Experiential Wealth

Wells Fargo Can’t Spell “Fiduciary”

Sep 12, 2016 | Individuals, Institutions, Opinions, Plan Sponsors

  • On September 8, 2016, Wells Fargo Bank accepted responsibility for wrongdoing and agreed to pay over $185 million for abusive practices in cross-selling bank products and services to its customers without their knowledge.
  • Wells Fargo implemented escalating sales goals and incentive programs tied to performance measurements to pressure employees into cross-selling bank products and services to existing customers.
  • Without knowledge or consent of the customers, deposit accounts and credit cards totaling over 2 million were opened in their names.  Money was transferred from legitimate accounts to validate the new fraudulent accounts while creating fictitious e-mails and PINs to set up accompanying debit accounts.
  • Although Wells Fargo is not a fiduciary nor held to the best interest standard of a fiduciary, it is understood that banks are stewards of our money and they should meet a higher standard. The egregious sales practice by Wells Fargo employees could not have gone on without tacit acceptance by bank management.
  • After the violations were uncovered, Wells Fargo officially and repeatedly affirmed its full time commitment to place customers’ interests ahead of its own – doing the right thing by the customers.  This fiduciary sounding commitment was immediately diluted by the bank’s spokeswoman stating that these violations were small in scale and immaterial to the bank’s quarterly financials.

Wells Fargo Agrees to Be Good and Pay the Fines

Wells Fargo Bank released a public statement1 for settling claims against the bank for years of widespread illegal, abusive2 and harmful sales practices (with emphasis added):

“Wells Fargo reached these agreements consistent with our commitment to customers and in the interest of putting this matter behind us. Wells Fargo is committed to putting our customers’ interests first 100 percent of the time, and we regret and take responsibility for any instances where customers may have received a product that they did not request.”

The bank agrees to pay fines of $100 million to the Consumer Financial Protection Bureau (CFPB)3, $35 million in civil penalty to the Office of the Comptroller of Currency4 and $50 million to the Los Angeles city attorney5,6.  Additionally, the bank agrees to make restitution to customers who were harmed by the bank’s unethical sales practices7.

In Wells Fargo’s CEO John Stumpf’s email8 to all employees on September 8, announcing the settlement, he said (with emphasis added):

“[o]ur entire culture is centered on doing what is right for our customers. However, at Wells Fargo, when we make mistakes, we are open about it, we take responsibility, and we take action.”

Stumpf further emphasized to the employees that when asked about the settlement to say that (with emphasis added):

“Wells Fargo’s culture is committed to the best interests of our customers, providing them with only the products they want and value. We also are committed to having a supportive, caring, and ethical environment for team members.”

Wells Fargo’s Systemic Deceitful Acts

Cross-selling bank products and services is an easy way to raise bank revenue and profit while tying customers to the bank, and Wells Fargo has distinguished itself as a leader in “cross-selling”. The bank’s expectations coupled with an incentive compensation structure have added significant stress to employees and created an environment of conflict that fostered unethical behavior for self-survival and self-gain. Yet, according to the LA Times December 21, 2013, article:

Wells Fargo officials said they make ethical conduct a priority and punish or fire employees who don’t serve customers properly. They acknowledged the bank’s strong focus on selling, but said it is intended to benefit customers by identifying their needs.

The CFPB found that the bank has set sales goals and implemented sales incentive-compensation programs causing thousands of employees to engage in improper sales practices to satisfy sales goals and earn rewards.  To qualify for incentives:

  • 1,534,280 new accounts were opened without consumers’ knowledge or consent, and funds were used from consumers’ accounts to temporarily fund the new accounts. This is known as “simulated funding”.  Approximately 85,000 of those accounts incurred about $2 million in fees to the bank.
  • 565,443 fictitious applications were submitted to obtain credit cards without customers’ knowledge or consent. Roughly 14,000 of those accounts incurred $403,145 in fees to the bank.
  • Employees used email addresses not belonging to consumers to enroll them in online-banking services.
  • Employees requested debit cards and created personal identification numbers to activate them without the consumers’ knowledge or consent.

Wells Fargo Is Not Really Sorry

Wells Fargo said that 5,300 employees, approximately 2% of its workforce, were fired between January 2011 and March 2016, for unsafe and unsound sales practices and fraudulent transactions. $2.6 million has been refunded to customers for any fees (overdraft, late, account, etc.) associated with products customers received that they may not have requested.  The statements from CEO John Stumpf seem pretty clear that the bank is sorry for what has transpired and affirmed that the bank is committed to doing what’s right for the customers by placing their interests ahead of the bank’s.  Well, the bank-wide illicit conduct that resulted in the largest fine paid to CFPB involving thousands of managers and employees and affected millions of accounts failed to be deemed material for public filing disclosure.

According to Bloomberg’s September 8, 2016, article9 (with emphasis added):

Mary Eshet, a bank spokeswoman, said: “On an annual basis, more than 100,000 team members worked in our store. While we regret every interaction that was not handled properly, the number of instances and team members involved represent a very small portion of our business…Each quarter we consider all available relevant and appropriate facts and circumstances in determining whether a litigation matter is material and disclosed in our public filings. Based upon that review, we determined that the matter was not material.”

Fiduciary Culture Remains Elusive

This Wells Fargo scheme to leverage bank customers for self-gain and reward is just the latest version of an old story.  Financial institutions build relationships with customers based on trust and then exploit them.  Their too-big-to-fail size and dominance offer a sense of security and confidence that naturally promotes consumer confidence.  Bank management has a fiduciary responsibility to serve in the best interest of its shareholders and not its customers.  However, bankers understand that, if they don’t also watch out for their customers’ interests, the bank will sooner or later have no customers at all.  There is continuum between (i) the bankers’ short-term self-interest to maximize profit for their institutions at the cost to their customers and (ii) the bankers’ recognition that the road that leads to long-term institutional strength and prosperity is through serving in the best interest of their customers.  Unfortunately, the pendulum is swinging decisively towards short-term-ism.

Business is back to usual.  $185 million is a small slap on the wristfor Wells Fargo.  They have been caught, and they are moving on. The regulators announced a win for the consumers and justified their existence, and they are moving on.  We have found a symptom,and we have stopped it.However, the long-term fix and the injection of a fiduciary culture remain elusive.  Unless consumers and investors rise up and demand a systemic change for incentives and behavior, the next abuse is waiting to be uncovered.

Chao & Company is investment advisor offering independent fiduciary investment advice and management to retirement plans, endowments, foundations and tax exempt organizations.

  1. https://www.wellsfargo.com/about/press/2016/sales-practices-agreements_0908.content
  2. Section 1036(a)(1)(B) of the CFPA prohibits “abusive” acts or practices. 12 U.S.C. § 5536(a)(1)(B). An act or practice is abusive if it materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service. 12 U.S.C. § 5531(d)(1). Additionally, an act or practice is abusive if it takes
  3. unreasonable advantage of the inability of the consumer to protect his or her interests in selecting or using a consumer financial product or service. 12 U.S.C. § 5531(d)(2)(B).
  4. http://files.consumerfinance.gov/f/documents/092016_cfpb_WFBconsentorder.pdf
  5. http://www.occ.treas.gov/news-issuances/news-releases/2016/nr-occ-2016-106b.pdf
  6. http://www.lacityattorney.org/allegations-against-wells-fargo
  7. http://freepdfhosting.com/29677883a9.pdf
  8. http://www.occ.treas.gov/news-issuances/news-releases/2016/nr-occ-2016-106a.pdf
  9. https://stories.wellsfargobank.com/perspective-todays-settlement-announcement/?cid=adv_prsrls_1609_102495
  10. http://www.bloomberg.com/news/articles/2016-09-08/wells-fargo-fined-185-million-over-unwanted-customer-accounts