'We're Not Wells Fargo' Won't Cut It with Regulators

In the wake of the Wells Fargo scandal, many inside and outside the industry are asking a very simple question: "Are the unethical sales practices unique to Wells Fargo or do they have broader industry implications?"

Those who believe opening phony accounts is restricted to Wells Fargo note that the bank has touted its cross-sell success as a core component of its overall performance and valuation for years. Others, mostly industry critics, claim that the Wells Fargo situation is symptomatic of just another industrywide practice designed to maximize profitability at the expense of customers.

While the "is this unique?" question is an important one, the answer won't change the ripple effect. The regulatory, management, reputational and risk oversight implications of the Wells Fargo action will be (and already are) significant for the industry as a whole.

It is doubtful that many CEOs or boards of directors are taking pleasure in the humiliation, public shaming and outright ridicule of one of the nation's largest banks. They understand, from firsthand experience, that the industry's reputation remains fragile: when a large bank sneezes, the rest of the industry catches a cold.

If there is one thing that is virtually certain, it is that regulatory actions are rarely one-off events. To respond quickly and credibly to regulatory inquiries and examination requests, get the data and programs in place now.

While it is likely that the CEO and board have been exposed to retail banking and sales performance metrics, it is also likely that most of them do not know how those metrics are calculated, reported, monitored or achieved. Expect this to change and change quickly.

The first question many CEOs will ask is "do we have a problem or risk and how do we know?" The answer of "yep, we're good, no problem" will not suffice. As a result, many retail executives have already taken the logical first step of scrubbing their sales and customer data for low balance and/or inactive accounts – the goal of which is to estimate the size and scope of potentially inappropriate sales behavior.

This is a good first step. However, take this step a little further – evaluate sales reports to identify outliers. Look at specific branches where sales and cross-sell performance far exceeds averages for the network as a whole and the profile of the individual salesperson.

This endeavor can be awkward because it means putting your top performers under the microscope and explicitly or implicitly appearing to question their integrity. Nevertheless, if this analysis is done in a transparent and supportive way, it will help to provide confidence that extraordinary performance is not being achieved through unethical behavior.

While this initial analysis will help to determine immediate issues and risks, it is probably not sufficient to determine how, and if, existing programs and practices should be changed. It is incumbent on retail and executive management to answer these questions:

• Do our performance metrics reflect the full range of activities and expectations of the branch and branch personnel, or do they primarily reward sales?
• Are the goals reasonable? Are they established based on the characteristics and potential of each individual branch market or are all branches and bankers expected to achieve the same results?
• Do sales metrics measure quality of sales as well as quantity?
• If we pride ourselves on creating value-added relationships with our customers, do we reward quality relationship management or do we push widget sales and incentivize product sales?
• Have we developed reporting and monitoring systems to systemically identify potential risks, and not just report numbers?
• Do we have a system in place to ensure proactive communications with customers to verify account opening and thank them for their business?
• Are we doing the in-the-field management work required to monitor behavior or are we just managing by the numbers?
• Do our incentive compensation programs clearly align with overall bank goals and with our cultural values or are they seemingly independent?
• Have we created a process and supportive environment to respond quickly and objectively to employee questions and concerns?
• Can we prove that there is consistent alignment between policies and practices and that there are proven methods in place to identify where and when there is a disconnect between the two?

This type of review is essential to assure that retail management, executive leadership and the board all have a consistent and confident view of the processes and practices in place to mitigate risk, grow the franchise, support the culture and achieve enterprisewide objectives.
Rolland Johannsen is senior consulting associate at the Capital Performance Group, a Washington-based consultancy focusing on the financial services industry. He can be reached at rjohannsen@capitalperform.com.