Bank under legal scrutiny: New class-action lawsuit imposes fresh accusations against Wells Fargo over cash sweeps practices
In the realm of finance, five major institutions - Morgan Stanley, Jefferies, UBS, Citi, and Wells Fargo - are currently under potential regulatory scrutiny, with their cash sweep programs and related compliance issues coming under the microscope.
Morgan Stanley, for instance, has faced an SEC investigation into its cash sweep program. Although the SEC recently closed the case without imposing federal penalties, the firm has faced criticism for steering customers into low-yield accounts and only raising interest rates after the investigation began.
Other financial giants have not escaped the regulatory gaze either. FINRA has penalised Jefferies, UBS, and Citi for supervisory failures in managing complex financial transactions, including cash sweep programs, mirroring broader industry vulnerabilities. UBS has also agreed to pay a significant fine over compliance failures in a separate but indicative case involving tax issues from Credit Suisse.
These cases are part of a wider pattern of regulatory scrutiny, extending beyond Wells Fargo to multiple major banks. This intensified regulatory environment is driven by increasing expectations for robust compliance systems and transparency in managing customer deposits and cash sweep arrangements.
Wells Fargo, a key player in this saga, has been under fire for underpaying interest rates in its cash sweep accounts. In 2023, the bank paid cash-sweep account customers just 0.15% interest, while the yield on short-term U.S. Treasury Bills hovered around 5.25%. A class-action lawsuit accuses the bank of underpaying interest to clients in its cash sweep program, alleging a breach of fiduciary and contractual duties.
Wells Fargo is not alone in this predicament. LPL Financial, a rival, is also embroiled in a class-action lawsuit over its cash sweep policy. Fidelity, another competitor, sweeps uninvested cash in its clients' brokerage accounts into a money market fund earning roughly 5%.
In a bid to address these concerns, Wells Fargo announced plans to raise rates in its cash sweep program for advisory brokerage customers, a move that is expected to reduce its annual earnings by approximately $350 million. The bank is also in discussions with the SEC to resolve the investigation into its cash sweep options provided to investment advisory clients at account opening.
Morgan Stanley is also grappling with two putative class actions regarding its cash sweep programs for retail clients, and is working with the SEC on the matter. The regulatory landscape is changing, with frameworks like the Basel III Endgame demanding banks maintain stronger capital positions and improve risk management practices, which indirectly relate to cash sweep program scrutiny.
For more insights into the cash sweep issue, readers may refer to the Dive Deposits article, "It might be the season of the cash sweep" by Dan Ennis, published on Aug. 7, 2024. Other institutions, such as Bank of America, also face potential regulatory risks related to the rates paid on uninvested cash in investment advisory accounts that are swept into interest-paying bank deposits.
This news serves as a reminder of the importance of robust compliance systems and transparency in the financial sector, as regulatory scrutiny continues to intensify.
Businesses in the finance industry, such as Morgan Stanley and Wells Fargo, are under regulatory scrutiny for their cash sweep programs and related compliance issues. These institutions have faced investigations and penalties for steering customers into low-yield accounts, supervisory failures in managing complex financial transactions, and underpaying interest rates in cash sweep accounts. The regulatory environment is expected to become more stringent, requiring banks to maintain stronger capital positions and improve risk management practices.
