Bankers Across Denmark Face Fallout of Overcharging Scandal

(Bloomberg) -- Denmark is investigating whether banks besides Danske Bank A/S have recommended loss-making investment products to their clients.

The country's biggest lender last week fired one of its star executives after an internal review concluded that management was aware it was charging its retail customers too much for products that were likely to offer very low returns. The bank has pledged to compensate the 87,000 clients affected by the scandal.

Read more on the dismissal of Danske's Jesper Nielsen

Jesper Berg, the director general of the Financial Supervisory Authority in Copenhagen, said in an interview that a probe conducted by his agency raises questions as to how widespread the practice is. The results could raise questions about bankers' compliance with so-called fit and proper requirements, which demand they act with "honesty" and "integrity."

Danske, which is being investigated separately amid allegations it was involved in a vast money laundering scandal, acted fast to crack down on the overcharging affair once the matter became known. Berg said the kind of swift action taken by Danske is critical in ensuring public trust in the finance industry.

“It is not a used car industry,” he said. “People have to believe that, although the banks obviously want to sell their products, they also take into consideration the interests of the customers, because there is such an asymmetry of information.”

Nordea Bank Abp, Scandinavia's largest financial institution by assets, said last week that an internal review had concluded that its fees are in line with expected returns. The FSA didn't disclose which banks were part of its probe.

Risk Incentives

According to a recent FSA report, customers are increasingly at risk of getting bad investment advice from their banks. When banks sell investment products, they must take into account all relevant options when weighing what to recommend, according to the FSA. That includes deposit accounts, which generally now offer an interest rate of zero.

But the industry has an incentive to move savings out of deposit accounts and into investment products in an effort to reduce the impact of negative central bank rates, the FSA said. Core earnings for Danish banks and mortgage lenders fell last year to the lowest in at least half a decade, FSA data shows.

Benchmark rates in Denmark are stuck below zero, along with much of the rest of Europe. Banks have so far refrained from passing that cost on to retail customers, for fear of losing them. The burden of that business model is growing, with retail customers holding over 934 billion kroner ($142 billion) in deposit accounts as of May.

Berg said banks outside Denmark probably face even bigger incentives to offer riskier investments because of their historical dependence on deposits for funding loans.

“We are privileged in Denmark because a large part of the funding of the banking sector takes place through mortgage bonds, which doesn't have the zero lower bound restrictions which deposit funding has,” he said.

The latest scandal to hit Danske began last year, when an employee notified management that a decision in 2017 to raise fees would mean some investors in so-called Flexinvest Fri products would face negative returns.

Read more on the impact of Danske's latest scandal on other banks

It's not the first time Danske has come under FSA scrutiny over its investment operations. Last year, the agency reprimanded the bank for multiple failures in its digital investment platform, including not confirming whether selected instruments were in fact suitable for customers.

Berg said the FSA is considering various sanctions, including reporting the bank to the police and imposing financial penalties. A decision is expected in the coming months. In the meantime, banks need to consider taking action independently if there's evidence of mis-selling, he said.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editors responsible for this story: Nick Rigillo at nrigillo@bloomberg.net, Tasneem Hanfi Brögger, Jonas Bergman

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