Concerns with Bank's Cash Sweep Products

Cash sweeping is the movement of funds from one account (bank or brokerage) to another. This is usually automated where an amount is transferred that exceeds a certain threshold or performed at a certain time. Typically, the amount transferred is to a higher interest-bearing account.

Traditionally used by businesses with the purpose of earning higher interest than compared to amounts remaining in a low interest current account. A minimum amount is set by a business for its account, for which any amounts more than this minimum, are transferred to a higher interest-bearing account.

A sweep could also be used by a business to transfer funds to an account that falls below a minimum level.

The sweep can be set to occur at a certain time, for example, end of the day, monthly.

Sweeps can also be used for personal use. This is typically used for brokerage accounts, where idle client funds are transferred until client decides to invest. 

Banks typically charge a fee for such a service, which is usually a percentage of the amount transferred, frequency of transfers or a set monthly fee.

Morgan Stanley, Wells Fargo and other institutions have been investigated by the US SEC recently over its cash sweeping programs. SEC investigated whether the banks and brokers steered clients to sweep their accounts that paid little or no interest. The question was also raised whether the banks and brokers had a duty to inform its clients that they can transfer amounts to another account that bears higher interest.

Results of these investigations led to Wells Fargo subsidiaries paying $35 million, Bank of America Merrill Lynch paying $25 million in settlements. 

In the UK, there is an obligation by the banks to inform its customers about accounts with higher earning interest rates than a customer currently has, usually notifying the comparative rate.

Internal audit should review the product plan of a bank offering cash sweep products. Typically, these products are suitable for medium to large businesses that have high cash holdings. These won’t necessarily be suitable for small businesses. Therefore, product plans should restrict selling these products to small businesses upon review of their circumstances. Sales should document how the customer meets the eligibility criteria and is this a product that the customer “needs.”

Internal audit should also review the communication and terms and conditions that was offered to the customer upon taking the cash sweep product. Audit should review whether a customer can make an informed decision of what the net benefit, i.e. interest earned minus fees, could be, so that it can decide as to whether they are getting a competitive rate.

Further, internal audit should review the communications with bank’s customers to ensure banks clearly note for customer’s understanding that interest rates and fees are periodically changed so it should review periodically whether it is still getting a competitive net benefit from the product.

Cash sweep programs are designed for customers to obtain a higher rate for excess cash they may have. Business customers especially should monitor periodically whether they are getting a net benefit and whether they have a competitive rate. Internal audit should assess the risk that banks divert customers to lower, or no interest rate accounts for cash sweep transfers and the duty to inform clients of getting higher rates in another account.