Two more settlements reached by Wells Fargo with regulators in the span of a week impart yet more “what not to do” ethics and compliance lessons.
On Feb. 21, the Department of Justice and Securities and Exchange Commission assessed total penalties of $3 billion against Wells Fargo in the aftermath of its long-running fake account scandal. Just six days later, the SEC reached a separate $35 million settlement with Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network for failing to oversee advisers who recommended high-risk investments to risk-averse investors, some of whom were senior citizens.
Ethics and compliance officers can learn a lot from the missteps of Wells Fargo, which a closer look at both the deferred prosecution agreement (fake accounts scandal) and the SEC order (improper oversight of advisers) reveals:
- In compliance, walking the walk is more important than talking the talk. In 1998, Wells Fargo increased its focus on sales volume and reliance on year-over-year sales growth. A core part of this sales model was its “cross-sell strategy” of meeting existing customers’ financial needs by selling them additional financial products that they “wanted, needed, and would use.” This was not the sales model community bank leadership followed. To the contrary, according to the DPA, employees were directed, pressured, and/or caused to sell large volumes of products to existing customers, “often with little regard to actual customer need or expected use.” Consequently, from at least 2002 to 2013, community bank leadership “encouraged, caused, and approved sales plans that called for aggressive annual growth” across several banking products, including checking and savings accounts, debit cards, credit cards, and bill pay accounts. While the messaging was correct, there was no follow-up to ensure that messaging was reflected in the actions of leadership.
- Sales pressure in a toxic culture inevitably turns into illegal and unethical conduct. Throughout the community bank, managers exerted “extreme pressure on subordinates to achieve sales goals, including explicitly directing and/or implicitly encouraging employees to engage in various forms of unlawful and unethical conduct to meet increasing sales goals,” the DPA states. Such extreme pressure naturally fostered a culture of fear, where “many employees believed that a failure to meet their sales goal would result in poor job evaluations, disciplinary action, and/or termination,” the DPA states. And, indeed, it did. As a result, thousands of employees began to engage in unlawful conduct to attain sales, including “through fraud, identity theft, and the falsification of bank records, and unethical practices to sell products of no or low value to the customer, while believing that the customer did not actually need the account and was not going to use the account.” These sales tactics were so pervasive and systemic that they had a name within Wells Fargo: gaming. In the compliance sense, a few bad apples can spoil it for the bunch.
- Rewarding unethical conduct encourages unethical conduct. As described in the DPA, senior leaders of the bank “contributed to the problem by promoting and holding out as models of success managers who tolerated and encouraged sales integrity violations.”
- No policies and procedures mean no compliance controls. Even though Wells Fargo had supervisory policies and procedures for compliance personnel and branch managers, it had no such policies and procedures for groups specifically addressing the suitability of volatile exchange-traded funds (ETFs) for risk-averse clients and did not adopt a procedure to assess whether financial advisors followed Wells Fargo’s existing policies.
- Existing policies and procedures cannot exist only on paper. According to the SEC order, Wells Fargo failed to implement existing compliance policies and procedures for financial advisors. For example, Wells Fargo failed to adequately execute its policy requiring that advisors consider clients’ financial ability and willingness to absorb potentially significant losses. It also failed to adequately implement its policy requiring advisors to closely monitor ETF positions. Nor did Wells Fargo separately have procedures to conduct this monitoring itself.
- Ensure proper training and education in relevant areas. According to the SEC order, Wells Fargo didn’t require training for its financial advisors and supervisors about certain ETFs and on related policies and procedures. Nor did Wells Fargo take other reasonable steps to educate financial advisors, so that they sufficiently understood the products and their risks before recommending them to clients. “In addition, a regional compliance supervisor whose job was to review securities purchases for suitability, was not familiar with Wells Fargo’s policies and procedures relating to single-inverse ETFs or the risks of holding single-inverse ETFs long term,” the SEC order states.
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