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Morgan Stanley Charged for "Unethical" Business Practices

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Within a month, Morgan Stanley (MS - Free Report) has become the second major U.S. financial firm to be accused of dishonest business practices. Massachusetts’ finance regulator has sued the company over “dishonest and unethical” business practices that put pressure on brokers to sale loans to their clients.

Last month, Wells Fargo & Company (WFC - Free Report) was fined by regulators for unauthorized account opening. Since then, banks are under spotlight for their cross-selling tactics (read more: Is Wells Fargo Scam an Indication of Major Banking Chaos?).

Brokers Provided Cash Incentives to Cross-Sell Loans

Per the complaint filed by Secretary of the Massachusetts Commonwealth – William Galvin – Morgan Stanley had set up internal sales contests in Massachusetts and Rhode Island, with brokers being provided with cash incentives worth up to $5,000 for selling securities based loans (SBLs). SBLs allow the clients to borrow against the value of their investment accounts.

Nearly 30 financial advisors in Morgan Stanley’s offices located in Massachusetts and Rhode Island had joined this contest. Galvin further added that their performance was being closely monitored by the supervisors.

While such contests are internally barred at Morgan Stanley, it continued to run for nearly one year, before the company’s compliance and risk office took notice of this practice. Notably, this did not stop until Apr 2015.

Driven by these tactics, Morgan Stanley was able to triple its loan origination volume and added around $24 million in new loan balances.

In a statement, Galvin said, “This complaint lays bare the culture at Morgan Stanley that bred the high pressure effort to cross sell banking products to its brokerage customers without regard for the fiduciary duty owed to the investor.”

He further added, “Morgan Stanley’s firm-wide culture emphasizes the aggressive cross-selling of banking and lending products to wealth management clients.”

The regulator is seeking a fine along with a cease-and-desist order.

Morgan Stanley to Fight the Case

Morgan Stanley has been striving hard to be a full-service bank to its 3.5 million clients of its wealth management division. In second-quarter 2016, the company recorded $69 billion as loans in its wealth management division. The company has come up with new incentives, including credit-card transactions and savings accounts, to boost client engagement.

Morgan Stanley plans to defend itself vigorously against the charges filed. The company spokesperson, in a statement, said, “The securities-based loan accounts were opened only after discussing the product with each client and obtaining their affirmative consent. ... Importantly, clients pay no fee to open a securities-based loan account. They are charged only if they choose to borrow money. The complaint is without merit, and Morgan Stanley intends to defend itself vigorously.”

Nevertheless, whatever be the outcome of this case, the fact that cross-selling is the lifeline for banking sector cannot be denied. Following the Wells Fargo incident – Thomas J. Curry – Comptroller of the Currency had stated, “I have directed that we are to do a horizontal review so we will be looking specifically at sales practices at our largest banks and midsized banks.”  

So, this has become an added concern of the banking industry, which is already grappling with a numbers of issues.

Currently, Morgan Stanley carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance space include Farmers Capital Bank Corporation (FFKT - Free Report) and Fidelity Southern Corporation (LION - Free Report) .

Farmers Capital witnessed an upward earnings estimate revision of approximately 0.9% over the past 60 days. Its share price has gained 11.1% over the past three months. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fidelity Corporation also sports a Zacks Rank #1. Its earnings estimates have been relatively stable over the past 60 days, while its share price is up 21.9% over a three-month period.

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