Banks revisit incentives in wake of Wells Fargo scandal

CASHING IN: Anouk Pedersen of Providence, left, manager at the Tropical Smoothie Café, talks with Washington Trust teller Hailee Malo, flex manager. / PBN PHOTO/MICHAEL SALERNO
CASHING IN: Anouk Pedersen of Providence, left, manager at the Tropical Smoothie Café, talks with Washington Trust teller Hailee Malo, flex manager. / PBN PHOTO/MICHAEL SALERNO

Benjamin Franklin once famously said, “It is easier to prevent bad habits than to break them.”

The mantra, albeit old, rings true in the wake of the recent Wells Fargo deposits scandal, when the bank opened more than 2 million accounts for unaware customers who were charged fees.

The scandal – which has resulted in the CEO stepping down and the firing of more than 5,000 employees – is especially egregious, as it runs contrary to the basic mission of a depositary. And it has cast a shadow on the banking industry, pushing executives to re-examine best practices regarding how to effectively incentivize behavior.

“I guarantee you every bank in America is going through the most extensive internal compliance you could imagine to make sure they’re not doing this,” said Michael D. Ice, finance professor at the University of Rhode Island.

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Indeed, while Wells Fargo doesn’t have any branch offices in Rhode Island, there won’t likely be much of a change in the deposit share market. But executives nonetheless are taking stock of internal processes.

“It’s about making sure that we’re not incenting improper behavior,” said Bruce Van Saun, chairman and CEO of Citizens Financial Group Inc. of Providence. “It starts with your approach, your tone and your culture.”

It became clear in the aftermath of the Wells Fargo scandal that there was a culture – or rather an institutionalization – incentivizing inappropriate behavior. Van Saun, and others in the Rhode Island banking community, however, says it’s not an industrywide practice.

“We’re in a much different place,” Van Saun said.

Incentivizing results is common practice in the financial-services industry, because the industry doesn’t work effectively if based entirely on salary.

“You wouldn’t get the best talent that way,” he said.

But the incentivized-based mode is only effective as long as it doesn’t push too hard, he added, saying there’s no excuse for a financial institution to siphon away money from retail customers, as it runs entirely contrary to what depositary banks – at the most basic level – are set up to accomplish.

“This is about as bad as you go if you’re a bank,” Ice said. “If you steal from your customers and therefore lose their trust, I don’t know that you can ever rebound as a bank. Of all the things you could do that is bad, this is by far the worst.”

Finding that balance between effective and improper incentivizing has local financial institutions, including Washington Trust Bancorp Inc., the state’s second-largest bank with $4.2 billion in total assets, revisiting incentive programs on a yearly basis to make sure quotas encourage results but stay within reason.

“We have various incentive-based programs to recognize employees for achieving their goals,” said Edward “Ned” O. Handy III, president and chief operating officer at Washington Trust. “We also have policies and procedures in place to ensure employees are adequately and appropriately rewarded for their behavior.”

There’s also a required review of ethics.

“We require our employees to annually review and acknowledge the bank’s code-of-ethics policy, as well as other policies and procedures that clearly identify the bank’s expectations, as well as the employee’s responsibilities,” Handy said.

Likewise, Citizens’ retail banking division spends an immense amount of time and money on employee trainings to make sure the right questions are being asked internally to ensure compliance.

The Wells Fargo mess comes at a precarious time for an industry that’s already feeling margin pressures brought on by the low-interest rates and high-compliance costs. Since the notorious Dodd-Frank Act passed in wake of the financial crisis of 2008, financial institutions – big and small – have been forced to spend increasing amounts of resources on regulatory compliance, and the Wells Fargo debacle signals familiar signs for the industry.

“I’m sure regulators are going to come through,” Van Saun said.

Washington Trust says it’s ready for any new regulations or requirements.

“Incentive plans have long been an area of review and new regulations are introduced every year,” Handy said. “We have a good relationship with our regulators and work with them to ensure our practices are compliant and are appropriately meeting the needs of our customers.”

The greatest negative impact stemming from this scandal will most likely be realized by Wells Fargo, according to Ice, who doubts the bank will be able to re-establish trust with customers in any real way.

But other financial institutions, including those in Rhode Island, he adds, are less likely to lose retail customers, as there isn’t much alternative to protecting one’s money.

“You have to put your money somewhere,” he said.

Ice urges customers to pay close attention to their bank statements in order to keep a tab on financial institutions. Institutions, he adds, should focus on the basics.

“This is going back to fundamentals,” he said. “My money should be safe in the bank.” •

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