Was Wells Fargo Banking on Abusive Practices?
The abusive practices alleged in Wells Fargo’s historic agreement to pay $185 million in fines for opening millions of unauthorized consumer accounts exemplify a toxic company culture based on unreasonable incentive programs and sales quotas poorly monitored for ethical and legal compliance.
To get a sense of the scope of the problem, consider a Harvard study which concluded that encouraging or tolerating highly productive but “toxic” employees actually results in a net profit loss to employers. Imagine for a moment that you can precisely quantify this profit loss. Now, multiply the lost profits of retaining a single toxic employee by several thousand, and you’ll have an idea of how big the problem Wells Fargo faces as result of unethical conduct by employees at all levels of the bank’s hierarchy.
The federal Consumer Financial Protection Bureau (CFPB) reportedly levied the largest fine against a financial institution in its five-year history against Wells Fargo for $100 million. The other reported fines were $50 million from the City and County of Los Angeles (also the largest in that agency’s history) and $35 million from the federal Office of the Comptroller of the Currency.
The bank must also pay more than $2.6 million in refunds to consumers who were harmed by the bank’s acts and practices.
By all accounts, Wells Fargo took pains to distinguish itself in the marketplace by cross-selling products and services, and motivated staff with an employee financial incentive program. However, the means by which employees accomplished their sales quotas have been in serious question since at least 2013.
The practices that got the bank (and consumers) in hot water, according to the CFPB, included:
- Opening roughly 1.5 million unauthorized deposit accounts, then transferring funds from existing customer accounts into the deposit accounts, resulting in charges for insufficient funds or overdraft fees to unwitting consumers
- Applying for 565,000 credit card accounts without customer authorization, incurring fees and finance or interest charges
- Issuing and activating debit cards and creating PINs without consumer knowledge or consent
- Creating phony email addresses not belonging to consumers in order to enroll them in online banking services without consumer knowledge or consent
These alleged acts violated the Consumer Financial Protection Act’s (CFPA) prohibitions on unfair and abusive practices or acts that: (1) are likely to result in substantial, unavoidable, and unmitigated consumer harm; (2) materially interfere with the consumer’s ability to understand a financial product or service; and (3) take unreasonable advantage of the consumer’s inability to protect their own interest with regard to financial products of services.
As is typical of legal settlements, Wells Fargo agreed to pay the fines “without admitting or denying the findings of facts and conclusions of law” except as necessary to accept the agency’s jurisdiction.
Although Wells Fargo did not formally admit to any wrongdoing in the legal settlement, the bank first found itself under the microscope of state regulatory agencies as a result of facts uncovered in a 2013 Los Angeles Times investigation. The resulting story led to various legal actions, and eventually, the nine-figure settlement. The story provided an inside look at the bank’s unethical workplace environment through the lens of several employee interviews.
How did the incentives motivate employees on a company-wide scale to engage in the alleged misconduct? The story that started it all revealed a culture that put profits before ethics, pitting employees against consumers and the clock:
- Regional bosses in Florida haranguing underlings with hourly conferences to gauge progress toward daily quotas for opening accounts and selling extra services
- Threats that employees who failed to make sales quotas after two months would be fired and wind up working for McDonalds
- Mandatory overtime to make sales goals without legally required overtime pay
- A community banking president in the Pacific Northwest excoriating branch managers who failed to achieve 120% of their daily quotas, in front of 60 of the manager’s peers
- Meticulously documented tracking of daily performance by personal bankers in 21 sales categories
One particularly egregious act occurred when an employee in the Pacific Northwest reportedly “talked a homeless woman into opening six checking and savings accounts with fees totaling $39 a month.”
Of course, not all employees drank the Kool-Aid. Wells Fargo’s high-pressure tactics that forced “unneeded and unwanted” products and services on consumers reportedly led to employee turnover. Included among the exodus was 14-year veteran branch manager Becky Grimes, who reportedly quit a Texas branch because “I could no longer do these unethical practices nor coach my team to do them either.”
There was also the former manager who discovered the scam against the homeless woman and helped her close all the accounts except one, which she needed as a depository for her social security check. The manager also reported the scam to her superiors, but never heard back from them.
In addition to paying fines and restitution, Wells Fargo has been ordered by the CFPB to hire an independent consultant to thoroughly review the bank’s procedures. As part of the order, the CFPB stated that the consultant’s “recommendations may include requiring employees to undergo ethical-sales training and reviewing the bank’s performance measurements and sales goals to make sure they are consistent with preventing improper sales practices.”
Ironically, the Los Angeles Times reported in 2013 that “Wells Fargo officials said they make ethical conduct a priority and punish or fire employees who don’t serve customers properly… The bank said this month that it is creating an Ethics Program Office to review standards for employees and handling of conflicts of interest.”
Assuming the bank did in fact create an Ethics Program Office in 2013, later developments seem to indicate the program was ineffective. It’s no surprise that ethics training or programs on paper do not always translate into better ethics in practice. A check-the-boxes approach, or an approach that seeks to super-impose ethics on inherently unethical systems will not substantively change company culture for the better.
The key takeaway from this is that the best ethical polices and training can only work as reinforcements to culture, not vice-versa. This point was strongly emphasized in the context of workplace discrimination by the Equal Opportunity Commission’s recent report on harassment in the workplace.
A corporate culture that succeeds financially by hurting consumers and driving good employees away is not sustainable. Studies have shown that bad ethics hurts the bottom line as well as that highly prized but intangible asset, good will. Good will is based on a positive reputation manifested in consumer loyalty, talent recruitment, worker retention, and competitor respect, among other things. If financial success is perceived to be the result of cheating, reputation and good will are harmed.
None of this is to say that holding employees accountable for sales quotas or other goals is inherently bad. Quotas can be an integral part of the growth engine, so long as they are not achieved at the expense of ethical conduct.
Smart companies foster a culture of purpose in the context of a growth culture in which employees meet company goals while still realizing a shared commitment to ethical and meaningful work.
Compliance training is one way employers can reinforce their cultural values and foster a sustainable and ethical workplace. If you’re unsure about how to do it, this case study on Namely, an HR-compliance startup that combined growth and culture with training, provides an inside look. To learn more, check out this white paper on ethics training.