TD rollover practices may mislead

John Kavanagh
The Australian Securities and Investments Commission has called on approved deposit taking institutions to review their term deposit advertising in light of what it described as a dual pricing strategy being followed by some institutions.

In a review of the term deposit market published yesterday, ASIC reported that it found some ADIs promote their term deposits by actively advertising the higher interest rates available on one or two terms, their headline rates, while maintaining lower interest rates for all other terms.

The terms for which higher interest rates are offered and advertised change on a regular basis. "Non-headline" TD rates were usually lower than at-call rates.

Because term deposits can roll over on a default basis, ASIC's view is that this dual pricing practice would appear to create a risk that a term deposit could roll over automatically from a higher interest rate to a lower interest rate, without the investor being conscious of the change.

ASIC has raised the prospect of automatic rollovers going into at-call accounts rather than new terms as a way of avoiding investors ending up in low rate deposits.

During the period of the review, May and June last year, ASIC found that banks had a 42 per cent differential between their high and low rates and mutuals had an 18 per cent differential.

Low rates were, on average, lower than at-call rates offered by the same institution.

In many cases, there was no apparent correlation between movements in the 90-day bank bill swap rate and 90-day term deposit interest rates.

ASIC found that a significant proportion of term deposits rolled over from high interest rates to low rates, although this varied from one institution to another.

None of the ADIs reviewed disclose the existence of dual pricing to their customers or the risk of rolling over at a lower interest rate.

Among the review's recommendations, ASIC said: "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."

It also recommended that ADIs make proper disclosure of their pricing and that investors are given early notice of the rate that will apply if they roll over. Investors should be informed if better rates are available other than for the rollover term.

ASIC also wants ADIs to make their investors aware of the grace period that applies to a rollover, allowing them to change their investment  decision.  

The grace period should be a minimum of five days but ASIC said industry best practice was 14 days.