Guy Rolnik writes,
After acknowledging that the OCC knew of the issues within Wells Fargo as far back as 2010, it stated that “The OCC did not take timely and effective supervisory actions after the bank and the OCC identified significant issues with complaint management and sales practices.” The report also said that the team in charge of Wells Fargo “focused too heavily on bank processes versus what those processes were actually reporting” and “reached conclusions without testing or determining the root causes of complaints despite the existence of red flags.”
Pointer from Mark Thoma. Read the whole essay, which concludes,
Executives knew, board members knew (or should have known), and regulators knew almost all along, yet failed to do anything about it.
To me, this hints at the problems with the way that we currently try to deal with misbehavior on the part of financial firms. Top executives can be unreliable. Boards of directors are often unwilling or unable to delve deeply into operational issues. Regulators are just going through the motions.
There is one constituency that often really cares about financial firms that misbehave: their peers. When you lose customers to a firm that is using shady products and sales practices, you get angry. Unfortunately, the most profitable response is often to copy what the bad guys are doing.
I suggest creating a Financial Ethical Standards Board (FESB), which is analogous to FASB. FESB would provide a forum for discussing and offering guidance on ethics in the financial industry. If you see a competitor doing something unethical, you can take your complaint to FESB. FESB would have the ability to name and shame the wrongdoers, and it would have the ability to focus the attention of regulators.
I believe that a down side of FESB, or peer regulation in general, is that firms would try to use it to resist innovation that they find threatening but which in fact is not unethical. But I think that we can live with this potential down side in exchange for better regulation of the financial industry.
The way I see it, ordinary regulation simply gives clarity to banks about what they can get away with. As the banks adapt, ordinary regulation becomes ineffective, or even counterproductive. Peer regulation would be more adaptive. I believe it would be better, although nothing is perfect.
There is one constituency that often really cares about financial firms that misbehave: their peers.
Shouldn’t libertarians point out their peers are also competitors? Notice, the United incident several weeks back. Southwest attendants made jokes about beating the competition not their customers. Or Delta started offering vouchers earlier in the process. (Given the increase of over-booking this incident was going to happen one way or another.)
In terms of banks, there probably is no way of always stopping bad things. In terms of peers, they don’t want have their information shared with competition or they might be slow to prosecute because they have similar skeletons. And aren’t most government agencies run by experienced industry experts? In fact, my guess agencies run by experienced experts are probably the best strong regulation.