What You Need To Know About The Wells Fargo Scandal

dollar-1362244_1920Wells Fargo has received a ton of negative publicity lately due to reports of employees opening fraudulent accounts on behalf of their customers.

This post will cover what you need to know about the Wells Fargo Scandal.

The Facts

First of all, let’s talk about what is known to have actually happened.

Wells Fargo is known among the large American banks to be the king of “cross-selling.” In 2014, Wells Fargo executives ran an investor presentation where they cited the strength of their ability to expand sales across multiple accounts for a single customer. In this same presentation, executives claimed that customers with 10-plus products with Wells Fargo were 10x as profitable for the bank – indicating that diminishing returns were not an issue.

This knowledge that cross-selling was profitable for their business led to high sales goals for the employees of the community banking (think – branches) division of Wells Fargo. Employees had to meet minimum sales goals to keep their jobs, and began opening fraudulent accounts as a result.

In total, 1.5 million fraudulent bank accounts and 565,000 fraudulent credit cards were opened between 2011 and 2015. Often, employees would close accounts shortly after opening them, and some employees went as far to create fake email addresses to avoid alerting the customer that the account was allegedly opened for.

Source: The New York Times

The Aftermath

Perhaps the most obvious result of this scandal is the insane amount of media coverage that the bank has received.  However, there are a lot of other repercussions that have a more significant effect on the bank as a business.

First of all, CEO John Stumpf has been under intense scrutiny either to resign or to make significant changes. Whether he admits it or not, as the CEO of Wells Fargo he is ultimately responsible for the behaviour and integrity of his employees. He has defended the bank in public statements, saying “There was no incentive to do bad things.” As well, with regard to the 5,300 employees that have been fired, he says “I wish it would be zero but if they’re not going to do the thing that we ask them to do—put customers first, honour our vision and values—I don’t want them here.”

Source: Zero Hedge

Another interesting dynamic is that Carrie Tolstedt, the head of Wells Fargo’s community banking division, is retiring at the end of the year. Her retirement compensation package is valued at $124 million, composed of a mixture of stock, options, and restricted stock.

As the head of the division were the fraudulent account openings occurred, many speculated that her resignation was related to the scandal. The bank denies this allegation. Still others believe that some of Tolstedt’s retirement compensation should be clawed back in light of the significant fines charged to the bank in relation to the fraud.

Source: CNN Money, Fortune Magazine

Wells Fargo is also set to remove sales goals for their retail employees, starting at the beginning of 2017. Stumpf: “We want to make certain our customers have full confidence that our retail bankers are always focused on the best interests of customers.”

Source: Seeking Alpha

The Penalties

In total, Wells Fargo is set to pay $185 million in charges.

The largest penalty Wells Fargo is set to receive is from the Consumer Financial Protection Bureau (CFPB), which at at $100 million makes it the largest penalty ever imposed by the CFPB.

They are also required to pay $35 million to the Office of the Comptroller of the Currency, along with $50 million to the City and County of Los Angeles (Wells Fargo is headquartered in San Fransisco, also in California).

Source: The New York Times

My Thoughts

“Unchecked incentives can lead to serious consumer harm, and that is what happened here.”  – Richard Cordray, director of the CFPB

I could not agree with this more.

While incentives are important to ensure business growth, checks and balances must be in place to make sure this type of behaviour is not only discouraged, but impossible to execute.

In Canada, we are fortunate to have a highly regulated banking system that is concentrated in five major banks. This type of fraud is scary to think about, but we are often cited as having the safest banks in the world, so hopefully this never happens here.

Readers, what are your thoughts on the Wells Fargo scandal? Do you think that penalties should be imposed on their retiring head of community banking? Have you ever been a victim of fraud yourself? Let me know in the comments section!

11 thoughts on “What You Need To Know About The Wells Fargo Scandal

  1. I have Wells Fargo shares, but luckily it is very tiny percentage of my entire portfolio. We were thinking Wells Fargo is a great company to invest, but now our point of view is different.

    This is the main reason I try to diversify my portfolio with multiple companies in one sector. If one goes wrong, I won’t get into financial trouble.

    Cheers,

  2. I agree that upper management would have known…If there were only a handful of staff that opened fraudulent accounts then I would agree a few bad apples.. Over 5300 employees fired then it has to have come from the upper management for that many to come up with the same ideas in different locations around the country.
    Too bad the employees had to lose their jobs and the management including the CEO don’t..

  3. I’ve had friends who worked at Wells Fargo and I’m not surprised to hear this was happening. I was told that they would routinely have 3 sales huddles throughout the day to see where they were at for that day with their sales goals. The employees were beyond pushy because they would get fired otherwise.

    In my opinion, there is no way that management didn’t know what was happening when they put ridiculous sales goals in place. I know that WFC is a dividend darling but I don’t see how it can last with their out of touch management.

    1. “There is no way that management didn’t know” – then you must agree with me when I say Carrie’s retirement package should be clawed back!

  4. Super topical at the moment! In Australia we too have a few large banks, and while I’m sure things like this occur, I’m not sure they would occur at the same scale.

    Incentives are incredibly important. What concerns me is a management team that sets clearly unreachable targets, and when employees cheat to reach them (to save their jobs, no doubt!), they lose their jobs and management washes their hands of it. Carrie Tolstedt should absolutely have part of her package clawed back – its totally irresponsible to benefit from these actions while not also taking ownership of the behaviour of her employees.

    Another question that I’ve seen asked is: How many employees were fired for not reaching their sales targets? If its greater than zero then management absolutely must forfeit any bonuses earned as this makes them complicit in the cheating.

    Unfortunately these types of skewed payoff profiles are pretty common with financial businesses.

  5. Wow – thanks for actually explaining what happened – I’d heard Wells Fargo had done something bad, didn’t realise it was that widespread.

    I think when you have employees with customer/client facing roles, they need to just be paid a fixed salary to do their best, otherwise they’ll be putting their needs before the customer – which will always end bad, like here!

    Tristan

    1. Good thoughts. It’s scary to think about the overall impact this could have…I’m sure there are millions of consumers that will be scared of banks, similar to after the financial crisis.

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