The Australian Securities and Investments Commission (ASIC) said there has been a surge in the advertisement of certain fixed-term, fixed-income products that liken themselves to term deposits, but aren't.
According to ASIC, it is monitoring the marketing of these products as ‘alternatives’ or ‘substitutes’ to term deposits, and said such products can be much riskier than a standard term deposit.
Term deposits are a basic low-risk investment product, where you deposit a lump sum of money in a financial institution for a set term in exchange for a fixed rate of interest.
Term deposits are considered low-risk because:
- They are protected by the Government’s Financial Claims Scheme, (the Government guarantee), which guarantees $250,000 in the event of a bank's collapse
- The ability of banks to honour their commitments to depositors is actively supervised and monitored by APRA (The Australian Prudential Regulation Authority)
In Australia, term deposits can be issued only by authorised deposit-taking institutions, aka banks, which is a key point of difference between term deposits and other non-deposit products.
The table below features term deposits with some of the highest interest rates on the market for a six-month term.
Some of the investment products advertised as comparable to term deposits often have concentrated portfolios of higher-risk assets, and ASIC recognises that many people are seeking products that give higher returns at a time of low interest rates and market volatility, partly brought on by COVID-19.
The announcement also comes shortly after ASIC revealed significantly more people were turning to risky day trading on the stock market in order to earn a larger return on investment quickly.
ASIC Deputy Chair Karen Chester said products that advertise higher returns are more than likely to not be term deposits.
"In the current uncertain and volatile markets, higher risk investment products are, more than ever, not for everyone. Especially for smaller investors, be they retail or wholesale, when they are not investing as part of a diversified portfolio," Ms Chester said.
“Be wary of investments that claim to be ‘like’ a ‘term deposit’. Products spruiking even a two or three percentage point higher return than a term deposit represent significantly higher risk.
"We are also seeing products offering only marginally higher returns with much higher risk profiles.”
According to Savings.com.au's list of some of highest term deposit rates, most of the highest rates for terms ranging from six months to five years are around 1.90%-2.00%.
A product advertising returns that are two or three percentage points above this rate would be in the 4%-5% range, and are unlikely to be a term deposit.
"Investment products marketed to consumers should be ‘true to label’," Ms Chester said.
"Products should not be marketed as having features like low risk of loss, regular returns or easy access to withdrawals unless the product issuer has reasonable grounds to believe they have and will continue to have such features through the economic cycles.
“When choosing an investment product, carefully assess if the product is appropriate for your circumstances, particularly when comparing relatively low-risk products such as bank term deposits with other higher return and thus higher risk investments.
"If in doubt, seek independent financial advice."
Denise Raward
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