Debashis Basu: Dealing with Wells Fargo-like episodes

On September 8, the Consumer Financial Protection Bureau (CFPB) of the US charged Wells Fargo, a US bank, for "the widespread illegal practice of secretly opening unauthorized deposit and credit card accounts." What is the scale of this misdeed? The bank opened more than two million unauthorised deposit and credit card accounts. CFPB has ordered Wells Fargo to pay full restitution to all victims and a $100-million fine to the CFPB's Civil Penalty Fund. The bank will also pay $35 million penalty to the Office of the Comptroller of the Currency, and another $50 million to the City and County of Los Angeles.

Wells Fargo is paying the largest penalty the CFPB has ever imposed. CFPB, an independent agency, responsible for consumer protection in the financial sector, came into existence in July 2011, following the 2008 financial crisis, caused by rampant mis-selling of mortgages. Its jurisdiction includes banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies operating in the United States. Interestingly, Wells Fargo, in which Warren Buffet has been a big investor, escaped the 2008 financial crisis with hardly a blemish, focusing on core lending rather than risky credit-default swaps and synthetic collateralised debt obligations. CFPB's action against Wells Fargo exposed the following about the bank's operations:

Unauthorised new accounts and fund transfer: Wells Fargo opened roughly 1.5 million new accounts secretly in customers' names. They then transferred funds from customers' authorised accounts to temporarily fund the new, unauthorised accounts. All this was done to meet the bank's sales targets and employees earned incentives. In some cases, customers were charged for insufficient funds or overdraft fees because there was no money in their original accounts.

Unauthorised credit card accounts: According to the bank's own analysis, its employees applied for roughly 565,000 credit card accounts that may not have been authorised by customers. Many customers have incurred annual fees on them, as well as associated finance or interest charges and other fees.

Unauthorised debit cards: Employees issued debit cards without customers' knowledge or consent, going so far as to create PINs without telling customers.

Created phony email IDs: Wells Fargo employees created phony email IDs not belonging to consumers to enroll them in online-banking services without their knowledge or consent.

Why were employees doing this? For the same reason Indian banks courier unwanted debit and credit cards to you, sell life insurance products or sell five-year lock-in products to 80-year-olds, churn mutual funds or stock portfolios and push structured products to the wealthy. Wells Fargo employees were driven by sales targets and compensation incentives as part of the top management's strategy of "cross-selling". The term "cross-sell" appears 20 times in the bank's annual report, according to a media report. Apart from the $100-million fine CFPB has directed that all monthly maintenance fees, nonsufficient fund fees, overdraft charges, and other fees gouged from customers be paid back. Here is the interesting part of the CFPB order: "Consumers are not required to take any action to get refunds to which they are entitled." (emphasis mine). This is a regulatory class action by CFPB, which is a must for any real enforcement involving customers, but has never been thought of in India. The only case of regulatory class action, disgorgement of proceeds of initial public offering ordered by the market regulator, ended in a fiasco.

Do similar episodes of gypping the customers happen here? All the time. Has there been any action by an Indian regulator on this scale? Never. Will regulation and enforcement alone contain this? Unlikely. Remember that Wells Fargo is one of the more ethical banks in the US, but 5,300 employees have been at this largescale mis-selling for more than five years. This episode will be looked at differently by different people in India. The top management of Indian banks would say: "Look at them, they do worse things over there." The average saver would wonder why such misdemeanours are not penalised hard enough here. Remember, when a sting operation revealed that Indian banks were involved in widespread violations of Reserve Bank of India rules, including anti-money laundering regulations, they got away easily thanks to a very lenient RBI.

No, regulators are unlikely to do much at this stage on their own. What we need is strong policy action from the ministry of finance to dramatically increase competitiveness of banks, who actually do most of the mis-selling. Banking licence has to be on tap, easier takeovers allowed, entry barriers across financial sectors need to go down, especially opening up the sector to more transparent, technology-driven players. Our policy action has been exactly the opposite: Allowing the incumbents to sit pretty and prevent new people from coming in. Money management regulated by the market regulator is a great example of this. But that is for another column.

The writer is the editor of www.moneylife.in

Twitter:
@Moneylifers

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel