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JPMorgan & Others Face Probe Over Interest in Cash Sweep Accounts
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The legal scrutiny of how banks and brokerages treat their customers during high interest rates intensifies as the phase is drawing to a close. Many large U.S. banks are accused of deceiving clients to make profits of billions of dollars.
JPMorgan & Chase (JPM - Free Report) , Raymond James (RJF - Free Report) , Morgan Stanley (MS - Free Report) , Wells Fargo (WFC - Free Report) and a few other banks and brokerage firms were sued for transferring clients' idle funds into sweep accounts with near-zero interest rates.
Cash sweep accounts are intended to convert idle cash into interest-bearing investment vehicles. Banks are facing proposed class action lawsuits alleging that they prioritized their profits by putting consumers' assets in low-interest options without sufficient disclosure.
These banks generated substantial revenues with their customers’ cash and beneficial returns on such cash while paying only a small fraction of those returns. The firms are accused of hiding their activities and providing insufficient explanations about how their cash sweep program operates.
Meanwhile, Charles Schwab, Ameriprise, LPL Financial, UBS Group and Bank of America’s (BAC - Free Report) Merrill Lynch subsidiary are facing various cash sweep-related legal battles.
Banks Sweep Programs: A Way to Turn Idle Cash to Work
Sweep programs were developed to allow banks and brokers to put their customers' idle cash to work. They move excess client cash balances overnight into a money market fund or another higher-yielding product offered by a bank or affiliate bank.
Brokers and banks make a spread or revenues on those funds and customers receive a specified rate of interest. It can be significantly lower than the yield earned by a consumer who invests directly in a certificate of deposit (CD) or money market fund.
Customers dissatisfied with sweep accounts allege that lenders and brokers earn excessively from their cash balances while customers receive minimal returns.
More Details on Banks Facing Sweep Account Lawsuit
For the past few years, the Securities and Exchange Commission (SEC) has been concentrating on cash sweep account choices. The case focused on the difference in interest rates, highlighting the potential earnings that clients could have elsewhere.
The criticisms come at a time when the Federal Reserve's benchmark rate remains at 5.25% to 5.5%, the highest level in 23 years. The central bank is anticipated to start lowering rates this month, beginning an easing cycle that might extend until 2025 or 2026.
Last month, JPM faced a class-action lawsuit filed in Manhattan federal court, alleging that the bank channeled customers' idle cash into accounts with unreasonably low interest rates.
Raymond James faces legal action related to its cash sweep program, alleging that the interest rates paid to RJF’s clients with cash sweep deposits ranged from 0.25% to 3%, significantly lower than the current Fed Funds rate.
Earlier in June, a similar lawsuit filed in the US District Court for the Southern District of New York contended that Morgan Stanley’s cash sweep program pays interest rates as low as 0.01% on uninvested cash, far below market rates. Also, WFC disclosed that it was facing an advisory account cash sweep investigation by the commission.
Charles Schwab settled SEC charges two years ago for $187 million after an agency investigation revealed the company's automated robo-adviser service included undeclared conflicts of interest and hidden client fees when shifting idle cash into sweep accounts.
Revenue from Sweep Accounts: A Double-Edged Sword for Banks
The revenue that banks generate from client cash has become a double-edged sword. It benefits firms in the high interest-rate market but is also a concern as regulators question firms' cash sweep accounts.
Earning little money on cash sweeps might mean a lot to a large bank, even in this time of elevated interest rates.
After facing potential scrutiny from regulators, lawsuits and increased competition, WFC, BAC and MS might be raising the rates they pay clients in cash advisory accounts to bring yields more in line with money market accounts. This rise in rates will eventually put pressure on their financials.
Wells Fargo, for instance, stated during a July call with analysts that it expected a $350-million hit to its net interest income from raising cash sweep rates across its wealth unit.
A rise in rates paid to customers and a corresponding drop in income would pose significant challenges to companies to maintain their profitability.
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JPMorgan & Others Face Probe Over Interest in Cash Sweep Accounts
The legal scrutiny of how banks and brokerages treat their customers during high interest rates intensifies as the phase is drawing to a close. Many large U.S. banks are accused of deceiving clients to make profits of billions of dollars.
JPMorgan & Chase (JPM - Free Report) , Raymond James (RJF - Free Report) , Morgan Stanley (MS - Free Report) , Wells Fargo (WFC - Free Report) and a few other banks and brokerage firms were sued for transferring clients' idle funds into sweep accounts with near-zero interest rates.
Cash sweep accounts are intended to convert idle cash into interest-bearing investment vehicles. Banks are facing proposed class action lawsuits alleging that they prioritized their profits by putting consumers' assets in low-interest options without sufficient disclosure.
These banks generated substantial revenues with their customers’ cash and beneficial returns on such cash while paying only a small fraction of those returns. The firms are accused of hiding their activities and providing insufficient explanations about how their cash sweep program operates.
Meanwhile, Charles Schwab, Ameriprise, LPL Financial, UBS Group and Bank of America’s (BAC - Free Report) Merrill Lynch subsidiary are facing various cash sweep-related legal battles.
Banks Sweep Programs: A Way to Turn Idle Cash to Work
Sweep programs were developed to allow banks and brokers to put their customers' idle cash to work. They move excess client cash balances overnight into a money market fund or another higher-yielding product offered by a bank or affiliate bank.
Brokers and banks make a spread or revenues on those funds and customers receive a specified rate of interest. It can be significantly lower than the yield earned by a consumer who invests directly in a certificate of deposit (CD) or money market fund.
Customers dissatisfied with sweep accounts allege that lenders and brokers earn excessively from their cash balances while customers receive minimal returns.
More Details on Banks Facing Sweep Account Lawsuit
For the past few years, the Securities and Exchange Commission (SEC) has been concentrating on cash sweep account choices. The case focused on the difference in interest rates, highlighting the potential earnings that clients could have elsewhere.
The criticisms come at a time when the Federal Reserve's benchmark rate remains at 5.25% to 5.5%, the highest level in 23 years. The central bank is anticipated to start lowering rates this month, beginning an easing cycle that might extend until 2025 or 2026.
Last month, JPM faced a class-action lawsuit filed in Manhattan federal court, alleging that the bank channeled customers' idle cash into accounts with unreasonably low interest rates.
Raymond James faces legal action related to its cash sweep program, alleging that the interest rates paid to RJF’s clients with cash sweep deposits ranged from 0.25% to 3%, significantly lower than the current Fed Funds rate.
Earlier in June, a similar lawsuit filed in the US District Court for the Southern District of New York contended that Morgan Stanley’s cash sweep program pays interest rates as low as 0.01% on uninvested cash, far below market rates. Also, WFC disclosed that it was facing an advisory account cash sweep investigation by the commission.
Charles Schwab settled SEC charges two years ago for $187 million after an agency investigation revealed the company's automated robo-adviser service included undeclared conflicts of interest and hidden client fees when shifting idle cash into sweep accounts.
Revenue from Sweep Accounts: A Double-Edged Sword for Banks
The revenue that banks generate from client cash has become a double-edged sword. It benefits firms in the high interest-rate market but is also a concern as regulators question firms' cash sweep accounts.
Earning little money on cash sweeps might mean a lot to a large bank, even in this time of elevated interest rates.
After facing potential scrutiny from regulators, lawsuits and increased competition, WFC, BAC and MS might be raising the rates they pay clients in cash advisory accounts to bring yields more in line with money market accounts. This rise in rates will eventually put pressure on their financials.
Wells Fargo, for instance, stated during a July call with analysts that it expected a $350-million hit to its net interest income from raising cash sweep rates across its wealth unit.
A rise in rates paid to customers and a corresponding drop in income would pose significant challenges to companies to maintain their profitability.