Wells Fargo Sham Account Scandal: One of the Biggest Mistakes in Banking History

Anyone actively following business or finance will surely have heard news of some of the biggest banks in the media, and, equally, their biggest slip-ups. In the past few months, Wells Fargo was one of those banks. For those who don’t know, Wells is one of the largest international banking and financial services holding companies in America. Their services range from banking, mortgage, and insurance to credit cards, investing, and other consumer and commercial financial services. The company is over one hundred and sixty years old, and is undoubtedly one of the largest banks in the world; in 2012, Wells was reported to hold 30% of the market share for US mortgages. In fact, chances are that you or either of your parents own some sort of account at Wells Fargo, whether it be for retirement, mortgage, or insurance.

So what’s the big deal with Wells? Sham accounts, unwanted credit cards, and malicious sales goals have been the buzzwords of the business world in the past few months. Just this past week, Wells Fargo reached a preliminary settlement of a payment of $110 million dollars to settle its recent class action lawsuit, which was sparked by an ongoing investigation that began three years ago. In 2013, the City of Los Angeles Attorney filed a lawsuit against Wells for having opened roughly 1.5 million bank accounts and 565,000 credit card accounts that may not have been authorized by consumers. Unknowing customers of Wells would have incurred fees for the wrongly opened accounts until they called the banks themselves to cancel the products. Account fees were not the only issue; any opened credit card accounts detrimentally affected the credit score of many consumers as well. The scandal hit the news quickly and Wells quickly became a hotspot for a range of investigators including PricewaterhouseCoopers (PwC), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB), the latter two acting as regulators for the Wells Fargo consumer banking branch.

So what caused the scandal? According to what we’ve heard in investigations and court hearings, the problem was aggravated by a combination of toxic company culture, poor top-level management, and unrealistic sales goals. In a September 2016 hearing, the Senate Banking Committee and John Stumpf, the CEO and Chair of Wells, met to discuss a previous court hearing that came to a $185 million settlement in fines for the fraudulent accounts. In the latest September hearing, Massachusetts Senator Elizabeth Warren highlighted the root cause of the problem at Wells Fargo: in essence, managers and senior executives promoted an environment which forced employees to “cross-sell,” the business practice of selling more than one product to the same customer. In SEC filings, Senator Warren highlighted how top-level executives boasted their cross-selling ratios, which were around six or seven products per customer, to incentivize investors to buy Wells Fargo stock; managers were reportedly “breathing down employees’ necks” as they pushed them to cross sell to customers. Many Wells Fargo employees—who had been fired or later resigned—reported a high-stress environment in which their jobs were often put at threat if they’d not met certain sales quotas by the end a work period. As a result, many employees were pushed into opening fake accounts using fake signatures just to meet their managers’ sales goals and keep their jobs—many of which payed less than fifteen dollars an hour. Many Senators at the hearing were furious for the fact that the scandal had been going on for three (or allegedly more) years, without any top-level management stepping in to clean up the mess. In fact, Senator Warren argued that “Wall Street loved it,” and that for the top-level executives, it was “business as usual.” Other senators were suspicious and angry at the fact that, out of the 5300 employees that were fired, most were low-level workers, some were mid-level branch managers, and none were top-level executives.

That said, CEO John Stumpf—after having been slammed at the Senate Banking Hearing—said that he would “respect and support any decision that the Board of Compensation would make”—which could mean not taking any bonuses, getting a pay cut, or even being fired for the big slip up. Many senators were also angry about Carrie Tolstedt, who was the head of the consumer banking division and who managed the employees that had participated in the scandal. According to many findings, she had walked out of the company with $125 million dollars in stocks, stock options, and rewards, without receiving any sort of penalty—apparently resigning before she could get fired. Senator Warren argued that Stumpf had known of the scandal before Tolstedt had announced her retirement—a statement which could imply clawbacks from her compensation. Stumpf himself resigned effective immediately in October of last year, effectively dodging the aftermath (and ongoing heat) of the scandal’s investigation.

But Wells Fargo is perhaps too big a bank to die out so quickly. The company has already announced its initiatives to pay back the money to the American people and “do right by each and every customer,” starting with the removal of its sales goals and a new e-mail notification system for newly opened accounts. In his testimony, Stumpf addressed a full list of positive initiatives to improve company culture and “gain back the trust of the American people”: working more closely with their regulator, the OCC; creating a new enhanced branch compliance program for monitoring sales practice violations; revising credit card authorization procedures, requiring documented, physical consent by signature; and the initiative to contact all customers with inactive credit cards to validate the accounts. As of today, Wells Fargo has refunded roughly $3.26 million dollars to 130,000 deposit and credit card accounts; all affected customers may receive a small gift ranging anywhere from $25 to $40 dollars. In consideration of the heat that Wells has taken, such measures indeed seem necessary—and it almost seems absurd that such problems had not been addressed in the past. The simple conclusion is that, in the future, government agencies should place a greater focus on integrating monitoring systems internally. Such an open and transparent form of banking would prevent such a problem from ever happening again. If you or any of your family members holds financial services with Wells Fargo, or have noticed strange activity in your banking accounts—beware; you may very well have fallen victim to one of the biggest banking scandals in financial history.