Yesterday, the Consumer Financial Protection Bureau (CFPB) announced that it had fined Wells Fargo Bank, N.A. (Wells Fargo) the largest penalty the CFPB has ever imposed for the widespread illegal practice of secretly opening unauthorized deposit and credit card accounts. Collection agencies should take note — this is not just about bank accounts. This is about compensation policy and the behavior it drives.
Wells Fargo is facing $185 million in civil penalties from the CFPB, OCC, and the city of Los Angeles over its aggressive cross-selling of financial products that resulted in unauthorized accounts being opened without consumers’ knowledge. The bank will pay full restitution to all victims and a $100 million fine to the CFPB’s Civil Penalty Fund. Wells will also pay an additional $35 million penalty to the Office of the Comptroller of the Currency, and another $50 million to the City and County of Los Angeles.
Per the Press Release issued by the CFPB:
Spurred by sales targets and compensation incentives, employees boosted sales figures by covertly opening accounts and funding them by transferring funds from consumers’ authorized accounts without their knowledge or consent, often racking up fees or other charges. According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers.
“Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses,’ said CFPB Director Richard Cordray. “Because of the severity of these violations, Wells Fargo is paying the largest penalty the CFPB has ever imposed. Today’s action should serve notice to the entire industry that financial incentive programs, if not monitored carefully, carry serious risks that can have serious legal consequences.”
Cordary elaborated further on the Press Call after the announcement. In his prepared remarks he noted:
“Much bank growth these days is occurring by cross-selling customers on more products and services. This is a common approach, and it should lead banks to devote more attention and resources to strong customer service, since the easiest and best way to earn more business from existing customers is by giving them superior value and excellent service. That produces high levels of customer satisfaction, which in turn should generate repeat business from them and positive word of mouth to others.
But what happened here instead is that Wells Fargo built an incentive-compensation program that made it possible for its employees to pursue underhanded sales practices, and it appears that the bank did not monitor the program carefully. Thousands of bank employees found ways to game the system by secretly signing up existing clients for new services that were never requested. They misused consumer names and personal information to create new checking and credit card accounts to inflate their sales figures to meet their sales targets and claim higher bonuses. Money that belonged to customers was used and moved around without their consent, and in some instances these activities generated new fees and costs.
Unchecked incentives can lead to serious consumer harm, and that is what happened here. We are not saying that companies cannot have incentive compensation structures. They are common enough in the industry and they can motivate positive behavior. But companies need to pay very close attention to make sure they have effective monitoring in place to ensure that consumers are protected.
Our investigation found that since at least 2011, thousands of Wells Fargo employees took part in these illegal acts to enrich themselves by enrolling consumers in a variety of products and services without their knowledge or consent. Many have since been terminated. According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers. Employees funded the deposit accounts by transferring funds from existing accounts. As a result of these illegal deposit and credit card practices, many consumers were hit with annual fees, overdraft-protection charges, finance charges, late fees, and other costs.”
A copy of the Consent Order can be found here.
The announcement also should set off alarms at all financial institutions and entities subject to CFPB supervision (including collection agencies) that incentive compensation practices need extra scrutiny to ensure there is no potential for consumer harm.
This sentence from Director Cordray’s prepared remarks is particularly notable,
“Our investigation found that since at least 2011, thousands of Wells Fargo employees took part in these illegal acts to enrich themselves by enrolling consumers in a variety of products and services without their knowledge or consent.”
Thousands of employees took part in these illegal acts! This statement is mind boggling. The offensive conduct was not conducted by a single individual or a small group of rogue employees. This statement suggests that the weakness in the incentive compensation policies was common knowledge – at least to a certain subset of Well Fargo employees.
This announcement is somewhat surprising to members of the ARM industry who have ever done any work for Wells Fargo or gone through the vetting process to be considered as a Wells Fargo vendor. The bank is well known for a stringent and through review process for it agency partners, which often lasts months and requires significant dedicated resources to comply with requests for documents and data. Wells Fargo has required that its vendors’ Compliance Management System (CMS) be virtually impenetrable. Many potential agency partners do not survive the Wells Fargo scrutiny.
However, the fine and consent decree suggest that Wells Fargo’s internal practices may not have been as robust as the company requires of the partners.
Most significantly, many collection agencies have recently begun adjusting compensation programs to incorporate compliance factors. This should stand as a very clear lesson: Do your incentive plans present the potential (whether intentional or unintentional) for harm to consumers? If you haven’t already taken a hard look at the behavior driven by your compensation program — especially collector compensation — now is the time.