The government guarantee on deposits seems to have been around forever, but it finally cleared its last legislative hurdle on 18 September 2014. The so-called Financial Claims Scheme (FCS) was introduced during the GFC in 2008, but the list of ‘protected accounts’ covered by the guarantee was formally regulated only a few weeks ago in the Banking Amendment (Financial Claims Scheme) Regulation 2014. It’s worth knowing which types of accounts are not covered, including accounts at a foreign branch of an Approved Deposit-Taking Institution (ADI) and foreign branches of Australian ADIs.
For completeness, the protected accounts include: savings, at call, cash management, cheque, current, debit cards, farm management, first home saver, mortgage offsets, pensioner deeming, term deposit, transaction accounts and trustee accounts.
Last week APRA also released a revised FAQ summary on technical issues. It includes Section 5, which states:
“Are products marketed as superannuation or retirement products, such as accounts held by SMSFs, protected products?
If a product, which is used for superannuation purposes, satisfies the definition of a protected product account, it is covered under the Financial Claims Scheme … the definition does not depend on what the account is used for, provided it has the legal features of a protected account.”
So that sounds fine for superannuation, but there is a point most commentators are missing.
Lack of coverage of most superannuation deposits
A number of articles on the FCS have appeared in recent weeks making statements such as, “All deposits with Australian ADIs up to $250,000 are covered.” One article then went on to say all term deposits and government bonds are exactly the same credit risk since the government backs both. In seeking the best deal, investors should just find the best rate from an ADI for any particular maturity.
Depositors believe this means that if they place up to $250,000 in a bank (or any ADI) deposit in a public super fund, they will be protected for the full amount. This is incorrect, and here is why.
(This point has been explained in more detail in Cuffelinks previously here, but it is repeated because of the recent passing of the legislation and the incorrect interpretation in other places).
All superannuation money must be invested through a trust that complies with the Superannuation Industry (Supervision) Act 1993. A superannuation fund is a trust controlled by a trust deed. When an investor chooses a deposit option in a superannuation fund, it is the superannuation fund’s trustee which invests with the bank (or ADI). The contract is between the bank and the trust, not the bank and the customer (the ‘natural person’), and the trust is a single entity. This is unlike when an investor places a deposit directly with a bank, which is a contract between the customer and the bank.
The FCS applies per account holder per ADI. An account holder is defined as an entity, and both trusts and superannuation funds are entities. Therefore, the $250,000 cap applies to the entire trust, which might have several billion dollars of ‘deposits’ in a single trust. A recovery of $250,000 under the guarantee may make a meaningless contribution to recovering money for an individual depositor if the underlying ADI cannot honour its obligations. The deposit is not effectively covered by the government guarantee.
In other words, there is no ‘look through’ from the trust to the end investor.
This can have important consequences. Any depositor placing $250,000 into a deposit with a public super fund should know which ADI the money is then placed with. If it is a second-tier ADI, the security may not be as good as the investor expects, and there may be little protection from the government guarantee, notwithstanding the super fund placed the money with an ADI.
In fact, if you check the website of various financial institutions, you will find much fanfare about the government guarantee on ‘normal’ deposits, but no mention of it for deposits in their super fund offerings.
One day, money will be lost in a super fund deposit
The full implications of this difference will only be felt when an ADI is unable to honour its obligations and the government covers the bank deposits but not the superannuation deposits. To make matters worse for public super funds, SMSFs can access the full $250,000 per ADI.
Graham Hand was General Manager, Capital Markets at Commonwealth Bank; Deputy Treasurer at State Bank of NSW; Managing Director Treasury at NatWest Markets and General Manager, Funding & Alliances at Colonial First State. Comments are for general purposes and not personal financial advice.