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.