In April, a 165 years plus old bank was in the news for all the wrong reasons. Wells Fargo, the bank in question was fined 1 billion USD for mis-selling. Yes, this is one of the oldest and largest banks in the US and has been fined for pushing the wrong products to customers, overcharging them fees and general malpractices when it came to dealing with clients. Unfortunately, this is not even the largest fine paid by far – Bank of America was fined a whopping USD $16.65 billion. Says Business Insider “The enormous penalty was the largest settlement in United States history between a corporation and the U.S. government. The payment was levied against Bank of America for packaging mortgage-backed securities that were not nearly as financially sound as investors were led to believe.”
Quoting the Financial Times on Wells Fargo “Regulators have ordered Wells Fargo to help them identify the victims of its latest mis-selling scandals, after they slapped a $1bn penalty on the US bank without yet being able to say exactly how many customers were affected. The Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency on Friday each imposed a $500m penalty on Wells, in one of the most severe punishments of a big bank since Donald Trump’s election.
As part of the settlement, Wells also agreed to track down and compensate hundreds of thousands of customers who were sold unnecessary insurance or hit by excessive home loan fees.
Car owners were billed for insurance coverage they did not want, while mortgage borrowers who wanted to lock in interest rates were stung by additional fees if they missed deadlines set by Wells — even if the delays were the fault of the bank.”
A more recent article on the same subject in the Financial Express states how Wells Fargo is going from pillar to post, identifying the instances of mis-selling in order to compensate those wrongly charged by the bank.
There is no doubt that the SEC and even SEBI are getting tighter regulations in place in order to prevent mis-selling in financial products across the board.
Mis-Selling Happens Across the Board
It would normally seem to many that the last leg of the chain is where the mis-selling occurs, where retailers who reach out to the retail customers manage to use their ignorance to make an extra buck on the side. One cannot be more wrong. The malaise of mis-selling, and make no mistake, comes from the very top.
With ambitious targets of growth and the need to makes piles of money for the stakeholders, the top bosses set difficult or unrealistic target for the teams to achieve. These teams are then driven by like-minded Vice Presidents and Directors, and therefore the bring in money by hook or crook, push the envelope syndrome percolates down to the last sales executive, who, needless to say passes it on to the to the retail seller. So while the top executives are given fat bonuses and are termed ‘aggressive’ and are called to various public forums to showcase their ‘aggression’ as a case study. It is lower down that the pressure is felt.
Take Lehman brothers, it has been 10 years since Lehman closed almost overnight and precipitated what has now been termed as the Lehman crisis. The CEO of Lehman was nicknamed the Gorilla for his aggression and was the darling of Wall Street. Ironically he was named Mr. Wall Street by Barrons in March 2008, Lehman filed for bankruptcy in September 2008. The Lehman case was textbook, at first looking to outstrip rival Goldman Sachs at every stage; decided to take too many risks, got too aggressive and paid the ultimate price.
Higher the risk, higher the gain, goes the old investment adage which we quote when we warn people about the risk aspect before investing in equities. It is the same quote that must have been running through Mr. Fuld’s mind – till, to take a leaf from Mr. Ramalinga Raju’s book (or shall we say letter) of Satyam – Lehman could ‘ride the tiger’ no more.
Wells Fargo – A Case Study
What happened at Wells Fargo is not new. Will try and summarize what happened at the firm since September 2016, when the SEC and the US Department of Justice started to probe Wells Fargo deeper. Ultimately this culminated in the $1Bn fine for the financial giant, something that could very well happen in India,
- Wells Fargo was hit with a $185 million fine. The US Department of Justice launches a probe for several million bank and credit card accounts without the knowledge of the people in whose name the accounts were created.
- CEO John Stumpf steps down
- SEC probe identifies as many as 2 million fake accounts (yes, you read that right, 2 million!)
- Wells Fargo admits to retaliatory action against employees who tried to blow the whistle on the mal practices and the insane pressure put on employees to deliver.
- Wells Fargo says it has found as many as 1.4 million more fake accounts, bringing the total number up to 3.5 million
- Bank is sued for allegedly overcharging small businesses for credit card transactions via 63-page contract. It also admits to have charged more than 570,000 clients for car insurance they did not need.
- Wells Fargo agrees to $1 billion penalty tied to mortgage and auto-loan issues; details emerge on regulators’ examination of clients being pushed to obtain in-house funds for retirement accounts.
- Wealth unit to refund clients $114 million due to incorrectly charges for certain assets and accounts; bank to pay refunds of $505 million to foreign exchange, car loan and mortgage clients;
- News breaks that Wells Fargo is working on refunds of tens of millions of dollars over add-on products, such as pet insurance and legal services.;
- Details emerge on how aggressive sales goals may have led to problems for wealth-unit clients
The Indian BFSI sector is no stranger to scams of mind boggling amounts. So far the guilty seem to be able to ‘game the system’ and make millions as a result, usually with the help of an insider. But stop to consider this, the companies that have grown multifold - have they grown by coming up with truly innovative products that have changed the lives of consumers, or have they stopped innovating and have merely become large sales machines that work off the sweat of the channels promoting their products.
The day is not far behind, when SEBI comes cracking down on mis-selling like the SEC did in the case of Wells Fargo – and some large firms may have to pay the price, if they have indulged in the pressure cooker like tactics of Wells Fargo, to grow their Assets.
In Fact It Is Closer Than One May Think
A very interesting article appeared on this subject in the Hindu Business Line in September. The article stated “The All India Bank Officers’ Confederation has urged the Reserve Bank Governor to take urgent steps to stop the menace of forced cross-selling of third party products in public sector banks”. Said the General Secretary of the confederation; “The regulator should go beyond the token gesture of issuing a circular and act decisively.”
The article goes on to say that “Aggressive cross-selling has led to forced selling and, in turn, to mis-selling” and adds “Many of the banks have even started making services conditional to their clientele; i.e. a savings bank account can be opened only if the customer agrees to purchase an insurance product.”
This is a disturbing trend which the RBI has been made aware of and the Central Bank is very prompt in curbing such mal practices before they become rooted in the system. We expect action to be taken against this soon.
This ‘malaise’ of mis-selling is not restricted to the BFSI sector alone; the directive to grow aggressively, to get a larger pie of market share becomes almost an obsession, which completely crushes those working towards it under the pressure of the huge demands made on the staff and the channels.
What Can Be Done?
There is nothing wrong in being aggressive and pushing for sales; one enters the realm of wrongdoing when the push is all that matters and not who one is selling to. Say there is a small cap fund to be sold – if the same is explained thoroughly, including the risk factors of investing in such a fund and this fund is pitched to investors who are high risk takers and below the age of 30 – then there is nothing wrong with that.
However, the same fund, if pushed to a 49 year old on the cusp of retirement – someone who has responsibilities of getting his/her children married and settled in the next 3-4 years; then pushing a small cap fund to such investors, without properly checking risk appetite and without explaining the inherent risk in small cap funds as compared to say a diversified equity large cap fund… then that is a malpractice or mis-selling; and everyone in the food chain – from the distributor to the AMC will be accountable as per the regulator,
Here are a few simple tips to keep in mind before pitching a product to a potential investor:
- Explain the need to plan and invest. Link investments to the life goals of the investor
- Keep it simple. Explain the product in as simple and layman’s terms as possible. Use day to day life examples if need be
- Avoid making commitments in terms of return on investment
- Always, always, always measure risk appetite – there are many online and offline tools that enable you to do so.
- Pitch solutions not merely products – products are the means to an end. Not the end itself.
Do remember that regulators around the world – not just SEBI are getting more and more concerned about mis-selling and will be tightening the screws even further in terms of regulations that are intended to nip the problem in the bud. Remember to always sell the right product to the right investor – at the right time.
Jimmy Patel is the CEO of Quantum Mutual Fund.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.