D’Aloisio shelved CBA term- inquiry

The Australian 12:00am January 8, 2018

Ben Butler

The corporate watchdog put a four-year investigation into a ­billion-dollar term deposit scam allegedly perpetrated by Com­monwealth Bank and other banks “on hold” awaiting a decision by then chairman Tony D’Aloisio before killing it completely, internal Australian Securities & Investments Commis­sion documents show.

ASIC killed the investigation in March 2010 despite officers fearing term deposit customers were having their interest rates “approximately halved”, according to the documents, obtained by The Australian under Freedom of Information laws.

As The Australian has previously revealed, in October 2006 ASIC launched an investigation into whether CBA was properly informing customers they would receive a much lower rate if they allowed their term deposits to roll over.

Because ASIC took no action against CBA, other banks allegedly followed suit in failing to properly disclose rollover rates, leading to consumer detriment estimated at as much as $1 billion over five years.

ASIC’s concerns peaked in 2008, as a meltdown on equities markets sparked by the global financial crisis prompted investors to flee to the perceived safety of fixed-interest investments including term deposits.

However, one of the documents obtained under FOI confirms The Australian’s previous reporting that ASIC received its first complaints about CBA’s failure to properly disclose rollover rates in 2005.

The document, a “no further action report” dated March 2, 2010, records the current status of the investigation as “on hold pending direction from chairman”. Mr D’Aloisio, who is now the chairman of financial services group Perpetual, said questions about the fate of the investigation were for ASIC, but “as it was on my watch, as the then chairman, I accept responsibility”.

“The unacceptable industry practices on term deposits which you cover in your articles were publicly disclosed at the time and stopped,” he told The Australian.

“This was a regulatory outcome which did not involve the risk and cost of litigation.”

He contrasted this approach with the one ASIC took against banks involved in the Storm Financial debacle, a financial planning scandal that cost thousands of investors about $3bn.

“On the other hand at that time a regulatory outcome on Storm Financial could not be achieved without the risk and cost of litigation and actions that were taken against the banks, including the CBA.”

ASIC declined to comment and CBA has denied wrongdoing.

The Australian first requested the documents detailed today — the report closing the investigation and a file note opening it — along with other documents on July 3 last year.

Under FOI law a decision about whether to release documents is ordinarily supposed to take less than a month, but the release of the file notes was repeatedly delayed because of objections from CBA and an unnamed “former employee”.

After losing their bids to stifle release of the documents at an internal ASIC review, the bank and the employee had until last week to ask either the Information Commissioner or the Administrative Appeals Tribunal to overturn the decision.

After neither did so, ASIC released the documents to The Australian.

According to the no-further-action report, the complaints ASIC received in 2005 “related to the manner in which CBA set interest rates for term deposits that are rolled over or renewed at the expiry of the initial term”.

“If the customer allows their term deposit to automatically renew for the same term, the deposit will drop down from a ‘headline’ interest rate to a ‘non-headline’ interest rate.

“There is a significant difference between these rates.”

It shows that ASIC’s concerns focused on a letter CBA sent term-deposit customers towards the end of their terms that said if the bank did not hear from them it would renew the deposit “at the rate which applies on the day of maturity of that term”.

This in turn referred to a line in the CBA term-deposit product disclosure statement that said market rates “may vary from time to time”.

“This statement may lead the customer to believe that the interest rate on their term deposit may, should it renew automatically, vary slightly, just as interest rates on loans such as mortgages vary slightly, from time to time,” ASIC said in the report.

“In reality, when a passive rollover occurs, the interest rate is approximately halved.”

After killing the investigation, ASIC put out a report, based on a survey of lenders, drawing attention to the practice across the industry. A follow-up report released in 2013 found industry practices had improved.