This article by David Jacobson was first published in Retail Banking Review.
Did you know that ASIC monitors online, print, TV and radio ads as well as seminars promoting financial products?
The information ASIC gathers is included in its research reports and if ASIC identifies a breach of the law or a potential breach it will pursue this with the promoter. ASIC has extensive investigatory powers if a company does not co-operate.
ASIC can either prosecute breaches or accept an enforceable undertaking from a company to comply with the law and, when relevant, to refund money to or compensate consumers. Occasionally a genuine dispute will come before the courts. ASIC’s powers are separate from a consumer’s rights.
Changes from 1 July 2010
On 1 July 2010 ASIC became both the national regulator for consumer credit (under the National Credit Code) as well as the supervisor for an expanded financial services consumer protection scheme (under the ASIC Act).
These roles are in addition to its existing duties as the financial services regulator for deposit-taking facilities and other financial products and securities markets.
ASIC’s role includes enforcing prohibitions on misleading representations, unconscionable conduct and misleading or deceptive conduct in relation to all financial services, including deposit and credit products.
Its duties involve monitoring how financial service providers market and disclose their product terms as well as ensuring that fees are calculated in accordance with contracts and are not unfair.
Examples of ASIC’s activities can be found in its report on term deposits and its proposals in respect of mortgage exit fees.
Review of term deposits
ASIC’s review of term deposits published in March 2010 looked at the period 1 January 2008 to 27 February 2009 and covered eight authorised deposit-taking institutions (ADIs) holding over 80 per cent of Australia’s total term deposits.
ASIC’s review found that seven out of the eight ADIs reviewed promoted their term deposits by advertising only the highest term deposit rates, while maintaining lower rates for all other deposit periods. The periods on which the advertised higher rates were offered varied over time.
In ASIC’s opinion, this ‘dual pricing’ coupled with the potential for term deposits to rollover by default if the investor does not take action, creates a risk that a retail investor could nadvertently end up in a much lower interest term deposit.
ASIC’s report contains recommendations for improvements to advertising, disclosure of interest rates and grace periods designed to maximise the disclosure to investors about what happens when their term deposit matures.
The recommendations are:
1. 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.
2. ADIs that have high and low term deposit interest rates should review their disclosure documents to ensure that there is clear and effective disclosure that:
A. dual pricing exists; and
B. because term deposits have the ability to roll over automatically without the investor taking active steps, there is a significant risk of rollover from a high to a low interest rate.
This disclosure should occur in term deposit application forms, Product Disclosure Statements (PDSs) or terms and conditions booklets and pre-maturity and post-maturity letters.
3. Investors should be made aware of the interest rate that will apply on their new term deposit before it rolls over, so that they have the longest possible period (the pre-maturity period and the grace period) to intervene if they wish. Investors who would roll over to a low interest rate should be made aware that better interest rates are available from the same ADI for comparable periods.
4. These disclosures should be made clearly and in the prematurity communication with investors. Although enclosing interest rate schedules with pre-maturity letters could potentially achieve this, ASIC considers that investors are more likely to read the actual letter rather than a potentially lengthy and detailed interest rate schedule.
5. ADIs should update their term deposit renewal communication so that they clearly disclose the actual or indicative interest rate that will apply to the new term deposit. Where the interest rate indicated is subject to last minute changes by the ADI, this fact should also be clearly disclosed.
6. It is important for investors to have, and be aware of, the grace period that applies when their term deposit rolls over by default. ASIC also considers that the grace period should be of sufficient length to allow the investor to act if they so choose.
According to ASIC, it is industry best practice to provide investors with a grace period no shorter than five business days, with industry best practice at 14 days.
Mortgage early exit fees
ASIC previously reviewed mortgage entry and exit fees in April 2008. With extended powers from July 2010 it recently made clear in its June2010 consultation paper that its interpretation of “unfairness” is wider than its investigation scope.
ASIC considers that a contractual term providing for an early exit fee which is unconscionable under the Code is likely to also be unfair under the ASIC Act. However, its opinion is that it does not necessarily follow that a fee that is not unconscionable will be fair for the purposes of the ASIC Act, as the relevant tests under the Code and ASIC Act are different.
