Rather than using a relationship with an established customer to sell additional products, as is generally the case with cross-selling, tying is the linking of two separate products: one that a customer is actually seeking and another that the customer is not really seeking. But the two practices — tying and cross-selling — have things in common. Wells has shown that there is good cross-selling and bad cross-selling. Similarly, there is good tying and there is bad tying, and banking law marks a sharp difference between the two.
No one objects to the inquiry, "Do you want fries with that?" But buying a bank product is different than ordering a hamburger. In short, banks are in a position of economic power over customers.
However, even though the legal distinction between good and bad tying is clear, federal enforcement of anti-tying laws — led by the Federal Reserve Board — has been weak. In fact, after the obligatory dressing down of Wells Fargo CEO John Stumpf, the Senate Banking Committee should now turn its attention to the Fed. The central bank has generally been missing in action when it comes to enforcement of tying policies. The Fed's past statements on tying can also be interpreted as encouraging aggressive cross-selling and tying activities by the likes of Wells Fargo and others.
Some more relevant background is needed.
In 1970, as Congress expanded the Bank Holding Company Act, it also added an important section making it illegal for banks to abuse their power over customers by conditioning the sale of a bank product on the customer agreeing to purchase a nonbank product. The Fed was to take the lead on enforcement.
But from 1970 to 1999, the Fed was virtually silent in exercising its anti-tying powers, leaving it to private litigants to create case law and speaking out only on rare occasions.
Pressure mounted on the Fed to write rules in 1999, when the repeal of most of Glass-Steagall opened a goldmine of tying opportunities for bankers. Much of the political pressure came from investment giants such as Goldman Sachs and Morgan Stanley, which had complained that big commercial banks' tying practices — including underpricing loans for customers if they bought investment products — were anticompetitive.
Finally, in 2003, under Fed Chairman Alan Greenspan, who favored light-touch regulation, the agency produced a "draft interpretation" reflecting its views of the anti-tying law. The document, still in draft form today, put forth a significantly high bar for violating the tying provision. To prove a violation, the Fed said, "coercion" by the bank would have to be shown. This was a new standard not previously contained in the statute.
To make matters worse, the Fed gave comfort to banks engaging in "aggressive" cross-selling. "Cross-marketing and cross-selling activities, whether suggestive or aggressive, are part of the nature of ordinary business dealings and do not, in and of themselves, represent a violation of section 106" of the Bank Holding Company Act.
Meanwhile, we haven't heard much complaining recently from Morgan Stanley and Goldman Sachs. And why is that? Perhaps it's because they were converted to bank holding companies themselves in the heat of the financial crisis, becoming beneficiaries of the very anti-tying law they had complained about.
Every sad tale deserves a takeaway lesson and here it is.
There was merit in the crocodile tears shed by Morgan Stanley and Goldman Sachs after the repeal of Glass-Steagall. The issue of tying is even more important today in the era of "too big to fail" banks.
The Fed should scrap its ill-considered draft interpretation of the anti-tying law and craft a vision of the law that takes account of the coercion that the nation's most dominant banks are capable of imposing on their customers. Better yet, in light of the Fed's miserable record in enforcing the anti-tying law, perhaps the Consumer Financial Protection Bureau should take over.
Andre R. Perron is a partner at Barnes Walker in Bradenton, Fla.