The Wells Fargo Scandal

With Wells Fargo being the 3rd largest US bank according to total assets, it would appear implausible that such a large institution would undergo illegal malpractice given the significant scrutiny by financial regulators. However, the ethical laws of the financial industry seem to be getting stretched as time goes on and banks are creating innovative ways to generate revenue, disregarding the ethics associated behind it. The individual reasons for why this might occur may be unknown to the public, but the laws and subsequent consequences are not.

Wells Fargo has had numerous legal scandals in the past, with many resulting in hefty fines for the megabank. The most notable incident surfaced in 2016 which is still ongoing and unresolved: from 2002 to 2016, Wells Fargo was found to have created millions of fake bank accounts in customers’ names without their permission. Wells Fargo charged extra fees to these customers who already had accounts with the bank by signing them up to products without their permission. This led to many customers filing complaints with the bank and these complaints were dealt with quietly by firing the employees involved to ensure the scandal wasn’t brought to the public eye. However, this proved unsuccessful as regulatory bodies such as the Consumer Financial Protection Bureau began to fine the bank, initiating public attention towards the bank.

Many investment banks have ambitious sales targets for their employees, and if these targets are not met, employees will be required to have performance-related meetings regarding their inability to meet the intended targets. Instilled regular goals are normal practises for competitive companies, but Wells Fargo took this one step further and introduced daily goals for employees despite daily unpredictability. Managers also were reported to not even change employee targets to reflect known economic trends. This was a driving force in the decision for many employees to carry out this misconduct - it would aid employees to reach these targets and relieve the extreme pressures applied.

Employees attempted to catalyse and exploit cross-selling, where customers with the bank have multiple products such as mortgages, credit cards or other financial services. If a customer has more products with a bank, more data can be extracted from the customer to analyse trends and preferences, enabling more profitable decision-making for the bank. Customers were mis-sold products using imperfect information which caused irrational decision-making. Bankers even secretly transferred customers’ money into their new accounts to qualify for any required minimum deposits. This happened on a large scale, with the reported number of fake accounts totalling up to 2 million. However, despite this technique assisting employees in reaching targets, the extra revenue created from these fake accounts was negligible compared to the overall net revenue figures of over 20 billion USD for the bank up until last year. Most of the victims were victims of a damaged credit score and an abundance of illicit fees. Consequently, 500 million USD of this amount will be used to set up a fund to compensate the victims of the crime.

The outbreak of the scandal and the subsequent initial settlement of 185 million USD resulted in an initial 10% decline in share price for the bank – a 31-month low at the time. Numerous charges have since been given to the bank with the latest settlement resulting in an additional 3 billion USD. Wells Fargo stock price has since consistently lagged behind the KBW bank index - a widely recognised indicator for banking sector performance. This means that the stock has proved unfavourable for investors amid the legal uncertainty surrounding the company. This is despite a strong financial position and a consistently growing revenue figure up until the recent outbreak of COVID-19. The bank has also maintained a large cash balance which will prove favourable amidst this legal scandal combined with the uncertainty regarding future profits with the pandemic. Wells Fargo did suffer a 2.38 billion USD loss for Q2 2020, leading the bank to a historical decision in cutting its quarterly dividend from 0.51 USD to 0.10 USD per share.

By Josh Davies