What's a debenture? You've probably seen ads for products offering interest rates that are much more attractive than your standard bank account or term deposit. Not all of them are for debentures but many are.

A debenture is simply a debt investment. By buying the debenture you are lending money to the issuer for a specified term and interest rate. So like any other lender, you want to know who is borrowing your money and what the odds are of them meeting their obligations. Despite the fact that debentures are often promoted as safe investments, their recent track record has been woeful. Over the 18 months to September, 15 issuers managing more than $900 million of investors' money were placed in external administration, according to the Australian Securities and Investments Commission. Most investors are expected to get some of their money back but that's hardly a ringing endorsement.

Investors are voting with their feet. Since June 2006, ASIC estimates the money invested in debentures has more than halved. But the regulator estimates debenture investments were still close to $17 billion last December, with about $4.6 billion invested in unlisted, unrated debentures (arguably the riskiest) in September. ASIC released its second review of this part of the market last month and found that while retail investors were being told more about the true nature of these investments, investor protections need further strengthening.

Why are those debentures more risky than others? Because they do not carry a credit rating (for what it's worth) and are not subjected to the scrutiny of the listed market, there is greater potential for investors to be misinformed or under-informed about the risks of unlisted, unrated debentures. You're also relying on the issuer to give your money back as you can't trade the investment on an external market if you want to get out.

That's not to say that you shouldn't still take the time to understand the risks of listed, rated debentures but extra care should be taken with the riskier offers.

So what should I look out for? First up, don't take those attractive ads as gospel. ASIC reveals it took regulatory action against 11 issuers due to concerns about their ads. Further issuers were given a gentle "reminder" about ASIC's advertising policy. As with any managed investment, if you're considering investing in a debenture, you should get a copy of the latest product disclosure statement and find out who the issuer is and where your money is going.

As a result of earlier changes, ASIC now requires issuers of unrated, unlisted debentures to disclose information against eight benchmarks such as the level of equity capital (the minimum standard is 20 per cent for property development and 8 per cent for other lending), liquidity, rollovers (what happens at the end of the investment term) and the existence and terms of any credit ratings. If the issuer lends your money on to other parties, it must meet minimum disclosure standards on the diversity of loans in the portfolio and any dealings with related parties. If the issuer is involved in property lending or uses your money to invest in property, it must also disclose the nature of valuations and loan-to-valuation ratios. If lenders don't meet the minimum disclosure standards, they must state why not.

In its latest review, ASIC found that while a higher proportion of issuers were now meeting the benchmarks, the level of compliance with some benchmarks was still below par. Tellingly, there had been a lower level of compliance with the equity capital, liquidity, valuations and lending principles benchmarks among issuers who have gone into administration. In September, all issuers were meeting the disclosure requirements on rollovers and related party transactions but only 60 per cent were meeting the requirements on equity capital exposure, 69 per cent on lending principles, 28 per cent on valuations and 3 per cent on credit ratings.

ASIC has produced a booklet, Investing in Debentures, which explains what to look for in the benchmark disclosure in more detail. ASIC has asked debenture issuers to help distribute the guide but not all do. You can download a copy at fido.gov.au.