There is an old saying in the banking industry that the greatest responsibility of an ethical banker is to "protect the client from the bank." In other words, experienced bankers know that banks will always seek to profit at the expense of their clients. And that is exactly what happened at Wells Fargo, an American international bank, headquartered in San Francisco.
It was revealed recently that the bank opened more than 2 million bank and credit card accounts for customers without their permission from 2011 through 2015, resulting in US$2.6 million in unwarranted fees for several thousands of unsuspecting clients.
On the surface, this scandal looks like another one of those post-2008 stories about unscrupulous bankers selling dud financial products to unsophisticated clients. But we are talking about Wells Fargo here. The poster child of banking prudence and until recently the most valuable bank in the world in terms of market capitalisation.
So what actually happened? This particular case is more than just a simple financial fraud but more to do with flawed business models for retail banks. Wells Fargo was known in the banking industry as the "king of cross-selling". In layman's terms that is pushing existing clients to open new accounts and buy ever more products such as credit cards, mutual funds, life insurance policies etc. from the bank.
The concept of selling as many products as you can to your existing customers is not a crime. After all, the customer can always say no. Moreover, cross-selling is particularly essential in the retail banking world because the most expensive part of the customer relationship is getting a prospective client to become a customer.
But at Wells Fargo, cross-selling soon morphed into mis-selling when employees were given impossible sales quotas to reach and berated or even fired for not meeting them. Apparently, tellers and bankers had a target of selling eight products to each customer. This high-pressure sales culture drove employees to cut corners by opening fake accounts and providing products and services to customers that they did not want.
As a result, Wells Fargo agreed to pay $185 million in fines to regulators, including $100 million to the Consumer Financial Protection Bureau, to settle claims that it defrauded millions of customers. The bank also dismissed some 5,300 employees in an effort to root out the problem.
If that wasn't enough, the bank's chairman and chief executive had to forfeit $41 million in compensation and was forced to eat a large piece of humble pie in the form of harsh grilling from lawmakers in the House Financial Services and Senate Banking Committees, many of whom face re-election in November. It was not a good week for him. The only thing he did right was to fly commercial instead of a private jet into Washington DC for the hearings. He later retired.
Is there a lesson to be learned here for Thai banks? Definitely. In fact, this is a parable for any business, not just banking. How should employees be measured, evaluated, rewarded and punished in today's super-competitive environment?
One of the key lessons here is the need for companies to put in place effective mechanisms to curtail excessive risk-taking and the pursuit of short-term results at the expense of long-term value creation and sustainability.
To address the above issues, different countries have put in place measures to strengthen their regulatory framework for managing excessive risk-taking and fraud prevention. In Thailand, doing jail time for misdeeds is already par for the course at most state banks. But these measures still did not deter bankers from putting their hands in the cookie jars.
Personally, I like the concept of a "clawback", whereby an employer can withhold or take back money that has already been disbursed to executives if they commit fraud or made accounting errors.
Both the US (the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010) and the UK (the Corporate Governance Code of 2014) already have laws that enable companies to recover or withhold the payment of any sum wrongly made to executives.
The implementation of a clawback policy will contribute to greater corporate governance, especially for executive compensation. It will also align remuneration practices with global best practices and help shape appropriate behaviour on the part of bankers. As we know too well, a banker's suit has no pockets because who's ever heard of a banker putting his hand in his own pocket?
Teera Phutrakul CFP® is a financial planner professional and an independent director of Sumitomo Mitsui Trust Bank (Thai) Plc, as well as a fellow member of the Thai Institute of Directors.