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December 2011 |
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MacGillivrays |
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Term Deposits - Redefined |
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An interesting interplay is going on at the present time between APRA and ASIC relating to how Term Deposits issued by authorised deposit taking institutions (ADIs) are treated.
The interplay illustrates how legislation and prudential standards can impact upon and shape the nature and features of retail banking products in the market place.
Under the financial services regime, term deposits issued by authorised deposit taking institutions are defined as “financial products”. To date, term deposits have attracted relief under the financial services regime from many of the disclosure and regulatory requirements by being classed as “basic deposit products”. The advantages of a term deposit being classed as a “basic deposit product” are that:
< staff at banks, credit unions and building societies can sell these products with minimal training requirements (Regulatory Guide 146) < no Product Disclosure Statement (PDS) is required to market these products < term deposits are also exempted from the requirement to give a client a statement of advice (SOA) under the Corporations Act.
The relief granted by ASIC in relation to term deposit products applies where the term deposit has a term of up to five years and where early withdrawal is permitted, even though the ADI may require prior notice of withdrawal and may impose a reduction in the return generated for the depositor.
The legal position of term deposits has been settled for many years.
The global financial crisis has precipitated a raft of reforms to the prudential regulation of ADIs. Reforms are proposed under Basel III, including the imposition of new liquidity standards. Under the proposed Basel III reforms it is recognized that at-call deposits have a greater potential for outflow and therefore more reserves will need to be held in relation to at-call deposits as opposed to term deposits.
Under the Basel III reforms, term deposits will only qualify for preferential treatment if the depositor has no legal right to withdraw the deposit within a thirty day period after giving notice to the ADI requesting withdrawal.
This proposed reform under Basel III is likely to impact upon ASIC’s treatment of term deposits under the financial services regime because to date a shorter and more flexible withdrawal structure has in practice operated with term deposits and their early withdrawal.
ASIC has recently issued consultation paper 169 which deals with this issue and whether the relief to date granted for term deposits ought be extended and if so upon what conditions. Consultation paper 169 titled “Term deposits that are only breakable on 31 days’ notice: Proposals for relief” was issued on 4 November 2011.
What ASIC is considering is to extend their relief granted for term deposits to encompass the new type of term deposit contemplated under the Basel III reforms, but to impose certain new conditions on that relief such as:
< give these term deposits a new product name < require that consumers be given a warning when a term deposit is issued < require a consumer’s express consent before a term deposit is rolled over < require pre-maturity letters to be issued in relation to term deposits < give a statutory grace period on roll over and post-maturity letters for term deposits.
Most likely these proposed reforms will fundamentally change the nature of term deposits and how they are issued, rolled over and redeemed.
It will be interesting to watch how the consultation process develops.
Article by Richard Williams, Partner Banking Services, MacGillivrays Solicitors
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PLEASE NOTE: This article is not legal advice and our comments are of a general nature only. This document is not to be relied on as substitution for proper detailed legal advice. Liability limited by a scheme approved under professional standards legislation.
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