Wells Fargo Bank agreed to a settlement of $185 million with the Consumer Financial Protection Bureau (CFPB), City and County of Los Angeles, and the Office of the Comptroller of the Currency. The settlement came after the City and federal officials made allegations that the bank’s employees opened new accounts for the its customers without their knowledge. The investigators believe that the employees opened the secret accounts to hit their sales targets and collect their bonuses for satisfying their quotas. Over 2 million unauthorized deposit and credit card accounts may have been created without customers’ knowledge as a result of the scheme. Driven by compensation benefits, employees opened the covert accounts and funded them by transferring funds from consumers’ authorized accounts.
The Wells Fargo settlement will be split between the city of Los Angeles and the federal agencies involved.
The Wells Fargo settlement will be split between the city of Los Angeles and the federal agencies involved. The CFPB will receive $100 million of the settlement payout. This is the largest fine the federal agency has ever imposed. “Because of the severity of the violations, Wells Fargo is paying the largest penalty the CFPB has ever imposed,” said CFPB Director Richard Cordray. “Today’s action should serve notice to the entire industry that financial incentive programs, if not monitored carefully, carry serious risks that can have serious risks that can have serious legal consequences.” The agency was conceived after 2008 financial crisis to make sure that the banks, lenders, and other financial institutions treat consumers fairly. The Office of the Comptroller of the Currency will receive $35 million. The city and county of Los Angeles will be paid $50 million out of the settlement. The bank will also have to pay restitution to all victims of the fraudulent scheme. Wells Fargo’s stock was downgraded to a “sell” rating, which means it is subject to the risk of a price decline, after the news broke.
Wells Fargo has headquarters in Sioux Falls, South Dakota. It is one the largest banks in the country and provides a variety of consumer financial products and services, such as savings and checking account, credit cards, debit and ATM cards, and online banking services. Many banks urge their customers to purchase more than one financial product from the bank. This practice is called cross selling. Wells Fargo attempted to establish itself in the marketplace as a leader in the practice of cross selling. It is a commonly accepted practice in the business when the efforts to generate more business from the existing bank customers are built on strong customer satisfaction and outstanding customer service. In the instant case, Wells Fargo instituted an employee compensation incentive program that urged them to sign up existing customers for additional services, but the bank failed to supervise the application of this program with adequate care. As a result of lack of oversight, thousands of Wells Fargo employees registered its existing customers for additional products and services without the client’s consent to obtain financial incentives for meeting sales goals in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the CFPB authority to act against and punish the institutions that violate consumer financial laws.
The Act prohibits unfair, deceptive, and abusive practices. Under the Act, Well’s Fargo violations include: (1) opening deposit account and transferring funds without authorizations; (2) applying for credit card accounts without authorization; (3) issuing and activating debit cards without authorization, and (4) creating phony email addresses to enroll consumers in online-banking services. The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the CFPB authority to act against and punish the institutions that violate consumer financial laws.
The bank refused to admit to any wrongdoing in the settlement, but apologized to customers and declared it will take steps to remedy its sales practices. Pursuant to CFPB’s consent order, the banks terminated 5,300 employees as part of its internal review. The order also requires Wells Fargo to pay refunds to reimburse all affected by the fraudulent scheme, pay a $100 million fine to the CFPB’s Civil Penalty Fund, and hire an independent consultant to conduct a through review of its procedures. “It’s outrageous for a bank to use a customer’s private information without permission to open an unwanted account. This is a major victory for consumers. Consumers must be able to trust their banks. They should never be taken advantage of by their banks,” said Los Angeles City Attorney Mike Feuer.
The Times investigation revealed that it was up to regional supervisors to push the rest of the bank employees to meet the sales quotas.
City Attorney’s Office sued Well’s Fargo in 2015 after Los Angeles Times launched its investigation into fake accounts. The Los Angeles Times first uncovered the allegations of the bank’s wrongdoing back in 2013. The Times’ investigation revealed that it was up to regional supervisors to push the rest of the bank employees to meet the sales quotas. The supervisors held hourly conferences regarding the progress made towards the daily quotas for selling the additional services to existing customers. Employees who did not meet the quotas had to stay late and work weekends to meet the bank’s objectives. Any employee who did not meet the sales goals was going to be fired. “We were constantly told we would end up working for McDonalds. If we did not make the sales quotas . . . we had to stay for what felt like after-school detention, or report to a call session on Saturdays,” said the bank employee, who later resigned.
Some employees begged their family members to open ghost accounts. Some employees used pressure sales tactics to force existing customers to purchase add-on financial services. When customers attempted to complain about the unwanted accounts, the branch managers would blame it on the computer glitch or say that someone with a similar name has requested the account.
The persistent pressure to meet the sales goals damaged the employee’s morale and led to unethical and illegal sales practices.
The practice of cross selling, selling additional financial products to existing customers, propelled Wells Fargo to being the leader in the add-on services marketplace. The practice also makes it more likely that the bank’s customers continue to stay loyal to the bank. Once a customer opened a checking, savings, and a credit card account with Wells Fargo, a customer is less likely to jump to competitors for additional financial services and products. However, such success comes at a steep price. The persistent pressure to meet the sales goals damaged the employee’s morale and led to unethical and illegal sales practices. The bank attempted to apologize to its customers by taking out full-page ads in some newspapers. It promised to eliminate the unethical culture that led its employees to set up 2 million fake accounts.
U.S. banks, including Wells Fargo, have paid billions of dollars in penalties for various violations since the 2008 financial crisis. The results of the Wells Fargo investigation, which uncovered widespread misconduct of thousands of bank employees, raised a question about whether federal regulators have done enough to detect and deter such fraudulent behavior by financial institutions. Some federal authorities believe that the banking industry at large should, but does not, adequately self-regulate to prevent such unethical practices among its employees. Some believe that individual criminal charges should have been filed against bank employees to deter and make a point that there should be individual liability. The amount of the settlement and the severity and pervasiveness of the fraudulent conduct at issue may open the door for regulators to review the sales practices at other banks. As one of the nation’s biggest retail banks, Wells Fargo had the financial resources to settle the matter without management being held accountable. However, the individuals and local institutions affected by its actions may continue to endure the effects of the fraudulent scheme for years to come.