Cross-Selling Scandal

In 2013, rumors circulated that Wells Fargo employees in Southern California were engaging in aggressive tactics to meet their daily cross-selling targets. According to the Los Angeles Times, approximately 30 employees were fired for opening new accounts and issuing debit or credit cards without customer knowledge, in some cases by forging signatures. We found a breakdown in a small number of our team members, a Wells Fargo spokesman stated. Our team members do have goals. And sometimes they can be blinded by a goal. According to another representative, This is something we take very seriously. When we find lapses, we do something about it, including firing people.

Some outside observers alleged that the banks practice of setting daily sales targets put excessive pressure on employees. Branch managers were assigned quotas for the number and types of products sold. If the branch did not hit its targets, the shortfall was added to the next days goals. Branch employees were provided financial incentive to meet cross-sell and customer-service targets, with personal bankers receiving bonuses up to 15 to 20 percent of their salary and tellers receiving up to 3 percent.

Tim Sloan, at the time chief financial officer of Wells Fargo, refuted criticism of the companys sales system: Im not aware of any overbearing sales culture. Wells Fargo had multiple controls in place to prevent abuse. Employee handbooks explicitly stated that splitting a customer deposit and opening multiple accounts for the purpose of increasing potential incentive compensation is considered a sales integrity violation. The company maintained an ethics program to instruct bank employees on spotting and addressing conflicts of interest. It also maintained a whistleblower hotline to notify senior management of violations. Furthermore, the senior management incentive system had protections consistent with best practices for minimizing risk, including bonuses tied to instilling the companys vision and values in its culture, bonuses tied to risk management, prohibitions against hedging or pledging equity awards, hold-past retirement provisions for equity awards, and numerous triggers for clawbacks and recoupment of bonuses in the cases where they were inappropriately earned (Exhibit 3). Of note, cross-sales and products-per-household were not included as specific performance metrics in senior executive bonus calculations even though they were for branch-level employees.

In the end, these protections were not sufficient to stem a problem that proved to be more systemic and intractable than senior management realized. In September 2016, Wells Fargo announced that it would pay $185 million to settle a lawsuit filed by regulators and the city and county of Los Angeles, admitting that employees had opened as many as 2 million accounts without customer authorization over a five-year period. Although large, the fine was smaller than penalties paid by other financial institutions to settle crisis-era violations. Wells Fargo stock price fell 2 percent on the news (Exhibit 4). Richard Cordray, director of the Consumer Financial Protection Bureau, criticized the bank for failing to:

monitor its program carefully, allowing thousands of employees to game the system and inflate their sales figures to meet their sales targets and claim higher bonuses under extreme pressure. Rather than put its customers first, Wells Fargo built and sustained a cross-selling program where the bank and many of its employees served themselves instead, violating the basic ethics of a banking institution including the key norm of trust.

A Wells Fargo spokesman responded that, We never want products, including credit lines, to be opened without a customers consent and understanding. In rare situations when a customer tells us they did not request a product they have, our practice is to close it and refund any associated fees. In a release, the banks said that, Wells Fargo is committed to putting our customers interests first 100 percent of the time, and we regret and take responsibility for any instances where customers may have received a product that they did not request.

The bank announced a number of actions and remedies, several of which had been put in place in preceding years. The company hired an independent consulting firm to review all account openings since 2011 to identify potentially unauthorized accounts. $2.6 million was refunded to customers for fees associated with those accounts. 5,300 employees were terminated over a five-year period. Carrie Tolstedt, who led the retail banking division, retired. Wells Fargo eliminated product sales goals and reconfigured branch-level incentives to emphasize customer service rather than cross-sell metrics. The company also developed new procedures for verifying account openings and introduced additional training and control mechanisms to prevent violations.

Question:

why did adoption of the Equator Principles not prevent the cross-selling scandal at Wells Fargo?