An arrangement can be copyrighted, but the copyright applies only to the arrangement and not to the original work. It has to be a substantial arrangement and requires the agreement of the copyright holder of the original work. Simple arrangements eg just adding guitar chords don't need the composer's agreement but aren't sufficient to obtain copyright.

The system is certainly flawed, especially where folk music is concerned, but it's difficult to think of a practical alternative. Most seem to agree with Nick Dow that the original songwriter or composer should get some money, but how should this work? The UK folk scene is perhaps small enough that you could probably contact them personally, but that wouldn't work with Bob Dylan or Paul Simon, and they wouldn't want to spend their whole time agreeing terms with everyone who wants to cover their songs. The current system removes the obligation from the performer entirely and places it on the venue or the promoter, and for the composer it provides a one-stop shop which periodically pays them their royalties.

Those who object to third parties getting involved overlook that the writer has chosen to have them deal with royalties on their behalf. There is no obligation on them to sell the rights to a publisher or join a music rights organisation. The system is clunky but it sort of works. Has anyone got a better suggestion?