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A Bank of Montreal sign is pictured in North Vancouver on April 2, 2019.

JONATHAN HAYWARD/The Canadian Press

An Ontario court has ruled that the investment arm of Bank of Montreal improperly charged clients nearly $103-million in foreign-exchange fees on funds held in registered accounts.

The ruling stems from a class-action lawsuit claiming that three subsidiaries of BMO failed to disclose the markup added to foreign-exchange fees charged in accounts such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).

The lawsuit against BMO Trust Co., BMO Nesbitt Burns Inc. and BMO InvestorLine Inc. covers a period from June, 2001, until September, 2011. An estimated 200,000 clients may have been charged the fees.

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The parent bank, BMO, is not a defendant, and lawyers for the subsidiary companies deny any wrongdoing. “We do not agree with the court’s interpretation of our agreements. We intend to appeal,” said Paul Gammal, a spokesman for the bank. “We pride ourselves on being transparent with our clients and work hard to provide them with the clear and relevant information they deserve.”

Before June, 2001, federal tax law prohibited investors from holding foreign currency in registered accounts, and banks routinely converted any foreign sums. But after the law changed, BMO was “technologically unable” to update its trading systems to allow clients to hold foreign currencies in registered accounts until Sept. 6, 2011, according to a ruling released Friday by Justice Edward Belobaba of the Ontario Superior Court.

As a result, BMO Nesbitt Burns and InvestorLine kept converting foreign currencies in those accounts for 10 years, charging a markup above the so-called “spot rate." The markup ranged from 20 basis points to 150 basis points, depending on the size of the sum being converted (there are 100 basis points in one percentage point). The fees added up to $102.9-million over a decade.

Justice Belobaba wrote that “the defendants’ failure to disclose the amount of the markup fee charged on the foreign exchange conversions and the unauthorized self-payment are a breach of trust and fiduciary duty."

The ruling came eight years after the class-action was certified. “This has been long and hard-fought litigation," said Jeff Larry, a partner at Paliare Roland Rosenberg Rothstein LLP, the lawyers for the plaintiffs. "We are pleased the court has recognized the importance of financial institutions dealing fairly with their customers.”

The plaintiffs – all experienced investors who were clients of Nesbitt Burns and InvestorLine – asked for an award of $419-million, using BMO’s return on equity to calculate accumulated interest on the improper fees.

But the judge instead ordered the BMO companies to repay the profit it made from those fees, plus interest. Justice Belobaba will calculate that profit by subtracting from the $102.9-million what he deems reasonable costs incurred in collecting the fees, and then add interest to that amount. The final amount to be awarded has not been decided.

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Lawyers for BMO, from Lenczner Slaght Royce Smith Griffin LLP, argued that clients understood that the bank would charge more than the spot rate and make some profit on the conversions. They also pointed to clauses in client agreements that said the bank “may earn revenue from the foreign currency conversion," and that clients agree to those terms unless they notify the bank otherwise within 15 to 45 days.

Justice Belobaba rejected those arguments, ruling that the bank’s disclosure of the “hidden fee” for converting currencies “falls well short of the mark."

“It is self-evident that the written disclosure of the markup fee would be important information for the class members,” he wrote, allowing clients to compare rates against those offered by competitors. “But comparison shopping was difficult, if not impossible, because the amount of the markup was not disclosed.”

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