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What You Need To Know About The Wells Fargo Scandal

Wells Fargo has received a ton of negative publicity lately due to reports of employees opening fraudulent accounts on behalf of their customers.

This post will cover what you need to know about the Wells Fargo Scandal.

The Facts

First of all, let's talk about what is known to have actually happened.

Wells Fargo is known among the large American banks to be the king of "cross-selling." In 2014, Wells Fargo executives ran an investor presentation where they cited the strength of their ability to expand sales across multiple accounts for a single customer. In this same presentation, executives claimed that customers with 10-plus products with Wells Fargo were 10x as profitable for the bank - indicating that diminishing returns were not an issue.

This knowledge that cross-selling was profitable for their business led to high sales goals for the employees of the community banking (think - branches) division of Wells Fargo. Employees had to meet minimum sales goals to keep their jobs, and began opening fraudulent accounts as a result.

In total, 1.5 million fraudulent bank accounts and 565,000 fraudulent credit cards were opened between 2011 and 2015. Often, employees would close accounts shortly after opening them, and some employees went as far to create fake email addresses to avoid alerting the customer that the account was allegedly opened for.

Source: The New York Times

The Aftermath

Perhaps the most obvious result of this scandal is the insane amount of media coverage that the bank has received. However, there are a lot of other repercussions that have a more significant effect on the bank as a business.

First of all, CEO John Stumpf has been under intense scrutiny either to resign or to make significant changes. Whether he admits it or not, as the CEO of Wells Fargo he is ultimately responsible for the behaviour and integrity of his employees. He has defended the bank in public statements, saying "There was no incentive to do bad things." As well, with regard to the 5,300 employees that have been fired, he says "I wish it would be zero but if they're not going to do the thing that we ask them to do-put customers first, honour our vision and values-I don't want them here."

Source: Zero Hedge

Another interesting dynamic is that Carrie Tolstedt, the head of Wells Fargo's community banking division, is retiring at the end of the year. Her retirement compensation package is valued at $124 million, composed of a mixture of stock, options, and restricted stock.

As the head of the division were the fraudulent account openings occurred, many speculated that her resignation was related to the scandal. The bank denies this allegation. Still others believe that some of Tolstedt's retirement compensation should be clawed back in light of the significant fines charged to the bank in relation to the fraud.

Source: CNN Money, Fortune Magazine

Wells Fargo is also set to remove sales goals for their retail employees, starting at the beginning of 2017. Stumpf: "We want to make certain our customers have full confidence that our retail bankers are always focused on the best interests of customers."

Source: Seeking Alpha

The Penalties

In total, Wells Fargo is set to pay $185 million in charges.

The largest penalty Wells Fargo is set to receive is from the Consumer Financial Protection Bureau (CFPB), which at at $100 million makes it the largest penalty ever imposed by the CFPB.

They are also required to pay $35 million to the Office of the Comptroller of the Currency, along with $50 million to the City and County of Los Angeles (Wells Fargo is headquartered in San Fransisco, also in California).

Source: The New York Times

My Thoughts

"Unchecked incentives can lead to serious consumer harm, and that is what happened here." - Richard Cordray, director of the CFPB

I could not agree with this more.

While incentives are important to ensure business growth, checks and balances must be in place to make sure this type of behaviour is not only discouraged, but impossible to execute.

In Canada, we are fortunate to have a highly regulated banking system that is concentrated in five major banks. This type of fraud is scary to think about, but we are often cited as having the safest banks in the world, so hopefully this never happens here.

Readers, what are your thoughts on the Wells Fargo scandal? Do you think that penalties should be imposed on their retiring head of community banking? Have you ever been a victim of fraud yourself? Let me know in the comments section!