Wells Fargo employees open two million unauthorized accounts
Wells Fargo & Co., which was the biggest U.S. bank by market capitalization up until just a few weeks ago, has found itself at the center of a scandal.
Following its $185 million settlement with the Consumer Finance Protection Bureau, the San Francisco-based bank has been under scrutiny for fraudulent sales practices over the last few years. An early investigation revealed that the bank opened nearly two million unauthorized deposit and credit card accounts for its customers.
Taxing sales targets and higher compensation incentivized employees to execute the questionable transactions. Currently, the bank has instructed several branch managers to temporarily freeze cross-selling operations and has announced plans to end product sales goals by early next year.
Cross-selling, which appears to be the center of the bank’s problem, is a common practice used in the industry to increase a company’s earnings. Employees are encouraged to push complementary products or services to existing customers and, in return, these customers are usually rewarded with savings on deals. In some cases, however, these sales are made with the sole intent and purpose of generating profit for the company and disregard the best interests of its customers.
What makes the Wells Fargo case special is the 5,300 firings that happened within the bank over the past five years. While the bank has yet to release any statements regarding senior management’s involvement in the scandal, CFO John Shrewsberry claimed that 10 percent of the firings included branch managers and above.
The community banking segment at Wells Fargo, which handles most of the retail banking products and services, accounted for 55 percent of the bank’s second quarter revenue and 57 percent of its net income.
Cross-selling has been a key driver for the firm’s earnings and, ultimately, made Wells Fargo a leader in its field. In 2015, Wells Fargo reported that its customers possessed an average of six products per household and nearly 82 percent of its credit card holders had a deposit account with the bank.
Carrie Tolstedt, who was the head of community banking operations prior to her retirement in July, has been under pressure to comment on the recent issues that have surfaced. The 27-year veteran of the bank has yet to discuss her involvement in the situation.
Tolstedt received $125 million in stocks and options as part of her retirement compensation in July, but many regulators have demanded the bank to claw back Tolstedt’s pay.
CEO John Stumpf initially took responsibility for his firm’s actions, but later shifted the blame to the 5,300 employees who were fired. In an interview with the Wall Street Journal, he shared that employees who do not “honor our vision and values” are not wanted.
The Senate Banking Committee summoned Stumpf to testify at a hearing on Tuesday, Sept. 20. Richard Shelby, senator and chairman of the committee, opened the meeting discussing the allegations facing the firm as well as comments from former employees who described the bank as a “high pressure” sales environment.
Stumpf announced that the misdeeds were not “an orchestrated effort” and that the bank has taken new measures to resolve the situation. He explained that Wells Fargo, which originally intended to check records dating back to 2011, was going to extend their review for fraudulent activity to 2009.
The recent findings of the malpractice did not come as a surprise to the executives at Wells Fargo, as Stumpf noted in his remarks at the committee meeting.
In 2013, the Los Angeles Times published an article that reported several Wells Fargo accounts being opened without the customers’ knowledge. The company took matters to hand and conducted internal investigations. In August 2015, the bank brought in PricewaterhouseCoopers to further review the firm’s operations.
The issues with the bank have also caught the attention of Democratic presidential nominee Hillary Clinton. In a letter to the bank’s customers, Clinton revealed that “the culture of misconduct and recklessness” in the banking industry must be corrected.
Despite the $185 million setback, analysts believe that the real damage from the penalties lie in the impending sanctions that will tarnish Wells Fargo’s reputation. If the probe leads to criminal charges, individual employees could face prosecution and the bank could also be subject to additional penalties.
Since the beginning of the month, Wells Fargo shares plummeted as much as 10 percent. Investors, who saw the rapid selloff as an overreaction, helped moved the price back momentarily before it fell again.