Conflict of interest in Banks

The Lehman Brothers crisis where hundreds of savers lost their life savings hasn’t moved the Banks enough to sort their ethics about Mis-selling. Recent incidents that have come to light show that the regulators are yet to find ways to force banks to curb such practices.

Individuals trust the banking system, but the practices and recommendations coming from the banks show their incompetence.

Global regulators need to look at ways to ensure that such practices get punished with severity and not a mere fine which has been the standard practice.

Singaporean law allowed banks to upgrade individual investors to accredited status if their assets are worth $ 2 million or have earnings of at least $300,000 in past 12 months. Due to the rise in property prices in the last decade, many ordinary Singaporeans have become eligible to the accredited investor category due to increased valuation of their homes.

This upgradation then translates to banks offering a wide array of investment choices that might be riskier in nature and the one that recently shook the world was the case of Swiber bonds which was available to accredited customers who were willing to invest a minimum of $ 250,000.

Take the case of Elaine Tham, who was persuaded to sign in as accredited customer on the basis of valuation of her property and car and eventually led her into investing in Singapore based energy services company, Swiber holdings Ltd and as fate would have it she lost all her money as the company declared that they are in no position to repay its bondholders. Her hard earned savings which were kept for children’s education was all lost.

Similarly, in another case, an Indian engineer Sandeep Kapoor landed up losing $250,000. He was also a victim of the flawed system that accorded him automatically “accredited investor status” because of higher earnings and had invested in Swiber bonds through a relationship manager of DBS Group holdings Ltd.

Although DBS, in its defence, had clarified that their managers followed a foolproof process to ensure that clients fully understood the product before investing into it and were informed of their Accredited Investor status from time to time. But, whatever the arguments or counterarguments are, there are certainly lessons to be learned the hard way .

The takeaway from this was that the regulators at Monetary Authority of Singapore have proposed revisions to the law that deters banks to automatically classify accredited status to those moderate investors whose wealth is mostly in property and may have appreciated considerably due to surge in real estate prices and also otherwise in cases of individual wherein earnings might be higher but the decision to opt or not for such a status shall remain with individual investor.

Shouldn’t the bank’s risk management practice be pro-active and capture such obvious mis-selling? Or should the regulators build a robust client risk management framework which also considers ethics and forces the banks to adopt it?

The Singapore regulator, one of the more pro-active regulators, have asked private banks that regardless of investors’ status, “(private banks) should adopt fair business practices and act in the best interests of their clients,”

A spokesperson of HSBC based in Singapore declined to comment on Tham’s case,when confronted with inquiries about the sales practices of the bank’s relationship managers and stated that in one of its 2013 annual report, HSBC had already stopped the practice of linking incentives earned by wealth-management relationship managers’ to sales volumes in markets for the U.K. and France that year, and would ensure same is effective in most markets by 2014.

Conflict of interest in Banks is prevalent not only in Private Banks but also in other areas of Banking. It is always the unsuspecting individual saver who is at the receiving end,

The Wells Fargo scandal is another example. The bank created hundreds of thousands of sham accounts to meet aggressive sales goals.

The magnitude of this scandal was so big that it involved a large number of employees of Wells Fargo who secretly created a new bank and credit card accounts without the consent of customers which resulted in overdraft and other fees accrued to customers.

This scam was not the outcome of individual greed but a collective sales pressure being put on employees by the top management to meet its sales target as part of Gr-eight initiative – a drive to increase the average number of financial products from six to eight.

This hard push by the bank drove the employees into a tizzy in achieving the daunting target set by the management and most of the employees finally succumbed to performance pressure which ultimately led to their integrity being compromised.

This resulted in mass firing by the management and it is estimated that 5,300 employees had lost their jobs. Some of the employees who did not yield to such pressure tactics and refrained from resorting to unethical means in opening unauthorized accounts have dragged the bank to the court for terminating their services abruptly by citing non-performance by the bank .

Six of the former employees of the bank filed a class action lawsuit seeking damages to the tune of $ 7.2 billion for their co. workers who were wrongfully demoted or fired for refusing to open fake accounts.

Experts dealing with human psychology have pointed out this new corporate culture of high work pressure arising out of unrealistic targets set by the management induces employees to the high level of anxiety propelling fear which leads them to resort to unethical practices.

Another factor in instrumenting lower display of ethics is the current business mentality that eliminates personal feelings, value and severely compromises ethics in professional situations .

The only panacea according to the experts is to create an environment where leadership is bred so that employees do not succumb to muteness and speak up as and when they confront unethical behaviors in the workplace and people who take up such leadership roles must be able to motivate others from speaking their minds out.

Regulators must also punish the Banks who are, through such corrupt practices harming the unsuspecting savers. The savers have been made to believe that they are “Safe” with the banks. But, the bankers have been belying this trust. The conflict of interest of profitability and Trust needs to carefully monitored and strong action needs to be taken by regulators when Trust is broken.

John Stumpf, the long-time chief executive of Wells Fargo, was clearly told by Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee that “Fraud is fraud and theft and is theft. What happened at Wells Fargo over the course of many years cannot be described any other way,”

Even though the Wells Fargo CEO has agreed to give up USD 41 Million for the 2 million fake accounts created to meet sales goals, the recent hearing with lawmakers in the United States Congress quickly turned hostile as Rep. Michael Capuano, D-Mass., asked: “Why shouldn’t you be in jail?”.

Hopefully, the US regulators will give up the cosy relationship with the Banks and take some very strict disciplinary action which is not only based on law but also ethics to remove all conflict of interest, else the savers will always be punished.

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