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Bills Digest No. 188 1997-98
Cheques and Payment Orders Amendment (Turnback of Cheques) Bill 1998

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.

Date Introduced: 8 April 1998

House: House of Representatives

Portfolio: Treasury

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 the following.

• 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 Royal Assent.
• 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 by:

• 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 failed bank

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 'dishonoured'.

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 cheques.

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.

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 bank.

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 reform.(4)

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)

1. 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.
2. 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.

3. Bills Digest on the Australian Prudential Regulation Authority Bill 1998.
4. Explanatory Memorandum to the Cheques and Payment Orders Amendment (Turnback of Cheques) Bill 1998; paragraph 2.21, 7.
5. Ibid., paragraph 2.23, 7.

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ISSN 1328-8091
© Commonwealth of Australia 1998

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Published by the Department of the Parliamentary Library, 1998.

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