What is one to make of the Wells Fargo cultural miasma that led to the bank paying a $100 million fine to the Consumer Finance Protection Board, the largest in the agency’s short history?
Add to that another $35 million to the office of the comptroller of the currency and $50 million to the City and County of Los Angeles and the fines total $185 million. The fines were assessed based upon the bank’s conduct of opening over 2 million phantom bank and credit card accounts, usually without customers’ knowledge.
The scandal was as straight-forward and pedestrian as one can imagine. It involved the sales of simple-to-understand, simple-to-use products such as credit and debit cards, coupled with traditional banking services such as car and home loans. These products were cross-sold to customers with an aggressive sales incentive program, which determined not only employees’ compensation, but whether they even kept their jobs.
What began as a legitimate, legal and beneficial business strategy became not only high-risk but illegal, because of the way Wells Fargo administered its approach to cross-selling. As with any sales initiative, if a company wants to push it, it will set up incentives to engage in such behavior, increasing commissions around the service or product being emphasized. Almost any product or service can present a substantial legal and reputational risk, if not properly managed.
Moreover, Wells Fargo seemed to have forgotten that a bank’s reputation is built on a basic cultural value: trust. People trust that their money will be there when they go to take it out. From the earliest days of banking in the west, the institutions succeeded because customers believed their money was safe. One need only consider the run on the bank scene from Walt Disney’s film version of Mary Poppins.
Banks and banking have certainly changed since 1890s England or even the 1930s Great Depression in America. Before the scandal, Wells Fargo was worth some $240 billion, a far cry from a neighborhood bank; it is a worldwide financial services organization. Yet many people still ascribe the values of our parents and grandparents to how we think a bank should conduct itself. This seems to be a lesson which was lost on Wells Fargo senior executives and its board of directors.
Former CEO John Stumpf seemed as out of touch as the head of a multi-billion-dollar corporation could be when he announced that the fraud was the fault of some 5,300 employees who were terminated. He initially failed to accept any responsibility for creating a culture where employees had to cheat, by creating false accounts, just to keep their jobs. It was not until the Senate Banking Committee hearing that Stumpf admitted responsibility for the failure. Unfortunately, he admitted that he had known about the scandal since 2013 and the company’s board had known about it since 2014. Wells Fargo had not even suspended the sales compensation plan that led to this fiasco, keeping it open until the end of the year. It was not until much later, when public pressure mounted after the House Banking Committee grilled Stumpf that the bank suspended its cross-selling sales incentive program.
One of the more remarkable facets of the Wells Fargo case is that the company had been aware since at least 2009 of the fraudulent cross-selling by its employees. In 2010 the bank found, from employee satisfaction surveys, that employees were uncomfortable with the sales targets of the product cross-selling. In 2012, the bank further internally investigated the fraudulent practices. In 2013, the Los Angeles Times broke the story publicly. This is when former CEO Stumpf stated he was first informed of the scandal, yet he waited a year to inform the company’s board of directors. Then in 2014, outside counsel and PwC were retained to perform additional investigations. Yet despite awareness of the problem, the cross-selling program was not changed.
Wells Fargo made less than $400,000 on its fraudulent cross-selling. The reported fines and penalties of $185 million, pre-settlement investigation costs of $60 million, post-resolution remediation costs of $50 million and loss of market cap of over $6 billion, put the loss to the company at significantly higher. One out of every seven Wells Fargo customers will or has plans to leave the bank as a customer. The SEC has announced they are investigating the bank and finally Wells Fargo has announced it has reserved $1.7 million for legal costs.
For every company the clear message is that if a problem arises, no matter how small or how localized, it must be dealt with before it rages out of control and consumes an organization. Wells Fargo also demonstrates that employees at all levels have a responsibility to keep the ship upright, from the board to the CEO to senior management to the front-line employees. If cross-selling of debit cards can lead to a more than $6 billion loss, what could happen to other companies?
Every manager should study the Wells Fargo case for the valuable lessons to be learned. Some of the simplest and most effective are:
- If employees raise their hands to speak up, they must be taken seriously.
- Letting any problem, no matter how insignificant or non-material, fester over many years is a recipe for disaster and may well also draw increased regulatory scrutiny.
- Design incentives with care; the company will get the behavior it incentivizes.
- Risk management is an ongoing, not an annual or one-time, process.
- It is not simply tone at the top but also tone in the middle and at the bottom that drive culture.
The impact of the Wells Fargo scandal will continue for some time. It should be studied by every manager and compliance professional going forward for important lessons about ethics and compliance.
Tom Fox is the compliance evangelist and compliance ambassador for the Red Flag Group. He can be reached at firstname.lastname@example.org.