Daily Archives: January 29, 2017

Wells Fargo Scandal Was Nothing Compared To What Others Are Doing Legally

Front Page Business Lawyer

Wells Fargo

The Wells Fargo mess informed us that retail account experts want to cross the line in pursuit of their end-of-year perk. However there is an equivalent if not greater interest in cross-selling: loan officers who also use the hat of financial investment advisor.
Having a bank loan officer authorized to likewise cross-sell securities resembles holding a burning candle at both ends; eventually the bank will get burned. The phony accounts scandal at Wells Fargo reminded management that for a retail worker, life can be more about capital than ethics.
When a bank or a commercial bank employee is also a signed up representative for an affiliated or unaffiliated broker-dealer, she or he is described as a “dual-hat employee.” These hybrid functions have methodically expanded throughout the banking sector as banks and their holding companies have aimed to increase market share, deposits and revenues.
Bank bonus offer programs typically create rewards for industrial loan officers to secure investment deposits for the broker-dealer affiliate. This in turn develops a dispute of interest for dual-hat employees between their duties to the consumer as a banker versus their responsibilities as a signed up representative. It is not tough to see the misalignment of inspirations in between the two roles. Whereas a financial institution underwrites a customer’s monetary health and keeps an eye on repayment, a monetary adviser goes through suitability requirements– and, as laid out in recent pending Labor Department guidelines, fiduciary commitments.
This evident conflict of interest exposes the bank to claims of predatory banking practices, negligent guidance and portfolio mismanagement. These disputes in turn are magnified by the financial power and weight of “too big to fail” corporations, which have a concentrate on the bottom line that inevitably leads to a business culture that will breach these ethical duties.
That is, unless institutional regulators step up their game. Wells Fargo could easily happen again, and even worse, happens all the time already.
These inextricably linked customer duties find their origin in the Gramm-Leach-Bliley Act, which was signed by President Clinton in 1999 and rescinded provisions of the Glass-Steagall Act of 1933. The 1999 law removed the regulative wall in between insurance, banking and the securities organization. This not only made it possible for the merger of industrial and investment banking, but likewise determined business to connect depository services with broker-dealer services, even more blurring the line in between traditional bank services and financial investment services.
To stem the tide of what resulted– one-stop monetary retailers integrating insurance, mutual funds, deposits and check services, and greater exposure for the FDIC safety net– a 2006 law gone by Congress required regulators to embrace guidelines governing the activity of bankers and broker-dealers. To even more that law, the Financial Market Regulatory Authority implemented a guideline requiring both the clear recognition of who provides broker-dealer services on a bank’s premises and the partition of the broker-dealer services from the retail deposit activities of the banks.
Likewise, the Office of the Comptroller of the Currency has chimed in on dual-hat employees. The OCC’s Handbook on Retail Non-deposit Investment Products states, “A bank should ensure that RNDIP sales program policies and procedures resolve the viability standard despite whether the sales are conducted by the bank straight or through a broker-dealer.” The OCC even more provided this prescient message concerning compensation in the sales of RNDIP: “Sales agents engaged in incorrect sales practices might be focused on creating commissions without thinking about a client’s financial investment profile and needs. … Other unsuitable strategies might consist of misrepresenting RNDIPs and misleading or pressuring customers.”
Nevertheless, such regulations and policy declarations by FINRA and the OCC are just as good as their implementation and enforcement. This is where the regulators fail, leaving bank clients exposed to predatory bank practices, possibly misleading trade practices and unneeded investment risk.
Commercial loan officers with a Series 7 license– the basic accreditation for securities representatives– are being armed with a business card marked on one side as an industrial banker and on the other side as a monetary adviser, a handful of advertising literature for both the bank and broker-dealer, and a reward program that rewards them not just for booking commercial loans but likewise brand-new properties under management for the broker-dealer.
Management has actually blurred the line with payment programs for cross-selling by these dual-hat workers– where their ethical commitments under their FINRA securities licenses are deemed to be covered under the cloak of their loan officer designation. Their tasks to their consumers are possibly compromised by these disputes of interest.
Research study on financial investment literacy conducted by the Securities and Exchange Commission, in conjunction with the OCC, suggests that consumer confusion originating from this dual-hat staff member status extends throughout the monetary product “circulation channels.”
Is a business banker prepared to divulge that a mutual fund of the affiliate is not FDIC-insured when making a play to protect the client’s investment portfolio in conjunction with the industrial loan? Is a commercial loan officer taking steps to avoid connecting the pricing and approval of a commercial loan to the condition that the customer transfers a securities portfolio to the broker-dealer affiliate? How can risk management cut across a double regulative plan to secure the interests of the bank?
The possibility of tying or perhaps consumer scams is arguably more worrisome with these cross-sale relationships than the unapproved opening of bank and credit card accounts by Wells Fargo workers. With the Wells Fargo scandal as a cautionary tale, regulators should planning to restrict dual-hat workers to secure the general public and the stability of the financial system.