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Opinion

Wells Fargo proves that big fines for banks don't work 

The banking profession should join the ranks of other trusted advisors, via a regulatory fiduciary rule that formalizes its commitment to seek only the customer's best interest.

Wells Fargo continues to make headlines, and not the kind that it wants. Still reeling from the consequences of its appalling sales practices earlier this decade, Wells Fargo agreed in December to pay $575 million to settle claims brought by several states.

Unfortunately, the cycle of bad acts, followed by customer outrage, lawsuits, settlements and later returning to business as usual is treated as a wash-rinse-repeat process for many financial services companies. Lawsuits, settlements and fines are often viewed as simply the cost of doing business. It shouldn't be this way.

The 1980s and 1990s witnessed an industrywide transition from "transactional banking" to "relationship banking" and consultative selling. Customer loyalty became an important asset as stock markets assigned higher valuations to banks with more stable revenue streams. The Financial Services Modernization Act of 1999 changed the landscape further, repealing barriers between commercial and investment banking that had existed since the 1930s.

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As a result, financial firms rushed to become one-stop-shop financial supermarkets. The landmark $76 billion Travelers-Citicorp merger became the poster child for the industry's march toward bigger, more integrated banks. In banking, size does matter. Banks have tangible economies of scale that yield higher profit margins, while also producing benefits for customers, including better technology, improved product platforms, increased productivity, potentially lower costs, and (at least the perception of) the safety that can come from a better capitalized company.

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However, size also carries risks. During the 2008-09 financial crisis, the U.S. learned important lessons about banks being too big to fail — only to see them get even larger and more concentrated in the aftermath. Big banks can incubate even more insidious problems. As these firms get ever larger, some have sacrificed core values in order to keep unsustainable growth rates.

For years, Wells Fargo has made aggressive cross-selling activities — a theme begun years ago under former chief executive Dick Kovacevich to drive increased revenue per customer — a key part of its business strategy. Cross-selling isn't inherently bad. It can be useful to have a trusted financial quarterback look for opportunities from within the firm's product offerings to benefit the customer.

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That relationship can turn toxic when the incentives are skewed toward encouraging sales over improving the customer's financial health. The matter worsens and becomes exploitative when bankers employ a hard-sell of subpar internal products and deceptive sales practices designed to achieve their sales targets.

What is disturbing is that these practices aren't necessarily limited to just Wells Fargo. In October, American Banker magazine reported that federal regulators found more than 250 red flags in a broad examination of more than 40 banks, including the opening of accounts without customer consent.

The banking industry needs to acknowledge that there can be significant disconnects between well-intentioned (hopefully) senior management and branch-level operations. During the height of its misbehavior, Wells Fargo had a well-written statement of corporate values. Two of its five values dealt specifically with ethics, trust and what's right for the customer.

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Clearly, words were not enough. At Wells Fargo, conflict-ridden compensation plans at the branch level contradicted its own values and contributed to its wrongdoing. Thus, enforcement should include the audit of plans at all levels and the redesign of those that have the potential for conflict.

Corporate culture begins with a clear tone at the top that is consistent and permeates throughout all levels of the organization, is given more than just lip service, and is regularly enforced. From a policy perspective, the banking profession should join the ranks of other trusted advisers, via a regulatory fiduciary rule that formalizes its commitment to seek only the customer's best interest. For example, such a rule has significantly improved the integrity of registered investment advisers vs. their unregulated counterparts.

It's time for banks to renew their commitment to the spirit of relationship banking by putting the long-term relationship ahead of cutting corners to meet short-term sales goals. Wells Fargo may find that the slightly increased cost of compliance or forgone revenue pales in comparison to the $575 million it just doled out.

S. Michael Sury is a lecturer of finance at the University of Texas at Austin. Prior to working in academia, he was a money manager, supervising several billion dollars in client investment assets, first at Goldman Sachs and then for his own firm. He wrote this column for The Dallas Morning News. 

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