The bank will pay $185 million in fines for what regulators are calling an 'outrageous' sales culture, where employees who were incentivized to cross-sell products opened some 2 million fraudulent accounts.
According to the CFPB, Wells Fargo employees had been secretly creating unauthorized bank and credit card accounts — millions of them, without people’s knowledge or consent. The scandalous activity was widespread, and persisted for years.
Spurred by sales targets and compensation incentives, the CFPB said employees artificially boosted their sales figures by covertly opening accounts and funding them by transferring funds from consumers’ authorized accounts, thereby racking up fees and other charges.
“Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses,” Richard Cordray, director of the Consumer Financial Protection Bureau, said in a statement.
An analysis conducted by a consulting firm hired by Wells Fargo concluded that bank employees opened as many as 1,534,280 deposit accounts and another 565,443 credit card accounts that were not authorized.
Some 85,000 accounts deposit accounts incurred about $2 million in overdraft fees, and 14,000 credit cards generated another $400,000 in unwarranted charges.
According to the CFPB, the violations Wells Fargo committed include:
- Opening deposit accounts and transferring funds without authorization. Employees would open accounts, then temporarily fund the new, unauthorized accounts. This gave employees credit for opening a new account, allowing them to earn additional compensation and to meet the bank’s sales goals.
- Creating unauthorized credit card accounts. On those unauthorized credit cards, many consumers incurred annual fees, as well as associated finance or interest charges and other fees.
- Issuing and activating debit cards without authorization. Wells Fargo employees requested and issued debit cards without consumers’ knowledge or consent, going so far as to create PINs without telling consumers.
- Creating phony email addresses to enroll consumers in online-banking services. Wells Fargo employees created phony email addresses not belonging to consumers to enroll them in online-banking services without their knowledge or consent.
In response, Wells Fargo axed some 5,300 of its associates. Wells Fargo says these firings took place between January 2011 and March 2016.
The nexus of the scandal stems from Wells Fargo’s internal cross-selling goal to hit at least eight financial products per customer, what it called the “Gr-eight initiative.”
But things don’t seem so great for Wells Fargo now.
“While we regret every interaction that was not handled properly, the number of team members involved represent a very small portion of our business,” a Wells Fargo spokesperson said.
Yeah… that depends on how you define “small portion.” The bank employs over 265,000 people, so 5,300 of them represents around 2% of the total workforce. If one out of every 50 apples you bought at the grocery store were rotten, that’s a lot of bad apples and you’d probably shop somewhere else.
“The sales pressure from management was unbearable.”
— Sabrina Bertrand,
Former Wells Fargo Banker
One former employee, speaking on the condition of anonymity said the fraudulent accounts were not opened by employees simply trying to hit sales quotas or earn bonuses. “It was more of threats from upper management,” he said, adding that workers feared they would lose their job.
“The culprit in this case in not just the individuals involved, but the corporate culture itself,” said Julie Ragatz, director of the Center for Ethics in Financial Services at the American College of Financial Services.
CEO John Stumpf doesn’t agree. He says there’s nothing wrong with the bank’s culture and denies management played any role, blaming the entire mess on rogue low-level employees: “Those that did it wrong, who we fired, terminated, in no way reflects our culture,” he told the WSJ in an interview where he defended the firm and the efforts it had taken to stop the behavior.
We’ll see how defiant Stump in front of Congress, who has summed him to Capitol Hill to explain himself and the behavior of his employees. Federal prosecutors in both New York and California are also piling on the pressure.
Meanwhile, Carrie Tolstedt, the Wells Fargo exec who headed the unit running the phony account scam, sneaked away quietly from the bank in July 2016 with a whopping $125 million bonus.
CEO Stumpf made $19.3 million in compensation in 2015. COO Timothy Sloan took home $11 million. CFO John Shrewsbury received $9.05 million, as did David Carroll, SVP of Wealth and Investment Management.
Wells Fargo had been the country’s largest bank by market capitalization. But once word broke of planned congressional hearings, the bank’s stock slid 3.3%, cutting its market capitalization to $236.9 billion — now second in value to J.P. Morgan Chase & Co., with $240.3 billion.
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Wells Fargo Punished With Biggest Fine Ever
Wells Fargo is being slapped with the largest penalty since the CFPB was founded in 2011. The bank agreed to pay $185 million in fines, along with $5 million to refund customers. Of the total fines, $100 million will go toward the CFPB’s Civil Penalty Fund, $35 million will go to the Office of the Comptroller of the Currency, and another $50 million will be paid to the City and County of Los Angeles.
Previously, the largest civil penalty from the CFPB was a $40 million fine imposed on debt-relief company Morgan Drexen for allegedly charging illegal fees.
Also as part of the settlement, Wells Fargo needs to make changes to its sales practices and internal oversight. The bank will be required to hire an independent consultant who will examine its performance-management and sales goals for employees to look for sales-integrity violations. The examiner will submit their findings to the CFPB within the next year.
Additionally, the settlement requires the bank to specifically alert all its California customers to review their accounts and shut down ones they don’t recognize or want.
You can read the full text of the CFPB’s Consent Order online.
The CFPB says the punishment is intended to send a message discouraging similar activities. “It reflects the severity of these violations, the breadth of the unfair and abusive practices, and how seriously we take them,” CFPB Director Cordray told reporters on a conference call.
It’s unclear, however, whether Wells Fargo — or any bank, for that matter — will be receiving the message that the CFPB is hoping to send. Sure, $185 million sounds like a lot to Joe Sixpack, but Wells Fargo made $22.894 billion in profits last year. The $185 million in fines and restitution represents a paltry 0.8% of the bank’s profits… again, earnings in a single year. To put that in perspective, that would be the equivalent of about a $400 fine for the average American making $50,000 annually — like an expensive speeding ticket, but hardly enough to make most tap the brakes and change their ways. It’s more like a slap on the wrist.
“One wonders whether the penalty is enough,” said David Vladeck, a Georgetown University law professor and former director of the Federal Trade Commission’s Bureau of Consumer Protection. “It sounds like a big number, but for a bank the size of Wells Fargo, it isn’t really.”
In a prepared statement, the ICBA said it is “outraged that any financial institution would betray the trust of its customers by opening bank accounts without their knowledge.”
“Not only is this conduct appalling and harmful to American consumers and communities,” the ICBA continued, “it also contributes to the growth of excessive regulation that needlessly burdens the local community banks that do right by their customers.”
Cross-Selling Incentives Under Fire
“Wells Fargo just became the poster child for when external and internal values don’t match.”
— Oliver Staley
The CFPB clearly has cross-selling and incentive-based compensation schemes in its crosshairs.
“This action should serve notice to the entire industry,” Mr. Cordray said. “Any such initiatives should be carefully monitored as a basic element in a company’s compliance program, to make sure that the incentives for employees are aligned with the welfare of consumers.”
Translation: If your bank or credit union is rewarding employees for selling stuff to consumers, you better make sure you’re doing it ethically, or the CFPB might come knocking.
Regulators fined Santander Bank $10 million earlier this year for a scheme that allegedly enrolled customers in overdraft protection services they never authorized. Last year, Citibank and its subsidiaries were ordered to pay $700 million to consumers for allegations they misrepresented the cost and benefits of credit card add-ons. And PayPal was ordered to pay $25 million in fines and customer refunds for claims consumers were unknowingly given credit accounts.
Coincidentally, regulators in Australia have concluded that sales incentives are harming the financial industry’s integrity. They have proposed that all bankers “from the top down” be banned from recommending financial products that contribute to their own paychecks.
The proposal stemmed from a survey of Australian bank employees where respondents were overwhelmingly critical of schemes that tied pay to product sales. Over two-thirds (71%) of bankers that completed the survey said that product and performance based pay had undermined public trust in their industry, and 48% said they had personally witnessed a poor customer outcome caused by performance targets.
A further 20% said their employer knowingly allowed staff to engage in conduct that might amount to a breach of ethical standards or responsible lending obligations, and 27% said they had either witnessed or personally engaged in unethical behavior. And almost a fifth (17%) said they had been asked to do something unethical.
As Matt Levine with Bloomberg points out, “There are two basic principles of management: (1) You get what you measure. (2) The thing that you measure will get gamed.
As for Wells Fargo, they are tucking their tale between their legs, announcing that it will eliminate all product sales goals in retail banking, effective January 1, 2017.
“We are eliminating product sales goals,” CEO Stumpf explains, “because we want to make certain our customers have full confidence that our retail bankers are always focused on the best interests of customers.”
Pete Stackpole, an expert on marketing for community banks, sees a silver lining in all the bad news.
“This event is sure to recall negative perceptions of the big banks brought on by the sub-prime mortgage fallout, and cause more and more consumers to reconsider their bank choice as they look for greater trust in their banking relationship,” says Stackpole. “As a community bank, today is the day to start taking advantage of this environment of change.”
“With the proper brand positioning, digital banking product line-up, and multi-channel marketing communications strategy, your bank can gain a local market advantage and steal customers who decide that a big bank is no longer right for them,” continues Stackpole. “This means that consumers no longer need to make the choice between trust and convenience, as community banks can now deliver both.”