Bank alerts save clients billions
The Australian Securities and Investments Commission has released a report on the industry after a seven-month review in 2011. It focuses on the use by banks and mutuals of term deposits that automatically roll over on maturity, and "dual-pricing" marketing strategies to attract customers.
"Dual pricing" is when a bank promotes its term deposits by advertising the high rates available on a small number of term deposit periods, while maintaining much lower rates for all other deposit periods.
ASIC says a 2009 review of the industry found 47 per cent of term deposits automatically rolled over to much lower interest rates, worth an average $560 million a month.
But in the recent review - which took place after banks started disclosing the risks of dual pricing - only 11 per cent of term deposits automatically rolled over, worth $270 million a month. That means customers have saved at least $2.03 billion since they were made aware of the risks, the ASIC report implies. "This monthly rate provides a general indication of the change," an ASIC spokesman said.
The report comes as the corporate watchdog prepares to face a Senate inquiry after revelations in Fairfax Media that it took it 16 months to act on information from whistleblowers about serious misconduct inside the financial planning unit of Commonwealth Bank. Last month, Senator Doug Cameron said the inquiry would investigate a range of issues including financial planners, the Commonwealth Bank and ASIC.
The ASIC report reviewed eight deposit-taking institutions and found the situation had generally improved after they began disclosing the risks of dual pricing. It says customers have taken advantage of better advertised "grace periods".
But it also found problems remained with the way some banks were advertising term deposits.
"Some banks and mutuals conducted mail-out campaigns to existing 'selected' customers, advertising term deposits at 'special' rates or as a 'special' or 'exclusive' offer," the report says. "This may be misleading if the offered rates are generally available."
Frequently Asked Questions about this Article…
ASIC's review found that after banks began disclosing the risks of automatic rollovers and dual pricing, the proportion of term deposits that automatically rolled over to much lower rates fell from 47% (in a 2009 review) to 11% in the recent review. The 2009 figure was worth about $560 million a month; the recent figure about $270 million a month. ASIC's calculations imply customers have saved at least $2.03 billion since those risks were made clear.
Dual pricing is when a bank advertises high interest rates on a small number of term deposit periods while keeping much lower rates for all other periods. It matters because customers attracted by advertised high rates can end up on lower rates if they take different deposit terms or if deposits roll over, so investors should check the specific terms being promoted.
An automatic rollover means a term deposit is reinvested at maturity without the customer taking action. If the rollover rate is much lower than the original advertised rate, the investor's interest income falls. ASIC highlighted that many customers were previously rolled over to much lower rates until banks began disclosing that risk.
Yes. ASIC's report found the situation generally improved after banks and mutuals began disclosing the risks of dual pricing. Fewer term deposits were automatically rolled over to lower rates, and customers made greater use of better advertised 'grace periods'.
ASIC noted that some banks and mutuals ran mail-out campaigns to selected existing customers advertising term deposits at 'special', 'exclusive' or 'special rates'. This may be misleading if those offered rates are actually generally available to a wider customer base.
ASIC reviewed eight deposit-taking institutions in a seven-month review. The focus was on the use of term deposits that automatically roll over on maturity and on 'dual-pricing' marketing strategies used by banks and mutuals to attract customers.
The report was released as ASIC prepared to face a Senate inquiry triggered by Fairfax Media revelations that it took 16 months to act on whistleblower information about alleged misconduct inside the Commonwealth Bank's financial planning unit. Senator Doug Cameron said the inquiry would investigate issues including financial planners, the Commonwealth Bank and ASIC.
Check the exact term and rate being advertised (not just headline rates), confirm whether advertised rates apply broadly or only to selected terms or customers, look for disclosure about automatic rollovers and the rate that will apply at maturity, and note any grace periods or special offers that allow you to withdraw or change terms without being locked into a lower rollover rate.
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