Wells Fargo Banking Scandal

One of the largest banks in the United States, Wells Fargo, committed one of the most significant errors in the modern banking sector experience. They violated several critical moral and legal boundaries by forcing their salespeople to expand the number of brokerage accounts by whatever means possible. They caused a controversy that has harmed the company in more than one. In September, Wells Fargo consented to a $185 million agreement with the Consumer Financial Protection Bureau (CFPB) plus two other government regulators, confessing to opening illegal transactions for millions of its customers. This was one of the greatest scandals a bank has had to face (Austin-Campbell, 2021). Sloan, a 29-year Wells Fargo executive and former COO and president, was elevated to the firm’s leading spot earlier when then-CEO John Stumpf quit after the financial meltdown, which Sloan acknowledged.

Background Information

Henry Wells and William Fargo formed Wells Fargo in San Francisco around 1852, initially offering credit facilities and rapid courier services to fulfill the demands of clients coming to the West before the California gold rush. In connection with business financial services, Wells Fargo also had activities in commodity banking, corporate finance, fund management, insurer brokerage, loan administration, and other areas. Wells Fargo surfaced from the banking crisis of 2008–2009 in a far stronger situation than several different companies. It benefitted from low funding costs, a diverse income mix, and an unwillingness to market many of the most complicated artificial alternative investments and no-documentation mortgages, which exposed other institutions to a significant danger. While it lost billions in the housing sector from 2003 to 2007, this was perceived as a symbol of morality when other banks failed (Mohd Nor Zamry, 2019; Tayan, 2019).

The company also announced the resignation of Community Bank Chairman Tolstedt on January 1, 2017, 2 months first before CFPB officially disclosed its deal with Wells Fargo. Stumpf commended her as one of the most valued Wells Fargo executives, a leading light of its environment, and an advocate for our clients in revealing her resignation. Tolstedt, 69, was slated to depart with around $125 million in profit and incentives after earning $27 million during her last four years with the company.

The Main Problem that the Company is Facing

The firm’s local banking marketing methods, which were aggressively concentrated on a cross-selling variety of products to current clients, were at the center of the controversy. Workers at a bank said that the demand to trade things was so intense that they were practically compelled to participate in unlawful activities to fulfill sales goals. Over five years, 5,300 bank workers were sacked for unethical sales practices. Only after the controversy surfaced in September, 2016 did Wells Fargo’s stock (WFC) plunge to its bottom point before early 2014, and its revenues dropped 2.6 percent for the quarter. Authorities imposed $185 million in fines, and complaints from customers, employees, and stockholders poured in. Sen. Elizabeth Warren openly interrogated CEO John Stumpf, and the footage immediately went global, prompting him to resign (Amernic & Craig, 2021; Austin-Campbell, 2021). Whenever the CFPB agreement was revealed, the public uproar over the habits of a financial institution that several people thought was one of very few residual real heroes resulted in the dismissal of Stumpf. Perhaps other corporate managers, a significant decline in stock value, and the failure of Wells Fargo’s cherished position as the most critical global bank.

How the Company is Dealing with the Problem

Wells Fargo was informed of workers creating illegal accounts over several years, even before the 2016 Consumer Financial Protection Bureau investigation made the problem public. As per Stumpf’s statement before the United States Senate Banking Committee, Wells Fargo saw an issue as early as 2011 and aimed to identify and prohibit unethical behavior. Wells Fargo’s big public lending approach was a process called “cross-selling,” or earning more revenue from current clients by offering them other services (Tayan, 2019). For instance, clients who create account balances may be urged to make retirement savings, debit cards, or loans at the same bank. Cross-selling is a widespread method in insurance firms. It is considered a powerful technique for attracting more customers in a rapidly market-driven industry and retaining clients in the big scheme of things.

Wells Fargo has also begun lowering the number of sales required for inducement awards.  From 2012 to 2015, the number of sales necessary to qualify for incentive rewards decreased by 30%. In addition, Wells Fargo lessened the focus on sales targets in annual reviews. Wells Fargo increased the amount of moral instructional material supplied to the company to clarify what was proper and unethical (Amernic & Craig, 2021). It specifically instructed staff attending ethics courses not to create bogus profiles for customers. In addition, the bank began removing workers whom it suspected had engaged in unethical activities to increase revenues. Throughout 2011 and 2016, the company laid off around 5,300 workers.

Lessons Learned

Wells Fargo was motivated to engage in these activities by seeking more clients, additional assets, more earnings from chequing accounts, and more spectacular data to present to investors. The only way to expand a company is to stress over the figures. Clients should preferably pick and stick with business due to the apparent value delivered. Anyone benefits when a bank is continually striving to upgrade the effectiveness of its client relationship. Wells Fargo is among the most established and well-known brands in commerce. When a company is so well-established and secured, it is easy to get sucked into the temptation of believing that consumers would overlook misconduct such as pushy sales methods or public controversies. Moving banks is difficult, particularly when consumers have many accounts and valuables with the same organization. Perhaps Wells Fargo thought that the danger of upsetting or alienating clients was little. That is a risky assertion; it is preferable to believe that consumers are always on the lookout for reasons to move to a rival. Clients have also already expressed their dissatisfaction with Wells Fargo: bank visits are down 10%, bank deposits are down 25%, and bank card requests are down 20% from the prior year (Mohd Nor Zamry, 2019).

There is just so much at issue to take that chance of navigating the complexity of accounting regulations or operating in the grey zone. Punishments, litigation, and brand image problems should not be taken lightly. Wells Fargo will most certainly fight this catastrophe, but it will face a lengthy and complicated recovery from the harm to its reputation. Banks must hold themselves responsible for conformity before authorities or clients do. Wells Fargo’s blunders will undoubtedly go down in financial history as lessons about what not to do. Never let the same thing has happened to the institution, whether it is a national brand or a smaller institution. If one is going to get media coverage, make it a better one. Heed the Client’s words, created an organizational environment to promote the level of customer satisfaction service, and kept on the legislative right side of the law.

Exhibits

1. Fake accounts.
2. Lawsuits

References

Amernic, J., & Craig, R. (2021). Evaluating assertions by a Wells Fargo CEO of a ‘return to ethical conduct.’ Leadership, 17427150211064396.

Austin-Campbell, S. (2021). Wells Fargo: An Examination of a Corporate Scandal and the Economic Impact on the Value of the Stock. Available at SSRN 3895348.

Mohd Nor Zamry, N. S. (2019). Corporate Governance and Its Determinants: A Study on Wells Fargo Scandal.

Tayan, B. (2019). The Wells Fargo cross-selling scandal. Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-62 Version, 2, 17–1.