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Banks save millions over fine print

Deposit investors could be missing out on thousands of dollars, with term deposits automatically rolling over to lower interest rates at the end of the term.

Australia’s banks have been put on notice by the Australian Securities and Investment Commission (ASIC), that despite improvements in advising customers of rollovers from high to lower rates, they still need to be more upfront on the fine print with customers. The regulator conducted a six month review in 2011, revisiting its 2009 review and recommendations, and has just released the report.

While banks had improved, ASIC still found that investors may not be conscious of the change to a lower interest rate, because of missing or limited disclosure in customer communications.

ASIC also said it was concerned about the banks’ practice of promoting their term deposits by actively advertising the higher interest rates available on selected term deposits, while maintaining lower interest rates for other deposit terms. The practise is known as dual pricing, and is frowned upon by ASIC, with significant differences between the high and low interest rates.

Our big four banks, ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corporation (ASX:WBC) are in the midst of a deposit war, as they attempt to source more of their funding from depositors.

At the same time, they have acknowledged that deposits are a high cost source of funding compared to wholesale markets, so attempt to lure customers with a high promotional interest rate for a short-term period. The interest rate can drop down to a lower rate at the end of the term, when it gets rolled over at the prevailing interest rate, unless the customer specifically advises the bank what to do with it.

Foolish takeaway

The onus is on investors to make their money work hard. Leaving it to the bank could see you missing out on hundreds or thousands of dollars of income.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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