The Federal Reserve has recently handed down unprecedented punishment on Wells Fargo & Co., the world’s second-largest bank by market capitalization, for the bank’s widespread consumer abuses. This includes creating millions of fake customer accounts.
Wells Fargo will not be allowed to grow any larger than it was at the end of 2017 until the Fed is assured that the bank has changed its practices substantially. In other words, Wells Fargo’s current assets cannot surpass $2 trillion.
The bank is still allowed to continue taking deposits and lending to customers, but it must stay below the limit. Wells Fargo is free to decide how it wants to do so, however.
In accordance with the Fed’s demands, the bank agreed to remove three people on its board of directors by April, with a fourth person to be removed by the end of the year.
The Wells Fargo case marks the first time the Federal Reserve has put a limit on the entire assets of a financial institution.
In a statement, the outgoing chairman of the Fed, Janet Yellen, gave her reason for the punishment, claiming that, “We cannot tolerate pervasive and persistent misconduct at any bank.”
Beginning 2011, Wells Fargo employees secretly created as many as 3.5 million unauthorized bank and credit card accounts, without customers’ knowledge or consent.
This occurred because of the bank’s aggressive culture, in which managers pressured employees to meet unrealistic sales goals by committing fraudulent activities.
These fake accounts allowed the bank to collect unwarranted fees and enabled employees to boost their sales figures, making more money in the process. The employees went so far as to create fake PIN numbers and email addresses to enroll customers in online banking services.
The process worked like this: for bank accounts, employees moved funds from customers’ existing accounts into newly created ones without their knowledge. Then, customers were charged for insufficient funds or overdraft fees because there were not enough funds in their original accounts.
Wells Fargo employees also submitted applications for 565,443 credit card accounts without customers’ knowledge, with approximately 14,000 of these accounts incurring over $400,000 in fees, including annual fees, interest charges and overdraft-protection fees, according to CNN.
Following the scandal becoming public, the U.S. Department of Justice opened an investigation and issued subpoenas to the bank. Wells Fargo lost its status as the world’s most valuable bank a week after the fake accounts scandal broke. The bank fired approximately 5,300 employees related to the scam, and agreed to pay $185 million in fines and refund $5 million to customers. The company’s CEO, John Stumpf, resigned a month after the scandal first broke. Customers opened fewer accounts at the bank. Despite all this, Wells Fargo continued to have issues.
It was soon discovered that the bank forced auto-loan clients to pay for unwanted car insurance, and 110,000 mortgage customers were improperly charged fees, according to Bloomberg. The company admitted that it had forced auto insurance on as many as 570,000 borrowers who did not need it. Roughly 20,000 of those customers had their cars wrongfully repossessed in part due to these unwanted insurance charges.
Last August, Wells Fargo was sued by small business owners who said that the bank used “deceptive language to dupe mom-and-pop businesses into paying massive early termination fees.”
As a result of all of these transgressions, the Fed has decided to intervene in Wells Fargo’s practices. Besides removing four people from its board of directors, the Fed also instructed the board to engage in “more intrusive oversight of Wells Fargo’s senior managers and come up with a plan to hold them accountable if they fall short.”
The board was also ordered to explain in detail how it will change the way senior executives get paid at the bank, and how it will punish them if they violate bank policies and government rules or enable adverse risk outcomes. These plans, along with the ones detailing how the bank will improve its internal controls and how it handles risk, are due in 60 days.
The Fed claims that Wells Fargo’s compensation programs played a large role in why the bank failed to comply with regulations.
The company has claimed that the impact from sanctions imposed by the Fed as a result of these past scandals could reduce its profit in 2018 by as much as $400 million. The bank has not decided how it will stay below its asset cap, but it may reduce its portfolio of “commercial non-operational deposits, financial institution deposits and trading assets.”
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