Big Banks Slammed For Paying Low Rates On Idle Cash Of Customers

The scrutiny of how banks and brokerages treated their customers during an era of high interest rates is heating up just as that era draws to a close, David Hollerith reported for Yahoo Finance.

Raymond James and JPMorgan Chase were hit with lawsuits in recent days by customers alleging they were shortchanged on the interest due from idle cash. I Photo: J.P. Morgan Wealth Management

Raymond James and JPMorgan Chase were hit with lawsuits in recent days by customers alleging they were shortchanged on the interest due from idle cash.

They are the latest of several such suits against wealth advisory units and brokers centered on the use of so-called cash sweep accounts that typically don’t pay much interest. It’s not just cash sweep accounts that have customers angry.

A major credit card lender, Capital One, also faces a class action lawsuit over customer complaints that it paid far below the advertised rate for a high-interest savings account.

The complaints come at a time when the Federal Reserve still has its benchmark rate at 5.25% to 5.5%, a 23-year high. The central bank is expected to start cutting rates as early as next month, kicking off an easing cycle that could last into 2025 and 2026.

"A government money market pays about 5%, and the federal funds rate is a little over 5%, so the magnitude of possible damages on an industry-wide basis, even just in retirement accounts, is in the billions of dollars," said Robert Finkel, senior partner with Wolf Popper LLP, who represented customers in a class action suit filed against Morgan Stanley.

Sweep programs move excess customer cash balances overnight into a money market fund or some other higher-yielding product.

Brokers and banks earn a spread or income on those funds, but the owner of the money is paid a preset rate of interest smaller than the yield earned when a customer directly invests in a CD or money market fund.

Both Morgan Stanley and Wells Fargo have raised their cash sweep rates. Morgan Stanley raised its rate from 0.01% to 2% on advisory accounts with cash balances over $250,000.