Thursday, August 24, 2006

Banks & Currency Conversion in Retirement Accounts

The Globe and Mail, Rob Carrick, 24 August 2006

It looks as if the financial industry has gone too far with some of the costs and fees charged to customers for converting money in and out of foreign currencies.

Customers are mad as hell, and they're not going to take it any more.

A $100-million class-action lawsuit recently filed in Ontario targets Bank of Montreal, BMO Nesbitt Burns Inc. and BMO Trust Co. over foreign currency conversion charges applied in registered retirement savings plans, registered retirement income funds and registered education savings plans.

Last month, the U.S. division of Visa International Service Association as well as MasterCard Inc. and several big banks agreed to a $336-million (U.S.) settlement with customers over charges associated with foreign currency transactions.

The costs and procedures for changing money to and from foreign currencies is a mystery to most individuals, and banks, brokers and other financial players have taken advantage of this. Even when properly disclosed, the fees are onerous and, worst of all, virtually unavoidable.

The class-action suit being prepared against BMO relates to a widely used practice whereby brokers don't allow clients to hold foreign currencies in a registered account. When you sell a U.S. stock, for example, they automatically change the money into Canadian dollars and apply a conversion rate that builds in a sturdy profit margin. If you buy another U.S. stock using the proceeds of the earlier sale, you'll have to convert your Canadian money back into U.S. funds and incur still more charges.

A change in the tax laws back in June, 2001, opened the door for investors to keep foreign currency in a registered account. But if you ask brokers about this, they'll talk about how their systems can't accommodate multiple currencies in RRSP, RRIF and RESP accounts.

Is it that the banks can't do this, or choose not to? The BMO lawsuit, if allowed to proceed by the courts, could test this in a way that would affect all brokers in Canada and their clients.

The recently settled lawsuit against U.S. card companies and banks alleged that the parties did not disclose conversion fees of up to 3 per cent on transactions in foreign currencies. The banks and card firms denied any wrongdoing.

In Canada, you'll find that currency conversion fees are spelled out somewhere in your cardholder agreement or other disclosure statements supplied by the card issuer. Here's how Canadian Imperial Bank of Commerce explains its fees in a statement about fees and interest rates on its website: "You are charged the same conversion rate CIBC must pay, plus an administrative fee of 2.5 per cent of the converted amount . . ." Bank of Montreal simply refers to a 2.5-per-cent "foreign currency markup on transactions, including refunds."

The federally funded Financial Consumer Agency of Canada recently asked various financial companies about the foreign currency fees on their credit cards and came up with this actual example from one institution. A client spent $47.98 at a U.S. store, which worked out to $53.20 (Canadian) at the institution's official exchange rate of the moment. That amount was then marked up to $54.96 as a result of the conversion fee.

The FCAC found that financial institutions differed in how they explained conversion costs to customers on monthly statements. Some listed an exchange rate that included the conversion fee, while others just showed the amount of the transaction in both Canadian and foreign funds.

It's only fair that card issuers get paid something for the work of handling currency conversions. But given the vast amounts that people already pay in annual fees and interest, a conversion fee of 2.5 per cent on top of the bank's own exchange rate just seems excessive.

Among the allegations in the BMO lawsuit, none of which has been proved in court, is one that a hidden currency conversion fee is applied in registered accounts. BMO has said that it intends to file a statement of defence.

The greater problem in the industry, though, is the practice of automatically converting foreign cash in registered accounts into Canadian dollars. What makes this especially galling is that it's easily possible to keep U.S. dollars in non-registered accounts.

Broker greed on foreign currency transactions is further highlighted by the fact that Ottawa has eliminated restrictions on foreign investing in registered accounts. With their currency charges, brokers are sucking some of the potential benefits away.

Brokers have had a sweet deal going with conversion charges in registered accounts, but the practice needs to end.