It’s called the Financial Claims Scheme, better known as the government deposit guarantee, and it provides comfort to millions of Australians who hold their savings in deposits with Australian banks, building societies and credit unions (collectively called Australian Deposit-Taking Institutions, or ADIs). Indeed, when the Treasurer, Wayne Swan, announced the revised scheme in September 2011, he wrote:
It will ensure that we continue to have one of the most generous and secure deposit insurance schemes in the world, and builds on the Government’s record of ensuring our financial system remains among the strongest in the world.
But here’s the bothersome fact: the government guarantee on deposits does not apply to deposits offered in public superannuation funds.
Many financial experts and financial advisers are unaware of this, even the highest profile writers who are read by millions, which suggests nobody has corrected them. For example, I enjoy George Cochrane’s column in The Sun-Herald, down-to-earth and practical, but in response to a reader question, George wrote on 18 November 2012, “Looking at term deposits within super funds … term deposits are protected by the government guarantee up to $250,000 per individual per institution and are net of fees.” Sorry, George, not so.
Then the financial commentator with the highest profile of them all, Mark Bouris, in the same newspaper on 9 December 2012, writing about superannuation, said, “Transaction accounts, cash-management accounts, term deposits and accelerated savings accounts are all capital guaranteed by the government up to $250,000 per person. They are all zero-risk.” Sorry, Mark, not when they’re in public super funds.
Advisers and investors are failing to understand the legal structure of public superannuation funds in Australia in the context of the guarantee. All superannuation money must be invested through a trust that complies with the Superannuation Industry (Supervision) Act 1993 (the ‘SIS Act’). A superannuation fund is a trust controlled by a trust deed, and all members of a superannuation trust must be natural persons.
Therein lies the problem for the government guarantee. When an investor chooses a deposit option in a superannuation fund, it is the superannuation fund’s trustee which invests with the bank. The contract is between the bank and the trust, not the bank and the customer, and the trust is a single entity. This is unlike when an investor places a deposit directly with a bank, which it is a contract between the customer and the bank.
The Financial Claims Scheme 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’, making a meaningless contribution to recovering money for an individual depositor if the underlying ADI cannot honour its obligations.
Public superannuation funds should never have allowed this to happen. Their clients are as much ‘natural persons’ as direct bank depositors, and they have left their clients in an inferior credit position, without telling them. They should have lobbied the government to amend it.
Why should this be a concern, when all ADIs are regulated by APRA in accordance with the Banking Act 1959? Well, just because an institution is regulated does not mean it cannot run into severe financial problems. Most people identify the term ‘ADI’ with the major banks, since they control about 80% of the deposit market. But take a look at APRA’s List of ADIs, which includes:
- 18 Australian-owned banks
- 8 foreign subsidiary banks
- 40 branches of foreign banks (to which the Financial Claims Scheme does not apply)
- 9 building societies
- 91 credit unions
The potential for financial difficulties somewhere in these 166 institutions, notwithstanding the best will in the world by the regulator, is obvious. Any one of them could be accepting the investments of a public superannuation fund.
Most super members are probably assuming they have a full government guarantee if their own deposits are less than $250,000. You can expect that if one of these ADIs were unable to meet its obligations, and a financial adviser had placed client money into a deposit in a superannuation fund with exposure to that ADI, action against the adviser would follow for not knowing the operation of the Financial Claims Scheme.
In fact, Wayne Swan himself would probably be on shaky ground because his press release said the Financial Claims Scheme covered, “$250,000 per person per institution to protect the savings held in around 99 per cent of Australian deposit accounts in full.” The actual definition is not ‘per person’ but ‘per entity’, and this would be critical in a financial crisis.
So how do financial institutions offering both direct bank deposits and deposits in super funds handle this complex communication to customers? The simple answer is, in effect, they don’t.
For the best example, take a look at ING Direct, which offers all its products on one home page. It even has a home page notice, “For information about the Australian Government Deposit Guarantee, click here.” This click takes a client through to a full page on how the guarantee works, all the bank accounts it applies to, and a large FAQ section. Wonderful stuff for a well-informed investor, but no mention that it only applies to direct deposits with the bank.
Now click from the same home page to their new Living Super product, a high profile and impressive move into retail superannuation. Not one word can be found on the government guarantee, even though cash and term deposits are an important part of the product range.
Why is this? Because the guarantee does not apply to the super deposits, but like most financial institutions, ING does not let its super customers know.
It’s surprising the regulator, APRA, does not issue a clarifying statement, and the public superannuation industry does not lobby for a change. Or are they both hoping the issue will stay buried?
The application of the guarantee is yet another free kick for SMSFs, which can invest directly into bank deposits, and as the fund is a single entity, gain protection for the full $250,000 ‘per entity per institution’.