Deposits greater than $1 million at risk
Fixed-interest specialist FIIG Securities has warned bank and credit union depositors with more than $1 million in deposits that they must access the Federal Government’s new deposit guarantee or put themselves in a riskier situation.
FIIG head of research Justin McCarthy said under rules that will take effect from November 28, 2008, depositors with more than $1 million who reject the guarantee in order to avoid paying a fee will be exposed to a new level of risk.
“In a liquidation scenario, non-guaranteed depositors are effectively subordinated by a new class creditor — the Federal Government — which will recoup amounts it pays out under the guarantee before ordinary depositors are able to claim any remaining money,” McCarthy said.
“This has the potential to lower recovery rates for non-guaranteed deposit holders in the case of an institution’s failure compared to what they would have received before the guarantee was introduced.”
McCarthy said by introducing the guarantee, the Government had “created a dilemma for large depositors who can either accept a lower level of security or receive a lower return than smaller depositors”.
McCarthy said the answer for investors seeking the security of the guarantee without the additional charge was to split larger sums into units of less than $1 million and deposit them in different institutions.
Under the new Federal Government deposit guarantee, deposits of up to $1 million per investor in each institution will be government guaranteed at no charge until October 2011.
Deposits of more than $1 million can still be guaranteed by the Federal Government but only if the institution pays a fee, which is likely to be passed onto the customer, resulting in deposits of more than $1 million earning a lower return than deposits of less than $1 million.
FIIG’s online portal is offering a service called Guaranteed Deposit Solution (GDS), which aims to help depositors split their savings between fixed deposits in different institutions.
AUTHOR
Mike Taylor
Recommended for you
Licensing regulation should prioritise consumer outcomes over institutional convenience, according to Assured Support, and the compliance firm has suggested an alternative framework to the “licensed and self-licensed” model.
The chair of the Platinum Capital listed investment company admits the vehicle “is at a crossroads” in its 31-year history, with both L1 Capital and Wilson Asset Management bidding to take over its investment management.
AMP has settled on two court proceedings: one class action which affected superannuation members and a second regarding insurer policies.
With a large group of advisers expecting to exit before the 2026 education deadline, an industry expert shares how these practices can best prepare themselves for sale to compete in a “buyer’s market”.
