How bank customers are being milked

Investment banks have been ripping off clients by paying them only average market rates on deposits, according to a senior merchant banker.

The practice of skimming is apparently widespread in the industry, the executive said. It involves fund managers depositing clients' non-invested money with the in-house bank at an average rate, instead of finding top returns in the market.

The investment houses can then use these funds to obtain the best market rates themselves, skimming off the difference into their profits. "This the real untold scandal in merchant banking," the executive said.

Best industry practice would suggest asset management companies have a list of top credit-rated banks, and that client money is deposited with whichever is offering the most competitive rate. Imro, which regulates fund managers, said it only required members to provide market rates for client money. "But we cannot prescribe the best market rate - that is a commercial decision."

The Barings collapse has thrust the spotlight on what asset managers do with the non-invested money of clients.