What’s a company do after an epic scandal is exposed? For banking giant Wells Fargo, hit with the largest fine ever meted out by the Consumer Financial Protection Bureau, the response includes firing 5,300 employees amid a pledge to redouble its efforts to foster a corporate culture of compliance and ethics.
On Sept. 8, the CFPB fined Wells Fargo Bank, a subsidiary of Wells Fargo & Company, $100 million for what it calls “the widespread illegal practice of secretly opening unauthorized deposit and credit card accounts.” The infractions date back to 2011.
The crux of the allegation: spurred by sales targets and compensation incentives, employees boosted sales figures by covertly opening accounts and funding them by transferring funds from consumers’ authorized accounts without their knowledge or consent, often racking up fees or other charges.
According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers. As part of a settlement, Wells Fargo will pay full restitution to all victims, a $100 million fine to the CFPB’s Civil Penalty Fund, $35 million penalty to the Office of the Comptroller of the Currency, and $50 million to the City and County of Los Angeles.
“Because of the severity of these violations, Wells Fargo is paying the largest penalty the CFPB has ever imposed,” CFPB Director Richard Cordray said in a statement. “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 legal consequences.”
According to the enforcement action, Wells Fargo had compensation incentive programs in place for employees that encouraged them to sign up existing clients for deposit accounts, credit cards, debit cards, and online banking.
The bank failed to monitor the implementation of these programs, however, and thousands of Wells Fargo employees illegally enrolled consumers in products and services without their knowledge or consent in order meet sales targets and earn bonuses. Many of those customers were financially harmed when the bank charged them overdraft fees because the money was not in their original accounts.
Wells Fargo employees applied for roughly 565,000 credit card accounts that may not have been authorized. On those unauthorized credit cards, many consumers incurred annual fees, as well as associated finance or interest charges and other fees. Employees also requested and issued debit cards without customers’ knowledge or consent, going so far as to create PINs without telling them. Phony email addresses enrolled customers in online-banking services without their knowledge or consent.
Under the Dodd-Frank Act, the CFPB has the authority to take action against institutions violating consumer financial laws, including engaging in unfair, deceptive, or abusive acts or practices. The order requires that Wells Fargo:
Refund all affected consumers the sum of all monthly maintenance fees, nonsufficient fund fees, overdraft charges, and other fees they paid because of the creation of the unauthorized accounts. The refunds are expected to total at least $2.5 million and consumers are not required to take any action.
Hire an independent consultant to conduct a thorough review of the bank’s procedures
Recommendations may include requiring employees to undergo ethical-sales training, and reviewing the bank’s performance measurements and sales goals.
Following the CFPB announcement, Wells Fargo detailed the initial steps it has taken:
Disciplinary actions, including terminations of managers and team members.
Investments in enhanced team-member training and monitoring and controls.
Strengthened performance measures that are tied to customer satisfaction, loyalty and ethics.
Sending customers a confirming email within one hour of opening any deposit account, and sending an application acknowledgement and decision status letter after submitting an application for a credit card.
Chairman and CEO John Stumpf issued the official mea culpa. “Our entire culture is centered on doing what is right for our customers,” he wrote. “However, at Wells Fargo, when we make mistakes, we are open about it, we take responsibility, and we take action.”
“We also have made improvements to our sales practices, enhanced our training, and made significant investments in monitoring and controls to further ensure customers receive only the products they want,” he added. “We have made substantial investments in additional monitoring and control systems and enhanced team member training.”
In his letter to employees, Stumpf reiterated that “every Wells Fargo team member is expected to adhere to the highest possible standards of ethics and business conduct, which are spelled out in [the bank’s] Code of Ethics. If you ever see activity that is inconsistent with our Code of Ethics, please report it immediately to your manager, HR Advisor, or our anonymous EthicsLine.”