A term account is not a term deposit
Can one word really matter when you’re chasing 7% returns? ASIC thinks so.
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In an extraordinary intervention, the corporate regulator, ASIC, recently paused some high interest-bearing products from the much-advertised and popular La Trobe Financial Asset Management.
The target of ASIC’s concern was La Trobe’s 12-month term account and two-year account products. ASIC is concerned the funds suggested investors allocate an inappropriate proportion of their portfolio to the funds, given the risks.
Since then, La Trobe has addressed some of the concerns, resulting in restrictions on some products being lifted. Commentators believe ASIC’s move “set off alarm bells in the private credit sector and shook confidence in the firm”.
It confirms ASIC has stepped up its scrutiny of the sector, focussing on fund transparency, governance, valuation practices, management of conflicts of interest, and fair treatment of investors – which was “conducted as part of its response to Australia’s evolving capital markets”.
ASIC says it acted to protect consumers and retail investors from acquiring products that may not be suitable for their financial objectives, situation, or needs.
The Australian Financial Review (AFR) described La Trobe’s 12-month and two-year funds as being heavily exposed to property, including to borrowers who cannot get finance from major banks. As of August, the 12-month account had $10.5 billion in mortgage investments and $149 million in cash.
Term accounts are not term deposits
ASIC’s concern should also be a concern for retirees chasing higher deposit returns. The regulator warns, “These products (term accounts) are not bank term deposits. The rates of return are not guaranteed and are determined by future revenue of the pool of assets that comprise the account, the investment may also not generate the expected income returns and there are conditions around withdrawals.”
ASIC is looking into the possible confusion for investors who mistake “term account” for “term deposit”. Private credit organisations, such as La Trobe can offer only term accounts not term deposits, which are bank products.
What’s the difference?
Simply, funds in term accounts are not guaranteed, not by the lender or by the government, and while they offer high interest rates, also come with greater market risk. On the other hand, term deposits up to $250,000 offered by financial institutions registered with the Financial Claims Scheme are guaranteed by the government.
According to recent figures, $1.24 trillion is invested in term deposits – the highest monthly total in more than 20 years. Currently, the highest rate for term deposits is between 4% and 5%.
However, term accounts offering up to 7.5% return are increasingly popular with retirees, who either accept the risk or may think they’ve bought a bank-like safe investment product.
Term accounts’ higher returns are achieved by investing in longer-term credit assets, including residential mortgage-backed securities (mortgages) and asset-backed securities, which one commentator told the AFR “are always going to have liquidity management problems when you get a stress event in the economy”.
Marketing of confusion
So, is the use of “term account” versus “term deposit” intentional? Financial researcher Ben Walsh thinks so, telling the AFR the conflation of the phrases is a deliberate marketing ploy.
“The audience is not sufficiently literate to understand the risk-reward trade-off,” he said, adding that “there’s no real, true discussion of risk”.
“They should all be stress tested in the same way that the banks get stress tested,” Mr Walsh said.
While account deposits invest in a mixture of cash, residential mortgage-backed securities, and asset-backed securities and generally disclose in the small print that they carry more risk than term deposits – how much more isn’t usually made obvious until deep into the fine print.
Andrew Stone, an investment fund and private market lawyer, said, “The use of product descriptions and terminology is definitely something that’s on ASIC’s radar again.”
La Trobe does disclose that “term accounts” are not as safe as a term deposit, noting that “an investment in the credit fund is not a bank deposit, and investors risk losing some or all of their principal investment”.
It is the extent to which those disclosures are enough to protect investors is what concerns ASIC.
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