PAUL DELEAN
Monday, August 21, 2006

Canadian banks are on a roll. Too bad their customers so often are the rollees.

From countless service fees to minuscule interest payouts on cash balances, banks constantly find ways to nickel and dime consumers.

A class-action suit filed in Ontario this month is shedding light on one of their more obscure money-makers: currency conversions in registered accounts.

The way it works now with most RRSP, Registered Retirement Income Fund and Registered Education Savings Plan accounts, any time a stock is sold or dividends or interest are received in foreign currency, the proceeds are automatically converted into Canadian dollars. At a cost to the planholder, of course, over and above any commission due.

The institution's cut on currency transactions typically ranges from one to four per cent. If the amounts in question are sizeable - as they often are in investment accounts - so is the profit.

While it used to be a government requirement that institutions switch foreign funds into Canadian currency in registered accounts, that hasn't been the case since 2001. Foreign currency is now permitted.

Unfortunately, most financial institutions are still operating under the old system, claiming it's not workable to have foreign funds in a registered account.

Presumably, even an investor who had nothing but U.S. stocks in his or her RRSP (which is permissible now with the lifting of foreign-content rules) would be subject to currency conversions every time U.S. dollars were processed in the account.

Jim MacDonald, a resident of Stouffville, Ont., thinks investors have been getting shafted, and he wants it to stop.

He's the lead plaintiff in a class-action suit filed in Ontario Superior Court against the Bank of Montreal, BMO Nesbitt Burns and BMO Trust Co. on behalf of individuals who held RRSP, RRIF or RESP accounts with the institutions and had "undisclosed" foreign-currency conversion charges in their accounts after the law changed in June of 2001.

In the statement of claim, it's alleged the institutions systematically made conversions without instructions from the customers, "and without there being any need to do so," primarily to continue raking in "hundreds of millions of dollars" in foreign-exchange fees.

The court document cites a case where MacDonald bought 500 shares of Tyco International at $14.89 U.S. in his RRSP in March of 2003, paying $1.502 per U.S. dollar. The stock was sold two months later for $16.04 U.S., but after the proceeds were converted back into Canadian dollars at an exchange rate of $1.381, he wound up losing $367 on the deal.

"The foreign-exchange fee is not and has never been disclosed to MacDonald and other class members," the suit states.

"Instead, the transaction confirmation forms and other account statements delivered to them ... disclose a 'conversion rate' comprised of the total rate charged to them."

The suit further alleges that each time the foreign-exchange fee was charged, it depleted the funds in customers' retirement or education plans.

BMO, trotting out the familiar "we don't comment on matters before the courts" response, declined to explain, justify or even confirm its foreign-currency practices.

But clearly it's not the only institution that's been mining this vein.

Looking through monthly statements from two non-BMO brokerages where I've had RRSPs, the procedures on foreign currency are remarkably similar and lacking in transparency.

If a U.S. dividend comes in, it gets converted first into Canadian dollars, then back to U.S. dollars to purchase another U.S. share if part of a dividend reinvestment plan. Instead of one currency conversion, there are two, with the brokerage presumably taking a cut for itself each time (though that fee is not indicated). The exchange rate is listed for U.S.stock purchases, but not for dividend payments or reinvestment. You have to figure it out yourself working from the total in Canadian dollars.

Only in the very fine print of material handed out when I opened the latest account was there any mention of currency transactions. It said the institution or related companies will set the rate of exchange and "may earn revenue in addition to applicable bid and ask rates for the currency." It also said rates could change depending on "gross trade value."

In 2003, TD Waterhouse Investor Services defended itself in a class-action suit by saying clients know financial institutions make money on currency transactions, so it didn't need to disclose it.

Three years later, the general level of disclosure doesn't appear to be a whole lot farther along.