cheques in their own
name. That Bill repeals the definition of bank in
the CPOA and substitutes the definition of financial
institution which is defined to include banks as well as
building societies, credit unions and their SSPs.
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) 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
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.
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.
Legal uncertainties concerning unsettled cheques drawn on a
Under the current payments system, cheques are
cleared via a specialised paper clearing stream. Financial
institutions collecting cheques deposited by their customers
provisionally credit their customers' accounts with the amounts of
the cheques deposited. However, these amounts cannot be withdrawn
until the collecting financial institutions are confident that a
cheque will not be dishonoured.
In the event of insolvency of a financial
institution participating in the payments system (however remote
that might be), there is uncertainty whether cheques drawn on the
insolvent participant has been paid or honoured. Other participants
may not, due to this uncertainty, treat unsettled cheques as
The object of the Bill is to make it clear that
in the event of insolvency of a participant, other participants
will have a clear and unambiguous right to treat unsettled cheques
as 'dishonoured'. This will enable other participants to reverse
the provisional credits made to their customers. Customers will be
required to seek payment from the persons who wrote the cheques
(the drawers of cheques). The drawers must then prove in the
winding-up of the insolvent financial institution for monies
deposited with that insolvent financial institution to meet those
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
The amendments to the CPOA are set out in
Schedule 1 to the Bill.
Turnback of Cheques Drawn on a Failed Bank
Item 5 of Schedule 1 inserts proposed
Division 3 to the CPOA titled: Turnback of cheques
drawn on failed banks.
Proposed subsection 70A(1) will
provide that a cheque that is lodged for collection with a failed
bank that is not a drawee bank will be taken to be dishonoured if
the drawee bank has become a failed bank after the cheque has been
lodged and at a time when the cheque has not been settled. The
dishonour is taken to occur at the time when the drawee bank
becomes a failed bank.
Proposed paragraph 70A(2)(a)
provides that a drawee bank will be treated as a failed bank if the
bank becomes an externally administered body corporate within the
meaning of the Corporations Law. Proposed
paragraph 70A(2)(b) also treats a drawee bank as
a failed bank when someone takes control of the bank's property for
the benefit of the bank's creditors. In addition proposed
paragraph 70A(2)(c) treats a drawee bank as a failed bank
if the Reserve Bank of Australia appoints a person to investigate
the affairs of the bank or assumes control of the business of the
bank under section 14 of the Banking Act 1959 and
determines in writing that the bank is to be treated as a failed
Item 6 of Schedule 1 repeals proposed
paragraph 70A(2)(c) and substitutes proposed
paragraph 70A(2)(c) where the only change is the
substitution of the Reserve Bank of Australia with the Australian
Prudential Regulation Authority (APRA) when it is established after
the enactment of the Australian Prudential Authority Act
1998 (APRA Act). As there is uncertainty when the Australian
Prudential Authority Bill 1998, now before Parliament, will be
enacted, proposed subsection 2(4) provides for
Item 6 to commence as follows:
- if the APRA Act commences before or at the same time as the
other Items in Schedule 1, Item 6 will commence immediately after
the commencement of those Items;
- if the APRA Act commences after the commencement of the other
Items in Schedule 1, Item 6 will commence immediately after the
commencement of the APRA Act.
It is relevant to note that the Cheques and
Payment Orders Amendment Bill 1998 when enacted will repeal the
definition of bank in the CPOA and substitute the
definition of financial institution which is
defined to include banks as well as building societies, credit
unions and their SSPs. In consequence the provisions relating to
turnback of cheques in proposed Division 3 will
apply to failed financial institutions.
The Regulation Impact Statement states that to
allow the existing uncertainties in relation to unsettled cheques
drawn on a failed participant to continue would leave Australia
well behind international best practice in payments system
The Regulation Impact Statement also proposes
that a joint review of the measures in the Bill if enacted, be
undertaken by the Treasury and the Reserve Bank of Australia 5
years after its commencement.(5)
- 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
- The package of Bills is as follows:
Australian Prudential Regulation Authority Bill
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
Life Insurance Supervisory Levy Imposition Bill
Payment Systems (Regulation) Bill 1998.
Retirement Savings Account Providers Supervisory
Levy Imposition Bill 1998.
Superannuation Supervisory Levy Imposition Bill
- Bills Digest on the Australian Prudential Regulation Authority
- Explanatory Memorandum to the Cheques and Payment Orders
Amendment (Turnback of Cheques) Bill 1998; paragraph 2.21, 7.
- Ibid., paragraph 2.23, 7.
6 May 1998
Bills Digest Service
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