The Wells Fargo cross-selling scandal was caused by the creation of millions of fraudulent savings and checking accounts on behalf of Wells Fargo clients without their consent or knowledge due to aggressive internal sales goals at Wells Fargo. News of the fraud became widely known in late 2016 after various regulatory bodies, including the Consumer Financial Protection Bureau (CFPB), fined the company a combined US$185 million as a result of the illegal activity. The company faces additional civil and criminal suits reaching an estimated $2.7 billion by the end of 2018. The creation of these unauthorized accounts continues to have legal, financial, and reputational ramifications for Wells Fargo and former bank executives as recently as September 2023.
Wells Fargo clients began to notice the fraud after being charged unanticipated fees and receiving unexpected credit or debit cards or lines of credit. Initial reports blamed individual Wells Fargo branch workers and managers for the problem, as well as sales incentives associated with selling multiple "solutions" or financial products. This blame was later shifted to a top-down pressure from higher-level management to open as many accounts as possible through cross-selling.
The bank took relatively few risks in the years leading up to the 2008 financial crisis, which led to an image of stability on Wall Street and in the financial world. The bank's stable reputation was tarnished by the widespread fraud, the subsequent coverage, and the revelation of other fraudulent practices employed by the company. The scandal led to the resignation of CEO John Stumpf, an investigation of the company's bank-led model, a number of settlements between Wells Fargo and various parties, and pledges from new management to reform the bank.
Background Cross-selling Cross-selling, the practice underpinning the fraud, is the concept of attempting to sell multiple products to consumers. For instance, a customer with a checking account might be encouraged to take out a mortgage, or set up a credit card or online banking account. Success by retail banks was measured in part by the average number of products held by a customer, and Wells Fargo was long considered the most successful cross-seller. Richard Kovacevich, the former CEO of Norwest Corporation and, later, Wells Fargo, allegedly invented the strategy while at Norwest. In a 1998 interview, Kovacevich likened mortgages, checking and savings accounts, and credit cards offered by the company to more typical consumer products, and revealed that he considered branch employees to be "salespeople", and citizens to be "consumers" rather than "clients". Under Kovacevich, Norwest encouraged branch employees to sell at least eight products, in an initiative known as "Going for Gr-Eight".
Early coverage Wells Fargo's sales culture and cross-selling strategy, and their impact on customers, were documented by the Wall Street Journal as early as 2011. In 2013, a Los Angeles Times investigation revealed intense pressure on bank managers and individual bankers to produce sales against extremely aggressive and even mathematically impossible quotas. In the Los Angeles Times article, COO Timothy Sloan was quoted stating he was unaware of any "...overbearing sales culture". Sloan would later replace John Stumpf as CEO.
Under pressure from their supervisors, employees would often open accounts without customer consent. In an article from the American Bankruptcy Institute Journal, Wells Fargo employees reportedly "opened as many as 1.5 million checking and savings accounts, and more than 500,000 credit cards, without customers' authorization".Rules amendments effective in December; Wells Fargo under fire for sales practices. (2016). American Bankruptcy Institute Journal, 35(10), 8-9. The employees received bonuses for opening new credit cards and checking accounts and enrolling customers in products such as online banking. California Treasurer John ChiangVerschoor, C. (2016). Lessons from the Wells Fargo scandal. Strategic Finance, 98(5), 19-20. stated: "Wells Fargo's fleecing of its customers ... demonstrates, at best, a reckless lack of institutional control and, at worst, a culture which actively promotes wanton greed."
Verschoor explains the findings of the Wells Fargo investigation show that employees also opened online banking services and ordered debit cards without customer consent. "Blame is being placed on the bank's marketing incentive plan, which set extremely high sales goals for employees to cross-sell additional banking products to existing customers whether or not the customers needed or wanted them."
In 2010, New York Department of Financial Services (NY DFS) issued the Interagency Guidance on Sound Incentive Compensation Policies. These policies monitor incentive-based compensation structures, and requires that banks appropriately balance risk and rewards, be compatible with effective controls and risk management, and that they are supported by effective corporate governance.Biben, M. L., Kini, S. M., Luigs, D. A., Lyons, G. J., & Alspector, L. (2016). Banking regulators focus on sales practices. Banking & Financial Services Policy Report, 35(11), 15–17.
Fraud Employees were encouraged to order credit cards for pre-approved customers without their consent, and to use their own contact information when filling out requests to prevent customers from discovering the fraud. Employees also created fraudulent checking and savings accounts, a process that sometimes involved the movement of money out of legitimate accounts. The creation of these additional products was made possible in part through a process known as "pinning". By setting the client's PIN to "0000", bankers were able to control client accounts and were able to enroll them in programs such as online banking.
Measures taken by employees to satisfy quotas included the enrollment of the homeless in fee-accruing financial products. Reports of unreachable goals and inappropriate conduct by employees to supervisors did not result in changes to expectations.
After the Los Angeles Times article, the bank made nominal efforts to reform the company's sales culture. Despite alleged reforms, the bank was fined $185 million in early September 2016 due to the creation of some 1,534,280 unauthorized deposit accounts and 565,433 credit-card accounts between 2011 and 2016. Later estimates, released in May 2017, placed the number of fraudulent accounts at closer to a total of 3,500,000.
In December 2016, it was revealed that employees of the bank also issued unwanted insurance policies. These included life insurance policies by Prudential Financial and renters' insurance policies by Assurant. Three whistle-blowers, Prudential employees, brought the fraud to light. Prudential later fired these employees, and announced that it might seek damages from Wells Fargo.
Initial fines and broader coverage
Despite the earlier coverage in the Los Angeles Times, the controversy achieved national attention only in September 2016, with the announcement by the Consumer Financial Protection Bureau that the bank would be fined $185 million for the illegal activity. The Consumer Financial Protection Bureau received $100 million, the Los Angeles City Attorney received $50 million, and the Office of the Comptroller of the Currency received the last $35 million. The fines received substantial media coverage in the following days, and triggered attention from further interested parties.Levine, Wells Fargo Opened a Couple Million Fake Accounts
Initial response from Wells Fargo and management After news of the fines broke, the bank placed ads in newspapers taking responsibility for the controversy. However, the bank rejected the notion that its sales culture led to the actions of employees, stating "... [the fraud] was not part of an intentional strategy". Stumpf also expressed that he would be willing to accept some personal blame for the problems.
Company executives and spokespeople referred to the problem as an issue with sales practices, rather than the company's broader culture.
Initial impact of the fraud, legal action, and press coverage On Wells Fargo management The bank fired approximately 5300 employees between 2011 and 2016 as a result of fraudulent sales, and discontinued sales quotas at its individual branches after the announcement of the fine in September 2016. John Shrewsberry, the bank's CFO, said the bank had invested $50 million to improve oversight in individual branches. Stumpf accepted responsibility for the problems, but in September 2016, when the story broke, indicated he had no plans to resign.
Stumpf was subject to a hearing before the Senate Banking Committee on September 21, 2016, in an effort led by Senator Elizabeth Warren. Before the hearing, Stumpf agreed to forgo $41 million in stock options that had not yet vested after being urged to do so by the company's board. Stumpf resigned on October 12, roughly a month after the fines by the CFPB were announced, to be replaced by COO Timothy Sloan. Sloan indicated there had not been internal pressure for Stumpf's resignation, and that he had chosen to do so after "...deciding that the best thing for Wells Fargo to move forward was for him to retire...". In November 2016, the Office of the Comptroller of the Currency levied further penalties against the bank, removing provisions from the September settlement. As a result of the OCC adding new restrictions, the bank received oversight similar to that used for troubled or insolvent financial institutions.
Stumpf received criticism for praising former head of retail banking, Carrie Tolstedt, upon her retirement earlier in 2016, given that the bank had been conducting an investigation into retail banking practices for several years at the time. In April 2017, the bank utilized a clawback provision in Stumpf's contract to take back $28 million of his earnings. Tolstedt was also forced to forfeit earnings, though she denied involvement. Tolstedt was responsible for the pressure placed on middle management to dramatically increase the bank's "cross-sell ratio", a metric for how many accounts each customer had.
The bank experienced decreased profitability in the first quarter after the news of the scandal broke. Payments to law firms and other external advisers resulted in increased expenses. After earnings were reported in January 2017, the bank announced it would close over 400 of its approximately 6000 branches by the end of 2018. In May 2017, the bank announced that they would cut costs through investment in technology while decreasing reliance on its "sales organization". The bank also revised up its 2017 efficiency-ratio goal from 60 to 61.
Wells Fargo costs The CFPB fined Wells Fargo $100 million on September 8, 2016, for the "widespread illegal practice of secretly opening unauthorized accounts". The order also required Wells Fargo to pay an estimated $2.5 million in refunds to customers and hire an independent consultant to review its procedures.
Wells Fargo incurred additional costs due to refunds and lawsuits: $6.1 million in customer refunds due to inappropriate fees and charges; $142 million in customer compensation due to a class-action settlement; $480 million settlement for a shareholder class-action lawsuit; and $575 million 50-state Attorneys General (AG) settlement for a combination of opening unauthorized accounts and charging for unnecessary auto insurance and mortgage fees.
The December 2018 AG settlement announcement indicated that Wells Fargo had already paid $2.3 billion in settlements and consent orders, so its $575 million settlement brought the total to nearly $3 billion.
On consumers