Recent news accounts of Wells Fargo’s retail banking unit opening unauthorized accounts for unsuspecting customers for the purpose of achieving sales goals raise serious legal and ethical issues. The allegations have resulted in a $100MM fine from the Consumer Protection Financial Bureau (CPFB), one of the bank’s regulators. John Stumpf, Wells Fargo’s CEO, resigned from the bank. And after he testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs regarding the settlement with CPFB, Wells Fargo’s Board of Directors clawed back significant long-term incentive compensation from Mr. Stumpf. Additionally, prior to settling with the regulator, the bank’s head of community banking took early retirement.
At issue is the bank’s sales culture, driven by senior management and supported by incentive compensation plans to cross-sell products offered to its customers. A simple example of cross-selling is when a banker asks a client who has a checking or savings account with the bank whether they might need or like to have a credit or debit card account. The client either accepts or declines the offer or engages with the banker in a more meaningful conversation about the client’s financial circumstances, goals and objectives. This is a universally accepted sales practice in banking and financial services in the U.S.
Large and midsize banking institutions offer a wide range of products and services to meet the needs of the clients they serve. The banker who makes an internal referral or cross-sell does so to meet clients’ needs and deepen the relationship between the bank and their clients. Banks are in the business of offering products and services that create solutions for their clients based on a thorough understanding of the client’s goals, objectives and circumstances.
A banker’s job is to understand the client’s needs and apply that insight when offering solutions for a client’s current and changing financial circumstances. When a banker offers an appropriate product solution to a client that helps the client achieve his or her financial goals given the client’s circumstances both the client and the bank benefit. The client’s financial needs are met and the bank grows its relationship with the client. Bankers who focus on their clients’ evolving financial needs and changing objectives are best positioned to build long-term relationships with their client base. This is true in retail banking, private banking, commercial banking and investment banking. The ultimate goal for the banker is to become the trusted advisor to his or her client.
When compensation plans cause employees to engage in aggressive sales tactics and illegal behavior to meet sales quotas, that goal has been forgotten and betrayed. Financial service professionals are creatures of the sales cultures fostered by the institution they serve. Compensation and sales plans at these institutions can and do drive professional behavior. When an institution’s sales culture and compensation plans for its professionals are not aligned with the long term best interests of the client, problems arise that create a risk to the institution’s long-term reputation, its employees, and its shareholders.
Wells Fargo may not be alone in its aggressive sales practices. Published reports by Fortune, Reuters and Bloomberg on March 3, 2016 indicate that financial regulators in Massachusetts and Rhode Island are now investigating sales practices at Morgan Stanley to determine whether the firm’s financial advisors were participating in prohibited sales contests involving securities-based lending products. Massachusetts Secretary of the Commonwealth William Galvin alleges the firm participated in high pressure sales contest in Massachusetts and Rhode Island, where brokers could earn thousands of dollars for selling so-called security-based loans (SBL).
And there is a high probability of more litigation to come regarding cross-selling practices at financial service institutions. Now the Office of the Comptroller of the Currency is seeking information about the sales practices and incentive compensation structures at banks under its supervision, according to The Wall Street Journal October 26, 2016.