One of Warren Buffett’s favourite investee companies is caught cheating customers and the senior management, who benefited the most from it, reacts by sacking 5,300 employees. But is Wells Fargo alone in squeezing profits by cross-selling and mis-selling financial products? Don’t we continue to have similar problems in India with no system in place to catch the culprits or force them to cough up hefty penalties?
Let us first look at what Wells Fargo did. In the five years since 2011, employees of the bank opened over 1.5m (million) bogus deposit accounts, 565,000 credit-card accounts and unwanted debit cards, without the consent of clients.
They also created fake e-mail addresses to enrol people for online banking and generated PINs to activate unauthorised debit cards.
All this was done to meet stringent cross-selling targets that were part of the bank’s strategy. It has, since, fired 5,300 employees who it held accountable for opening these dubious accounts.
Media reports are now suggesting that many employees, who attempted to blow the whistle and refused to open such accounts or pointed out to their illegality, were also fired by the bank.
The Consumer Financial Protection Bureau (CFPB), a watchdog body set up in US after the global financial crisis of 2008, brought the scandal to light. Wells Fargo has paid up a fine of $185 million. Of this, $100 million was levied by CFPB which accused the bank of “widespread abusive and illegal sales practices dating back to the beginning of 2011.”
The CFPB investigation revealed that Wells Fargo’s employees had transferred funds from customers’ existing accounts into new accounts created without their knowledge or consent. Worse, this led to some customers being charged for insufficient funds or overdraft fees, because the money was not in their original accounts. Customers were also billed annual fees, interest and other charges for unauthorised credit cards opened in their names. The bank is now in the process of reimbursing approximately $2.5 million to customers who were duped, without requiring any action from the customers themselves.
Readers would recall that the most profitable and aggressive banks in India (mainly private and foreign ones) did a much of what Wells Fargo is accused of, right until the global financial crisis of 2008. Most of them were forced to clean up their act by the then Reserve Bank of India (RBI) governor Y Venugopal Reddy and they did it by taking a hit on their books and selling their bad loan portfolio to recovery agents and asset recovery companies.
Nearly 10 years later, Moneylife Foundation continues to hear about customers who are harassed by recovery agents or struggle with poor credit records, mainly because of poor financial awareness.
Here’s one latest example, with names changed. Rajesh has an account with two leading private banks. He is a careful customer who also insists on controlling risk on his debit and credit cards, by insisting on a ceiling of Rs40,000 on withdrawals as a precaution. A month ago, he sold a property, leading to a huge cash injection of Rs1 crore into his savings account.
A couple of weeks later, on 9th September, two thick envelopes came, via a courier who asked Rajesh for identification as they contained a credit card and debit card. Since Rajesh had not applied for either card, he refused to accept them.
As a matter of abundant caution, he wrote to the bank’s senior management informing them about his refusal to accept unsolicited cards. The main objective was to ensure that the cards, printed with his name on them, are properly destroyed and don’t fall into wrong hands. He also pointed out that a higher card limit increases his own risk if it is misused. Moreover, he said, it was his understanding that RBI specifically banned unsolicited cards. Now, there is a strange twist.
The bank responds to say that it has checked with the leading courier company handling its work and there was no delivery for Rajesh on 9th September. It also claims that it has not issued any cards to Rajesh. Is this believable? It is even more worrisome. Is the bank fudging facts because it knows it has no business sending out unsolicited cards? Most likely. Here is probably why the cards were issued.
Every Indian bank has automated systems to monitor clients’ savings accounts, to spot opportunities to sell a host of financial products (mutual funds, hybrid investments, insurance, wealth management services and credit and debit cards).
A large sum in your savings accounts immediately alerts the entire system to target the individual. It happened to the singer Suchitra Krishnamoorthi when she got a large divorce settlement that was, later, systematically ripped off under a wealth management programme; Rajesh’s property sale proceeds would have triggered a similar alert.
The first stage of softening the customer is to flatter him with high-value plastic (a platinum, titanium or credit card of similar nomenclature). The next is to send over a smooth, glib-talking, jargon-spewing, investment expert along with the relationship manager to pitch investment ideas based on ‘risk assessment’. Rajesh had such a session too.
Now, here’s the worry. If the bank had merely said, ‘sorry to have bothered you; we will destroy the card’, the matter would have ended right there. But the elaborate effort to claim that no card was sent at all suggests that the bank knows it is flouting RBI rules and trying to cover up. So we checked out RBI’s master circulars. The key directive, under the right to privacy section says, ‘unsolicited cards should not be issued’; if issued, activated (without the written consent of the recipient) and billed, then charges will be reversed forthwith and a penalty equal to twice the value of charges will be paid ‘without demur’.
The victim can also approach the banking ombudsman to claim a compensation for loss of time, harassment, mental anguish, etc. Is it any surprise that the bank is simply denying that it continues to send out unsolicited credit and debit cards in complete violation of the RBI circular? And, it has been getting away with it too, because consumers do not know the rules or their rights.
In fact, every time a bank upgrades your card and enhances your credit or withdrawal limit (in case of a debit card), it also increases your risk, when things go wrong. The misuse of debit cards is so widespread that RBI has recently put out a draft notification seeking to limit the liability of innocent victims and to transfer the burden of proving customer liability on to banks.
Over the past few months, RBI deputy governor SS Mundra has repeatedly pulled up banks for their shabby treatment of consumers, rampant mis-selling of third-party products and flagrant violation of the customer code of the Banking Codes and Standards Board of India.
And, yet, when it comes to action, India has nothing like the CFPB which nailed Wells Fargo and forced it to pay a hefty fine. Or a situation where a bank CEO is hauled before a parliamentary committee on live television, like the US congressional hearings in this case.
Forget about live televised grilling, RBI has yet to name or punish a single bank for failing to treat consumers fairly or to single out egregious cases for exemplary action. On the contrary, RBI insists that it has no power to punish banks and financial intermediaries. Earlier, we were told that RBI did not have a structure and framework for initiating such action. But, even after it has put in place a framework in the form of a Consumer Charter, RBI has ensured that it remains toothless by making no attempt to frame polices for punishment and compensation.