Term Deposits: Consumers better off by billions

9 July 2013

Consumers Better Off

According to a report released by ASIC recently (REP 353: Further review of term deposits), consumer outcomes in relation to rollovers of term deposits have improved by billions of dollars over the past three years.

The report is a follow-up to an initial review of term deposits report that was released in February 2010 and which addresses the issues around the marketing and disclosure of term deposit rates and dual pricing as it relates to automatic rollover of money upon maturity.

Automatic rollover (or automatic renewal) of term deposits can be a common pitfall for term deposit investors. It is standard industry practice and occurs when a term deposit matures and the investor has not provided the financial institution with any further investment instructions in relation to the money. In this case the term deposit may be automatically renewed, possibly onto a less-competitive interest rate. In fact the original ASIC report in 2010 found that of the financial institutions reviewed, there was a high level of default rollovers (a weighted average of 47%) from high interest rates to low interest rates.

The situation has improved

ASIC?s new report has found significant industry improvements over the three year period. While automatic rollover and dual pricing is still industry practice, the surveyed financial institutions have improved disclosure of these risks to clients. All of the surveyed institutions also disclose the existence of grace periods (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). As a result:

  • The proportion of term deposit rollover from a ?high? to ?low? interest rate has reduced from 47% over the time of the first review to 11% over the time of the second review
  • The number of average rollovers per term deposit has reduced from 5 to 3.5
  • Investors made significant use of grace periods during the second review period, 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.

According to APRA statistics, term deposits enjoy continued popularity among investors and are a $700 billion market for our financial institutions. Small differences in the rate on offer can, therefore, lead to large differences in overall profit. As an investor, make sure that you are getting a great value return. Know when your term deposit will fall due and shop around for a good rate beforehand.

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