ASIC has released the results of its review of the Australian term deposit market.
ASIC’s review looked at the period 1 January 2008 to 27 February 2009 and covered eight authorised deposit-taking institutions (ADIs) holding over 80 per cent of Australia’s total term deposits.
ASIC’s review found that seven out of the eight ADIs reviewed promoted their term deposits by advertising only the highest term deposit rates, while maintaining lower rates for all other deposit periods. The periods on which the advertised higher rates were offered varied over time.
In ASIC’s opinion, this ‘dual pricing’ coupled with the potential for term deposits to rollover by default if the investor does not take action, creates a risk that a retail investor could inadvertently end up in a much lower interest term deposit.
ASIC’s report contains recommendations for improvements to advertising, disclosure of interest rates and grace periods designed to maximise the disclosure to investors about what happens when their term deposit matures.
The recommendations are:
- ADIs should review their term deposit advertising to ensure that, where dual pricing practices operate, investors are not given the impression that good or competitive returns are available across all deposit terms when this may not be the case.
- ADIs that have high and low term deposit interest rates should review their disclosure documents to ensure that there is clear and effective disclosure that:
A. dual pricing exists; and
B. because term deposits have the ability to roll over automatically without the investor taking active steps, there is a significant risk of rollover from a high to a low interest rate.
- This disclosure should occur in:
(a) term deposit application forms;
(b) Product Disclosure Statements (PDSs) or terms and conditions booklets; and
(c) pre-maturity and post-maturity letters.
- Investors should be made aware of the interest rate that will apply on their new term deposit before it rolls over, so that they have the
longest possible period (the pre-maturity period and the grace period) to intervene if they wish. Investors who would roll over to a low interest rate should be made aware that better interest rates are available from the same ADI for comparable periods.
- These disclosures should be made clearly and in the prematurity communication with investors. Although enclosing interest rate
schedules with pre-maturity letters could potentially achieve this, ASIC considers that investors are more likely to read the actual letter rather than a potentially lengthy and detailed interest rate schedule.
- ADIs should update their term deposit renewal communication so that they clearly disclose the actual or indicative interest rate that will
apply to the new term deposit. Where the interest rate indicated is subject to last minute changes by the ADI, this fact should also be clearly disclosed.
- It is important for investors to have, and be aware of, the grace period that applies when their term deposit rolls over by default. ASIC also considers that the grace period should be of sufficient length to allow the investor to act if they so choose.
It is industry best practice to:
A. tell investors about grace periods at every disclosure point, including PDSs/terms and conditions, pre-maturity and post-maturity letters.
B.provide investors with a grace period no shorter than five business days, with industry best practice at 14 days.
ASIC will conduct a follow up review 12 months after the implementation of its recommendations by ADIs.