ASIC gives relief on TDs

The Australian Securities and Investments Commission has issued a class order giving issuers of term deposit products requiring 31 days' notice for early withdrawal relief from a provision of the Corporations Act that would have meant their TDs could not be classified as "basic deposit products".

Around 20 authorised deposit-taking institutions changed the conditions of their term deposit products late last year and early this year, requiring depositors to give 31 days' notice if they wish get their cash out before the maturity date.

The change was in response to the introduction of a new liquidity coverage ratio requirement at the start of the year. Under the new LCR rule, ADIs must maintain an adequate level of high-quality liquid assets that can be converted into cash to meet liquidity needs for 30 days.

To determine the appropriate LCR, banks must estimate their net cash outflow over 30 days under stressed conditions, with higher runoff rates to apply to less stable deposits. Retail deposits are divided into "stable" and "less stable" portfolios.

The Australian Prudential Regulation Authority's liquidity standard (APS 210) says: "Cash outflows related to fixed or term deposits with a residual maturity or withdrawal notice period of greater than 30 days will be excluded from LCR calculations if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR."

This condition has pushed ADIs to target deposits that can't be withdrawn before 31 days.

The catch is that, under the Corporations Act, a basic deposit product must allow for early withdrawal by the depositor. ASIC's view is that a notice period of 31 days for early withdrawal would be unlikely to meet the definition of a basic deposit product.

Products that fall outside that classification are subject to more onerous requirements, including a higher level of training for staff advising on products, the obligation to provide a product disclosure statement and a statement of advice.

One consequence of TDs falling outside the basic product classification is that bank staff advising customers on them would have to be included on the Register of Financial Advisers.

Last year ASIC issued a "no-action" letter to the Australian Bankers Association for distribution to its members and now it has issued a class order giving relief, so that term deposits with 31-day notice periods will be treated as basic products.

The relief is for 18 months. ASIC said: "The temporary period is intended to give the Government the opportunity to consider legislative reform to clarify the meaning of basic deposit product as defined under the Act, as it applies to 31-day notice term deposits."

ASIC has also added some consumer protection. Its concern is that investors may put money in a term deposit or allow a TD to roll over without being aware of the 31-day notice period.

Depositors will have a seven-day grace period after a rollover, during which they can withdraw or transfer the funds to a different product without incurring a fee or a reduction in the return.