Most financial institutions have developed incentive programs, known as cross-selling, for branch employees to sell additional products to customers beyond the typical checking and savings account.
They could be a certificate of deposit, a money market account, auto loan or mortgage, insurance plan, wealth management advisement.
“Customers with multiple products are significantly more profitable,” according to a 2016 Harvard Law School Forum presentation.
It was the fee-income and bonus-generating elixir that Wells Fargo & Co. executives touted as a major factor in its dramatic revenue growth spurt — through acquisitions — from a West Coast and Midwest super-regional bank to one of four national too-big-to-fail financial institutions.
From 2010 to 2016, between 55% and 60% of Wells Fargo’s average annual profits were attributable to the products and services provided by its Community Bank retail unit.
But in a damning 100-page report released Thursday by the U.S. Office of the Comptroller of the Currency, cross-selling emerged as the devil in the details that cost 5,300 branch employees, their managers and middle managers their jobs between March 2011 and October 2016.
“The root cause of the sales practices misconduct problem was the Community Bank’s business model, which imposed intentionally unreasonable sales goals and unreasonable pressure on its employees to meet those goals and fostered an atmosphere that perpetuated improper and illegal conduct,” the OCC said.
Little of the OCC’s report represented new revelations, but rather regulatory confirmation that hundreds of thousands of Wells Fargo employees were affected by the high-pressure cross-selling tactics.
The fraudulent customer-account scandal that erupted in September 2016 eventually toppled Wells Fargo’s executive management team and most board members, and stained what had been a sterling reputation for ethical banking.
The bank acknowledged in 2017 the opening and issuing of at least 3.53 million unauthorized checking and savings accounts, debit cards and credit cards between 2009 and October 2016.
Although the bulk of the fraudulent accounts were established in California and Arizona, the bank has told The Charlotte Observer it cannot rule out that 38,722 unauthorized customer accounts were established in North Carolina and 23,327 in South Carolina.
The OCC said Community Bank business leaders and senior executives “presented a stark dilemma to employees every day” from 2002 to October 2016.
The Community Bank was led by Carrie Tolstedt, while chairman and chief executive John Stumpf applied a look-the-other-way oversight approach, the OCC said. He seldom discussed the high-pressure sales tactics with a compliant board even after employees directly alerted him to the fraud as early as 2013.
Stumpf served nearly seven years as chairman and nine years as chief executive before being allowed by the board to resign in October 2016, in large part to remain eligible for a golden parachute and deferred compensation worth tens of millions of dollars.
The goal of cross-selling is entrenching customers so deeply into accounts, whether they needed/wanted them or not, that they are less likely to move to a competitor, either out of perceived or real inconvenience, or out of loyalty.
The industry expectation has been three to five accounts per household, according to analysts.
Tolstedt expected, and Stumpf bragged about to analysts and investors, that Wells Fargo’s goal was for branch employees to establish up to eight accounts per household.
Part of Wachovia Corp. branch and wealth management employees’ introduction into Wells Fargo’s culture in 2009 was the indoctrination to cross-selling.
Some of those employees quit or burned out from the stress.
“The Community Bank’s business model was highly profitable because it resulted in a greater number of legitimate sales than would have been possible without the unreasonable sales goals and sales pressure,” the OCC said.
“Community Bank management intimidated and badgered employees to meet unattainable sales goals year after year, including by monitoring employees daily or hourly and reporting their sales performance to their managers, subjecting employees to hazing-like abuse, and threatening to terminate and actually terminating employees for failure to meet the goals.
“They could engage in sales practices misconduct — much of which was illegal — to meet their goals, or they could struggle to meet their goals and face adverse consequences, including losing their jobs.”
Cross-selling was perhaps the biggest benefactor at Wells Fargo when the bank acquired a collapsing Wachovia in October 2008.
Wells Fargo basically doubled in total assets size from the Wachovia takeover, taking its first Southeast and East Coast presence outside Florida.
It also gained access to Wachovia’s vaunted wealth management products that it could introduce to its West Coast and Midwest customers base.
Howard Atkins, its chief financial officer in 2009, told analysts that with the bank having the potential to serve one in three U.S. households, “revenue synergies from cross-selling are a huge opportunity, much like the Wells Fargo-Norwest merger 10 years ago.”
Cross-selling helped Wells Fargo set quarterly records for net income and fee income as the country recovered from the Great Recession of late 2007 to early 2011.
Stumpf described the bank’s cross-selling ability as a difference maker in the marketplace.
“To succeed at it (cross-selling), you have to do a thousand things right,” Stumpf said.
“It requires long-term persistence, significant investment in systems and training, proper team member incentives and recognition, (and) taking the time to understand your customers’ financial objectives.”
Stumpf, Tolstedt and Wells Fargo drew industry and media praise for how it grew into the nation’s third-largest bank.
The Harvard Law School Forum presentation cited how Fortune magazine applauded Wells Fargo for “a history of avoiding the rest of the industry’s dumbest mistakes” during the Great Recession.
American Banker called Wells Fargo “the big bank least tarnished by the scandals and reputational crises.” It named Stumpf as its Banker of the Year in 2013, while Tolstedt received its most powerful woman in banking honors.
“Tolstedt’s compensation awards explicitly took into account the Community Bank’s achievement of record cross-sell ratios,” according to the OCC. She received tens of millions of dollars in compensation as a result.
By 2013 some Wells Fargo branch employees were trying to inform senior executives, particularly Stumpf, of the sales pressures they were facing.
The OCC listed in its complaint several high-pressure sales tactics stressed, if not required, in order to generate service fees. They included:
- Transferring customer funds between accounts without customer consent, a practice the bank refers to as “simulated funding”;
- Enrolling customers in online banking and online bill-pay without consent, known as “pinning”;
- Accessing and falsifying personal customer account information without authorization, such as phone numbers, home addresses and email addresses.
The OCC said that from 2006 through 2014, total (internal) EthicsLine complaints received from employees increased year-over-year.
One employee complaint example cited by the OCC was addressed to Tolstedt:
“Surely, you must be aware that you will reach a sales number to be achieved that will force the staff to cheat to obtain it. You have reached that point.”
“(T)he noose around our necks ha(s) tightened: we have been told we must achieve the required solutions goals or (we) will be terminated. This type of practice guarantees high turnover, a managerial staff of bullying taskmasters, (and) bankers who are really financial molesters (and) cheaters.”
Another example cited by the OCC:
“Another employee wrote to the CEO’s office and to a senior leader in the Community Bank in 2013 that “I was in the 1991 Gulf War. ... This is sad and hard for me to say, but I had less stress in the 1991 Gulf War than working for Wells Fargo.”
The OCC said that from December 2013 through September 2015, the bank “received at least 5,000 customer complaints related to lack of consent” on accounts opened in their name.
By 2013, the Los Angeles Times reported on what appeared to be isolated incidents of fraudulently established customer accounts that resulted in the firing of about 30 employees.
“We found a breakdown in a small number of our team members,” according to the bank. “Our team members do have goals. And sometimes they can be blinded by a goal.”
Stumpf and other executives were told by the OCC at that time to resolve the customer account issues and to inform the board of the seriousness of the problem.
However, Stumpf decided the fraudulent account issues weren’t a big enough concern for the board to declare them as material, which would have generated a warning to investors in regulatory filings.
Stumpf told the U.S. Senate Finance Committee that he did not believe the fraudulent accounts would lead to a large financial risk.
Once the scandal became public in September 2016, bank executives placed the blame on what they termed rogue branch employees.
“The 1 percent that did it wrong, who we fired, terminated, in no way reflects our culture nor reflects the great work the other vast majority of the people do,” the bank said. “That’s a false narrative.”
Sen. Elizabeth Warren, D-Mass, and a 2020 Democratic presidential candidate, declared in September 2016 that Stumpf showed “gutless leadership” by emphasizing that 5,300 retail employees, managers, middle managers and an area president were fired for their fraudulent cross-selling actions.
“This isn’t right,” Warren said. “The only way that Wall Street will change is when executives face jail time when they preside over massive fraud.”
Stumpf resigned shortly after the committee hearing when the board recognized he was too attached to the root of the scandal to be the one to resolve it.
Tolstedt, who was allowed to take leave shortly before the scandal surfaced, was retroactively fired with cause by the board.
The OCC said that “everything that (it) learned in the course of its investigation of the bank’s sales practices misconduct regarding the root cause, scope, duration and severity of the problem, as well as the inadequacy of the controls, was available to respondents long before September 2016.”
“It took a massive failure on the part of the senior management of the Community Bank, the Law Department and Audit for the sales practices misconduct problem to become as severe and pervasive as it was and last as long as it did.”
Stumpf told the OCC during his recent testimony before the agency that “employees did all they could to complain about the unreasonable sales goals to bank senior leadership in numerous ways over many years, by calling the EthicsLine, sending emails, holding protests and approaching newspapers.”
“He further stated that the senior leadership team, and not the employees, is to blame for the bank not moving fast enough to address the sales practices misconduct problem.”
Other bank executives who reached settlements with the OCC agreed that employees complained about pressure and “gaming” (customer accounts) for many years.
Wells Fargo agreed in September 2016 to pay a combined $185 million in fines to resolve regulatory complaints.
Overall, Wells Fargo has agreed to pay more than $4 billion to date to settle various regulatory and legal disputes since the fall of 2016.
In April 2017, in the first of several company attempts at a mea culpa, Wells Fargo’s board officially placed the bulk of the blame for the scandal on Tolstedt and Stumpf.
The board said its investigation identifies cultural, structural and leadership issues as root causes of improper sales practices.
Tolstedt and other community bank leaders “were unwilling to change the sales model or recognize it as the root cause of the problem.”
Altogether, the bank clawed back $69 million in compensation from Stumpf and $67 million from Tolstedt.
The bank has paid $42.9 million in customer refunds as of November.
On Thursday, OCC regulators ordered a $17.5 million fine against Stumpf. He agreed to a prohibition order, which includes a lifetime ban from the banking industry.
The largest fine of $25 million was assessed against Tolstedt, in part because she has declined to cooperate with the OCC.
Altogether, the OCC issued fines totaling $58.5 million to eight former Wells Fargo executives.
Five executives, including Tolstedt, received notices of charges. It is the first time federal regulators have issued individuals fines related to the scandal.
Tony Plath, a retired finance professor at UNC Charlotte, said the OCC’s fines represent “a slap on the wrist” given the fact the executives “knowingly harmed their customers, to whom they held a fiduciary responsibility, in a variety of creative ways, for their own personal and professional gain.”
Plath said the executives’ actions created “cultural damage they caused to a fine financial institution, turning a great bi-coastal bank franchise into a dumpster fire of repeated strategic customer abuse, and the billions in lost shareholder value, and the reputation damage they caused the entire banking industry.”
“Tolstedt and Stumpf are emblematic of everything that’s wrong with crony capitalism, and history needs to judge — and treat — them accordingly if our system of free markets and free enterprise is to survive into the next generation,” Plath said.