Prosecutors used the $3 billion settlement with Wells Fargo to send a message to the bank’s competitors: careful with those cross-sales.

Done right, there is nothing wrong with building business by marketing products from different parts of a bank, such as car or home loans, to financial services clients.

And, in fact, that is the strategy at the heart of many wirehouses’ growth plans.

One day prior to the Wells Fargo settlement announcement, Morgan Stanley CEO James Gorman highlighted the ability to expand corporate stock plan offerings as well as lending to clients as part of the firm's deal with E*Trade.

“The more we dug into it, we just saw more opportunities to gain revenue by effectively cross-selling to the different client bases,” Gorman said during a presentation announcing the firm’s $13 billion planned acquisition.

Merrill Lynch and UBS have likewise eagerly expanded lending programs, as reported.

“If there is going to be this much hunger for cross-selling, I think folks are going to have to be very careful. I think I will need to include this in my audits,” warns Joseph Borg, director of the Alabama Securities Commission, a state agency that regulates broker-dealers.

The Department of Justice and the Securities and Exchange Commission made clear that the primary problem at Wells Fargo was a failure to inform customers about conflicts — which in some cases amounted to blatant fraud.

Wells Fargo’s cross-selling represented “an aggressive business strategy” that involved “loading up each customer with as many products as possible,” Nick Hanna, the U.S. Attorney for the Central District of California, who led the Wells Fargo prosecution team, said during a Feb. 21 press conference in Los Angeles announcing the settlement.

At the same event, prosecutors made clear that they are vigilant and will act on similar infractions from other companies.

“I flew into LA this morning to deliver a message in person to Wells Fargo and to other financial institutions doing business in Charlotte,” R. Andrew Murray, U.S. Attorney for the United States District Court for the Western District of North Carolina, said during the press conference. “When a reputable institution like Wells Fargo caves to the pernicious forces of greed and put your own interests above customers, we will not stand idly by.”

And scrutiny from prosecutors may only increase as politicians slam regulators as weak.

The New York Times on Wednesday described a report from the U.S. House of Representatives Financial Services Committee which states that one government appointee promised that regulators would go easy on the bank.

Eric Blankenstein, who once worked for the Consumer Financial Protection Bureau, told former Wells Fargo interim CEO C. Allen Parker that there would be “political oversight” of regulatory actions regarding the scandal, according to the House report. Blankenstein resigned in May 2019 over racist statements he made when in law school, the New York Times reports.

Financial Services Committee Chairwoman Maxine Waters (D-Calif.) described the company as a “reckless megabank.” Wells Fargo CEO Charles Scharf is scheduled to testify before the committee on March 10.

A spokesperson for Murray tells Financial Advisor IQ that he was not referring to any single institution in his comments. Charlotte, N.C. was the home base of Wachovia, which Wells Fargo bought during the financial crisis. Bank of America Merrill Lynch and LPL Financial, among others, also have headquarters in or near the city.

Borg, the Alabama state regulator, says that financial institutions need to be cognizant of various state rules as well and make sure all cross-sales are done by the book.

Representatives must have the appropriate license to recommend any particular product. So, if they are recommending an insurance product, for example, they need a license to sell insurance. If, however, they are only recommending that a client contact a licensed insurance broker in their company to learn about insurance products, that likely would not create a violation risk, Borg says. If advisors are compensated for the sale of their employer’s financial products that they don’t have licenses to market, they might also be risking committing a violation, Borg adds.

But wirehouse executives seem confident that with training and oversight, cross-sales offer massive opportunity.

A senior Merrill Lynch executive recently noted loans and lending to clients with the type of collateral exhibited by their wealth accounts offer “great examples” of how the business of the wirehouse fits in well with the bank.

Reflecting on how the divisions work today, the executive said, "There’s no comparison in terms of where we were 10 years ago.”

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