Sales Misconduct Wells Fargo Community Bank

Sales Misconduct Wells Fargo Community Bank

1. What in your view were the causes of the problems at Wells Fargo?

Number of causes were the problems at Wells Fargo:

1. High pressure sales targets regardless any kind of customer satisfaction or even how targets were set which resulted to misconducts by employees to achieve their targets and keep their jobs. Pressure to meet sales goals in the Community Bank became so pervasive that employees created jargon to refer to aggressive and illegal sales practices that were becoming common. “Sandbagging” meant an employee did not open a requested account and instead saved the customer’s account application for a later time when the employee wished to boost sales metrics. “Bundling” was when an employee falsely informed a customer that certain products were only available when coupled with add-ons such as extra accounts, protection and insurance plans, or retirement plans. Employees fearing retribution from managers, begged friends and family members to open ghost accounts; opened accounts that they knew customers didn’t want; forged signatures on account paperwork; and falsified phone numbers of angry customers so they couldn’t be reached for customer satisfaction surveys.
2. Poor Corporate Governance in terms of reporting lines and reporting to the board, the overall culture of aggressive sales over controls (it was important to achieve sales regardless)
3. Carrie Tolstedt (Head of the Community Bank) who was very sales oriented, Tolstedt and her inner circle were insular and defensive and did not like to be challenged or hear negative information. She also challenged and resisted scrutiny both from within and outside the Community Bank and she reinforced a culture of tight control over information about the Community Bank, including sales practice issues.
4. Long standing working relationship between John Stumpf (Wells Fargo Chairman and CEO) and Carrie Tolstedt (Head of the Community Bank) influenced his judgment. Tolstedt reported to Stumpf until late 2015 and he admired her as a banker and for the contributions she made to the Community Bank over many years. At the same time, he was aware that many doubted that she remained the right person to lead the Community Bank in the face of sales practice revelations, including the Board’s lead independent director and the head of its Risk Committee

1. What were the failures of control systems that, in your view, allowed the dysfunctional behaviors to spread?

• Corporate functions such as risk management, law, human resources, internal investigations, and audit, often reported to the heads of their respective segments rather than to their equivalent superior in corporate.
• Group risk officers within each unit managed operational risk in each line of business, reporting to their group’s top executive and on a dotted-line basis to the chief operational risk officer within the corporate risk function.
• In 2010, Michael J. Loughlin became the bank’s chief risk officer (CRO). However, the “CRO did not have any line authority or directive power to enforce changes on the lines of business,” according to the board.
• Neither Community Bank HR nor corporate HR tracked, analyzed, or reported on issues relating to sales practices.
• Tolstedt reinforced a culture of tight control over information about the Community Bank, including sales practice issues and this hampered the ability of control functions.

1. How and when should the board have intervened? Did they have, in your view, sufficient information that would indicate the existence and the extent of the problem?

The board should have intervened early days by:

• Immediately discharging Carrie Tolstedt
• Restructure the bank and imposing corporate governance procedures in place.
•  Soften Sales targets (which actually happened in 2013 and 2014)

Although as per Shearman & sterling (independent counselor) report blamed on Tolstedt for failing to provide the board with accurate information, however, I believe the board had sufficient information at least they had some information indicating the existence of the problem:

• In 2004 an internal was titled “Gaming” and included a large number of forewarning signs about what could happen at Wells Fargo if the bank did not reduce sales pressure.
• In 2007 a Wells Fargo employee addressed a letter directly to Stumpf, describing significant unethical activity within sales branches and “routine deception and exploitation” of clients, which was so widespread that it had become a normal sales practice.
• Having received no acknowledgment of the letter, the employee wrote a second one, addressed, again, to Stumpf and also to the Audit and Examination Committee, repeating the descriptions of unethical behavior and reiterating concerns for future reputational damage, lawsuits, and regulatory sanctions.

Neither the “Gaming” report nor the letters were taken into serious consideration by Stumpf or by the Board