We’re getting back from an overdue team lunch and my colleague next to me in the car exclaims: “Oh! a VIP car is getting checked!” We all cheered. The new Motor Vehicles Act had just kicked in and stories of fines that cost more than the vehicles were giving social media its new outrage. Lawless Delhi was beginning to stop before the zebra crossing and the four-hour lines at the pollution centres were telling their own story of the degree of non-compliance with basic road rules.
We’ve all heard and told stories of order and rule of law in the more developed parts of the world and shaken our heads to say—how well we behave when abroad, why don’t we do the same here? Then we’ve aspired for tougher rules and their implementation at home. But bring tighter rules on the ground and we resort to strange acts of defiance—newspaper reports said that one drunk biker set his vehicle on fire rather than pay the fine. Reacting to the public outrage, several states are rolling back the steep fines with one eye on political gains.
We fined Wells Fargo a historic $100 million for the illegal practice of secretly opening hundreds of thousands of unauthorised deposit and credit card accounts.”
Log in to the home page of the US watchdog Consumer Financial Protection Bureau (CFPB)http://www.consumerfinance.gov/ , a government agency set up to ensure that consumers of financial products are treated fairly by banks and other lenders, and you see this as the top featured story.
What’s the Wells Fargo story and why is it relevant to us? Wells Fargo is one of the biggest banks in the US, and is known to be an aggressive cross-seller of financial products. Cross-selling is something we’re all familiar with—you have a savings account with a bank and it pushes other products at you: loans, funds, insurance, cards.
What role do incentives play in directing the flow of financial products into household portfolios? One way to answer this question is to look at data on retail financial products that have seen incentives change over the past 10 years and look at the direction of the flow of money. We can do this for two sets of investment products—pure asset management products such as mutual funds, and insurance-embedded investment products in the form of life insurance policies. There are now several data points that we can map given that privatization in mutual funds is more than 20 years old and that in insurance is 15 years old, and there have been regulatory changes in incentive structures in both products over the past decade.