Curbing the Sales Culture In Banks?

In the Singapore press, there have been questions raised as to the role played by the aggressive sales culture in commercial banks that has led to the Lehman-linked investment products debacle.

The sales culture in banks started some time in the 90's and was imported from the US. Many local banks at that time engaged foreign consultants to jump-start their organizations because returns were not satisfactory and there was pressure to either upgrade or get merged.

Some of us will remember how the local banks used to operate and I am not sure if we want to go back to those days. The banking reforms have been good for the country. Although I can think of some controls to the sales culture, any changes will bring fresh issues so long as there is little attempt to educate the investors.

For example, there could be prohibition of the sale of investment-linked products at branches. The authorities could mandate that they be sold only via certain channels, like the internet (where the people are more likely to be educated) or on enquiry at the head office. Marketing activities can be controlled, much like the controls on advertisements on cigarettes. That will limit the exposure of small-time depositors to the availability of such products. However, this could be seen as effectively discriminating against the small-time deposit-holders, especially in a bullish market. Who knows, some of them may indeed want to earn higher returns on their deposits and do not mind taking on higher risks, but are unaware of the means to do so.

Another possibility is to eliminate the conflict of interest that resides in the job of the Relationship Manager as the salesperson as well as the financial risk advisor. This can be done through separation of duties. Have the RM work with a financial risk advisor. While the RM is compensated by a commission earned for bringing in a sale, the financial risk advisor is paid a fixed salary. The latter's role is to advise all customers of the potential risk before they sign on the dotted line. As the financial risk advisor does not benefit from the sale, there will be no conflict of interest. The onus is then on the RM to bring in the right customers, otherwise the RM's effort will be in vain. Obviously, there will be cost and efficiency implications if this is implemented, again new issues to be addressed.

Of course, the entire compensation structure of RMs can be changed. They can be salaried persons who just have a target to meet. Whether they meet the target or not, they will still earn their salary. It's just their advancement in their career that will be affected. This structure is reminiscent of yesteryears, this was how things were done before. Some pressure will be taken off the RMs but this may also blunt their motivation to sell and cross-sell. How this will affect the city-state as a financial centre will be another issue to address.

Liberalising the financial market is the direction that the city-state has chosen to take and any new regulation will need to be managed well as as not to be misconstrued. Some control is obviously good, but over-reacting due to the recent uproar over the sale or mis-sale of investment- or credit-linked products may not be to the benefit of all. Whatever it is, some form of investor education or investor awareness programme will not go amiss.