Term Deposits !

The Commonwealth bank has sent a curious letter to all it's customers who have money invested in the form of a term deposit with them.   It gives notice of new banking regulations that came into force on December 8, 2014 under which those people wishing to make an early withdrawal must give the bank thirty-one days notice.

A term deposit takes the form of an offer by the bank for a certain amount of interest to be paid on an agreed sum of money left with the bank for the nominated period of time.  At the expiration of such terms, it is usual for the account holder to contact the bank and peruse the varying offers of interest rates that apply to differing deposit periods and make a fresh renewal choice - or withdraw the funds.

Early withdrawals have in the past been a matter of negotiation with the bank.  The length of time the deposit is held is regarded as a contract and some banks readily allow early withdrawal, but either reduce or entirely cancel the interest earned as the penalty for breach of contract.  At lot depends on the circumstances for the early withdrawal request.   In the event of the death of the depositor, some banks waive penalties to allow the settlement of the deceased estate to be concluded promptly.

This new banking regulation seems designed to lock in funds and make those needing to vary a term deposit wait a minimum of thirty-one days before they can access their money - and it makes no mention of what penalty may apply for an early withdrawal.   The money market is volatile and it may be that this new regulation is mainly aimed at the big end of town, hedge funds and major investors who are prepared to forego short term interest loss to enable their investment to take a new direction.   This measure will certainly give the banks more direct control of their liquidity.

Term deposits are a sore point with many bank customers.   When the term is nearing expiration they usually receive a letter from the bank which gives them seven days notice each side of the termination date to renew or withdraw funds.   It advises that if no instruction is forthcoming, the capital will be reinvested for the same time term as the original investment - and nominates an interest rate that will be paid.

Invariably, this interest rate is on the lower end of the scale offering, and often they have the temerity to offer differing interest rates for exactly the same term and scale, but each with a differing name applied to the offer.   A customer taking the trouble to call at the bank and discuss what is offering can usually obtain a better interest than contained in the bank's letter.

This is a ploy that is common across the entire financial spectrum - banks, building societies and credit unions.    That letter of automatic renewal disregards the claim that such institutions are always "working in their customer's interest ".   The unwary will find that the proposal for automatic renewal will be very much in the lenders favour.

At this stage, the new regulation only applies to those seeking early withdrawal before the term maturity date.   Some will wonder how long before the banks require thirty-one days notice of intention to withdraw - before the actual term comes to an end !