On Thursday, September 8, 2016, the Consumer Financial Protection Bureau (“CFPB”), in connection with the Office of the Comptroller of the Currency (“OCC”) and the City of Los Angeles, announced that the government was levying a combined fine of $185 million on Wells Fargo, N.A. (“Wells Fargo”) for aggressive sales tactics related to “cross selling” from January 1, 2011 through July 2015.
Specifically, these problematic sales tactics arose from Wells Fargo’s practice of providing financial incentives to its employees to cross sell financial products, i.e. open a credit card for a deposit customer. The CFPB detailed in its consent order the following misbehavior by the Wells Fargo sales force, including that employees: “(1) opened unauthorized deposit accounts for existing customers and transferred funds to those accounts from their owners’ other accounts, all without their customers’ knowledge or consent; (2) submitted applications for credit cards in consumers’ names using consumers’ information without their knowledge or consent; (3) enrolled consumers in online banking services that they did not request; and (4) ordered and activated debit cards using consumers’ information without their knowledge or consent.” See In the Matter Of Wells Fargo Bank, N.A, CFPB Consent Order, September 4, 2016, 2016-CFPB-0015. The consent order states that as a result of Wells Fargo employees’ actions, consumers suffered the following financial harm:(1) Wells Fargo employees opened about 1.5 million unauthorized deposit accounts, and transferred funds from authorized accounts. Because of these unauthorized transfers, the bank charged consumers overdraft fees or insufficient funds penalties because the employee took money out that the consumer thought they had and tried to use; and (2) Wells Fargo employees applied for 565,000 unauthorized credit cards. As a result, consumers were charged annual fees or finance or interest charges.
The CFPB found that this behavior violates §§ 1031 and 1036(a)(1)(B) of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. §§ 5531 and 5536(a)(1)(B).
In addition to the fine, the CFPB required that Wells Fargo also (1) pay full refunds to consumers, totaling over $2.5 million; (2) hire an independent consultant to review its sales policies and procedures; and (3) require ethical sales training for its employees.
Looking at the larger picture for the industry, the bank had two problems here. First, it failed to respond to the evidence that there was a problem. Wells Fargo fired over 5,300 employees over four years related to this cross selling behavior. This extensive firing demonstrates how pervasive this behavior was, and that it was known within at least part of the company. But that it lasted so long shows that Wells Fargo failed to react in a timely fashion to what it was seeing. If nothing else, this enforcement action underscores the necessity of a reasonable investigation regarding the extent of any malfeasance that is discovered, and the need to act in a timely manner.
Wells Fargo’s other problem is the failure to monitor financial incentive programs themselves. In a press release, CFPB Director Cordray stated that he was trying to send a message to the entire financial services industry that any internal financial incentive program will have to be closely monitored. Despite this pronouncement, the CFPB’s investigation failed to disclose what the problems were in the oversight of Wells Fargo’s financial incentive system. There is no discussion of how the incentive program worked, or how it was implemented, which would have provided some guidance to other financial companies that want to look at their own compensation programs. Given that lack of insight into what the CFPB found lacking, the best companies can do is take steps to make sure there is some objective monitoring of their incentive programs.