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Bank Earns US$1m In Fees While Client Loses US$2.34m

Written By: Tiang Chuan on June 11, 2011 One Comment

The High Court has ordered a Swiss  private bank to return US$2.34m lost through unauthorized forex transactions, reports the 11th June 2011 edition of The Straits Times (Give back customer’s US$2.34m, bank told). The customer’s client relationship officer made more than 160 unauthorized forex transactions, making losses of US$2.34m for the client and close to US$1m in fees for the bank in the process.

The client, a China national who applied to become a Singapore permanent resident through the Monetary Authority of Singapore Financial Investor Scheme (FIS), sued the bank over the losses after the bank denied liability due to two clauses, known as conclusive evidence clauses, in an agreement. These clauses place the responsibility of verifying bank statements and notifying the bank of any discrepancies on the client.

This was the first time that the clauses has been used by a bank to deny responsibility and the case has became a test case.

Justice Steven Chong ruled that the unauthorized trades were carried out fraudulently and that bank cannot invoke such clauses to avoid liability.

In my opinion, this is a ‘straightforward’ legal case as the client sued due to losses in her account. What if the relationship manager has made money instead? There probably won’t be any lawsuits and there might even be a big ang bao for the relationship manager.

On the other hand, how would it have affected the bank if there were profits instead? It would probably have earned its US$1m in fees and may even earn more from future trades following the good results.

So what’s the moral of the story? When the client made profits, the bank earn its fees. When the client made losses (assuming no lawsuit), the bank make its fees too. If you are the bank(or for the matter, any platform that earns a fee from transaction), would you propose more transactions or less transactions? Remember, transaction brings fees.

And you still believe that it is easy to make tons of money from trading? If that is the case, why would banks and financial institutions not trade using their own money and have to go through the trouble and business risks to offer wealth management services to clients?

A recent survey by Barclays Wealth reviled a disturbing, but probably expected, belief amongst Asian high networth individuals. A big portion from this group of successful individuals believe that they must buy and sell often to do well in the markets.  It seems like the financial institutions have done a good job in convincing the rich that trading will make them richer. I am not so sure trading will make people rich. But I am sure that it will make the platform providers and advocators/trainers  rich!

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