15 Aug 2013
Rolling over: ASIC's further review of term deposits
by Samantha Carroll, Damien Cooling
Since its first review of term deposits by large banks and mutuals in 2010 there have been improved disclosure and fewer default rollovers from high to low interest rates, but more work needs to be done, says ASIC.
In July 2013, ASIC released its further report of term deposits which highlighted a number of improvements in the term deposit market in Australia since its last review in 2009 (which produced its 2010 Report 185 Review of term deposits). The key findings of the report are:
Australian banks and mutuals still use dual pricing for term deposits (ie. high and low interest rates);
disclosure of the existence and risk of dual pricing and interest rates has improved;
default rollovers from high to low interest rates have decreased;
the number of investors using grace periods to change their term deposit has increased; and
most Australian banks and mutuals have adopted changes to advertising protocols.
Dual pricing was defined in ASIC's 2010 Report as the circumstances where term deposits are actively promoted with reference to a high interest rate offered by the financial institution for term deposits when the rates offered for other deposits were lower than the rate advertised. Many of the 2010 recommendations related to default rollovers from high to low interest rates (that is, upon the expiry of a term deposit the invested funds rollover by default to a new term deposit at a lesser interest rate). In 2010, ASIC found that a total of $1.9 billion of investors' funds rolled over from high to low interest rates by default.
Advertising and promotion
ASIC has found in its further review that the major Australian banks and mutuals have implemented its previous recommendations from 2010 by no longer making representations in advertising materials about interest rates being consistently high. ASIC has however identified a number of new issues in advertising for term deposits which it will monitor and take action where necessary, such as:
some banks were identified as conducting targeted mail out campaigns to existing customers advertising term deposits at "special" or "exclusive" rates when the rates were otherwise generally available. ASIC has recommended in its Report that only genuine "special" or "exclusive" offers are advertised in this manner and that interest rate schedules are attached to these types of campaigns;
one major bank published an advertisement making unqualified representations about guaranteed returns which was found to be inconsistent with the Government deposit guarantee scheme; and
another major bank published an advertisement which gave the overall impression that term deposits were more likely to provide better returns than other savings accounts when this was not necessarily true.
Disclosure of interest rates
ASIC also found that most major Australian banks and mutuals have generally improved their disclosure regarding dual pricing and implemented the recommendation to disclose in their pre-maturity letter the actual or indicative interest rate that will apply to investors' rolled over term deposits.
In the current report though, ASIC highlighted that in addition to its previous recommendations, it considers it is best practice for investors to receive information about the applicable interest rates both before and after the term deposit rolls over so that they have ample opportunity to consider alternative investment options.
ASIC again highlighted its concerns about the timing of the disclosure of the risk of dual pricing and suggested it considers it best practice to disclose information about any grace periods in both the pre- and post-maturity letters sent to clients.
Next steps for implementing new recommendations
ASIC has indicated that it will approach individual banks and mutuals with the view of implementing the new recommendations contained in its recent report by consent.
Our Banking and Financial Services department and Governance and Compliance group are experienced in advising further on the recommendations arising out of ASIC's recent Report, including how they will affect advertising campaigns and promotions relating to term deposits. Please contact us if you require any further assistance or information.
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