ASIC has released a report that highlights improved industry practice and better outcomes for investors in relation to the automatic rollover of term deposits. The report reveals that consumer outcomes on rollovers of term deposits have improved by billions of dollars.
ASIC Report 353: Further review of term deposits (REP 353) follows an earlier review and report ASIC released in February 2010, Report 185: Review of term deposits (REP 185), that found aspects of disclosure that were of concern to ASIC (refer 10-37AD).
The key risk for investors is that at the end of the term, their term deposit can roll over automatically from a high interest rate to a much lower interest rate. This is a result of the combination of the practice of dual pricing by authorised deposit-taking institutions (ADIs) and the automatic rollover of term deposits. Dual pricing is when ADIs promote their term deposits by advertising the high rates available on a limited number of term deposit periods, while maintaining significantly lower rates for all other deposit periods.
REP 353 found:
- The eight ADIs reviewed have generally implemented ASIC’s recommendations to improve disclosure. All eight now disclose the risk of dual pricing in terms and conditions documents and in at least one mode of investor communications. All eight also disclose the existence of grace periods in pre-maturity and/or post-maturity letters, and most also tell investors the actual or indicative interest rate that will apply to their new term deposit before it rolls over
- ADIs still use dual pricing so the risk of rolling over into a low interest rate remains. However, now, more of the available terms (one month, two months etc) have high interest rates applicable, so even on an automatic rollover, the risk of rolling into a low rate is reduced
- there were fewer default rollovers from ‘high’ to ‘low’ interest rates. In the 7 months of the review, 11% of default rollovers involving a total of $1.9 billion rolled into low interest rate deposits. In our earlier review, which covered a 14 month period, 47% of default rollovers, involving $7.88 billion rolled into low rate deposits, and
- investors made significant use of grace periods with a total of $97 billion of investors’ funds being re-lodged or cancelled during the grace periods which are available and are now better disclosed.
Deputy Chairman Peter Kell welcomed the fact that industry has largely adopted ASIC’s recommendations whilst noting the need for continued monitoring of the effectiveness of the disclosures being made.
‘It is essential that investors are provided with timely information about the risks and the return they will get if they let their deposit rollover’.
Mr Kell also highlighted the need for ongoing vigilance by investors using term deposits.
‘While term deposits are generally a safe, low-risk investment, they should not be a set-and-forget investment, and investors should still shop around to see what other rates are available’.
ASIC will continue to monitor the term deposit market to encourage further improvements to disclosure, including by ADIs which did not participate in our review.
ASIC made recommendations in REP 185 designed to address ADIs improving their disclosure to investors about the risk of dual pricing and about what will happen when their term deposit matures.
Standard industry practice is for term deposits to rollover automatically on maturity meaning that in the absence of instructions from the investor they are renewed for the same term on a default basis.
Of ADI’s using dual pricing, the ADI with the greatest disparity between its high and low rates had an average difference of 339 basis points during the period of the review. The ADI with the smallest difference between its high and low rates had an average difference of 57 basis points.
A grace period is a short period of time after rollover, during which an investor can cancel the new term deposit or change to a different one without charge. They generally range between 5 business and 14 calendar days.