From 1 January 2015 larger banks will be required by APRA Prudential Standard APS 210 Liquidity (APS 210) to impose 31 days’ notice for early withdrawal on term deposits in order to exclude the amounts from liquidity calculations. Background.

ASIC has published Class Order [CO 14/1262] to give relief for 18 months (until 30 June 2017) to enable 31-day notice term deposits of up to five years to be given concessional regulatory treatment as basic deposit products under the Corporations Act.

The new class order will mean that affected term deposits (as defined in the class order) will be treated as basic deposit products, subject to meeting the relief conditions, pending a Government decision on legislative reform.

The definition of basic deposit product in section 761A of the Act does not specify the period of notice an ADI may require a depositor to give in order to make an early withdrawal from a term deposit of up to two years. ASIC’s view is that a notice period as long as 31 days for early withdrawal is unlikely to meet the definition of basic deposit product.

Section 761A of the Act provides that term deposits of between two and five years must allow an early withdrawal without prior notice in order to meet the basic deposit product definition (except for the special provision for mutual ADIs contained in reg 7.1.03A of the Corporations Regulations 2001).

Without relief, term deposits that require a notice period of 31 days for early withdrawal would not be “basic deposit products” and therefore would be subject to additional regulatory requirements under the Act, including:

• a higher level of training standards at the Tier 1 level for persons advising on term deposits under ASIC Regulatory Guide 146: Licensing: Training of financial product advisers; and
• more prescriptive disclosure obligations, including obligations to provide a Product Disclosure statement (PDS) in a recommendation, issue or sale situation and a Statement of Advice (SOA) when advisers provide personal advice to clients about term deposits.

The class order modifies section 1012D of the Act by imposing a requirement in new subsection 1012D(7AB) of the Act that at or before the time an ADI offers to issue an affected term deposit, the ADI discloses the following information to the investor:

• if the depositor requests the funds standing to the credit of the product to be withdrawn or transferred before the last day of the period that the funds are agreed to be deposited – a notice period applies to such requests, the duration of the notice period, and that the ADI has the discretion to delay withdrawal or transfer of the investor’s funds until the end of the notice period (but not beyond the maturity date);
• if the investor has a need to immediately withdraw or transfer funds, other deposit products may be more suitable; and
• if the investor consents to the term deposit rolling over at maturity, it may roll over into a term deposit with a lower interest rate.

The class order also inserts a new subsection 1012D(7AC) of the Act, which imposes the following requirements on affected deposits that apply if the ADI has obtained the investor’s consent for the term deposit to roll over at maturity:

• each time funds are rolled over in accordance with the consent, give the depositor the benefit of a grace period of at least 7 days, during which the depositor can withdraw or transfer the funds standing to the credit of the new product without incurring a fee or incurring a reduction in the return generated for the depositor, which begins on the day of the maturity date of the product or on the following day;
• before each time a term deposit rolls over, the ADI makes pre-maturity contact at least five business days before maturity, and provide the following information and statement, either orally or in writing:
  – if the funds standing to the credit of the product will roll over into a new product which will or may have a lower interest rate – a statement to that effect;
  – if the interest rate that will apply to the new product is known at the time notice is given – that rate;
  – if the interest rate is not known at the time notice is given – information on how and when the depositor can ascertain the interest rate for the new product;
  – a statement that a higher interest rate may be available from the ADI for another basic deposit product with a comparable term;
  – a statement that there will be a grace period, the days on which the grace period will begin and end, and a description of the depositor’s ability to withdraw funds during the grace period;
  – information that if the depositor wishes to withdraw their funds after the grace period, the ADI has the discretion to delay withdrawal or transfer of the funds until the end of a notice period (but not beyond the maturity date for the new product), and that the depositor may incur a fee or a reduction in the return generated for the depositor;
  – a statement that the depositor gave consent for the funds to roll over into the new product; and
• each time a term deposit rolls over the ADI makes post-maturity contact by no later than one business day after the maturity date of the product (or two business days after the maturity date if the maturity date is not a business day) to provide the following information and statements:
  – a statement that the depositor has the benefit of a grace period and details of the days on which the grace period begins and ends;
  – information about the depositor’s rights during the grace period;
  – the interest rate that applies to the new product;
  – a statement that a higher interest rate may be available from the ADI for another basic deposit product with a comparable term;
  – information that if the depositor wishes to withdraw their funds after the grace period, the ADI has the discretion to delay withdrawal or transfer of the funds until the end of the a notice period (but not beyond the maturity date for the new product); and that the depositor may incur a fee or a reduction in the return generated for the depositor; and
  – information about any reduction in the return generated for the depositor and any fees applicable for withdrawal or transfer of funds standing to the credit of the new product after the expiration of the grace period.