Despite the fact that banking scandals and large fines handed down by the CFPB have become something of a de rigueur part of life for those who work in financial services over the last several years, Wells Fargo certainly managed to turn some heads last September when it was slapped jointly with $185 million worth of fines from the U.S. Office of the Comptroller of the Currency, the CFPB and the L.A. District Attorney’s office. The CFPB’s portion of the fine — $100 million — was the largest in the agency’s five-year history and actually more than doubled the next highest amount.
More eye-catching than the big ticket price on the fine, however, was what the fine was for.
Wells Fargo employees were accused — among other things — of opening as many as two million deposit and credit card accounts without customers’ knowledge, federal and local authorities said.
“It is quite clear that these are unfair and abusive practices,” CFPB Director Richard Cordray said. “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.”
When the scandalous news broke, Wells’ then-CEO John Stumpf enjoyed a few rounds of public excoriation on Capitol Hill before resigning in October — and was forced to return $41 million in compensation. Timothy Sloan replaced him at the helm of the bank. Since then, Wells has been trying to win back the hearts and minds of a large swath of American customers who no longer trust them.
As part of that effort, Wells Fargo is now going back to monitor those programs that perhaps they weren’t quite watching closely enough in the past. The bank’s board hired the law firm Shearman & Sterling to conduct an intensive independent review of what went so badly wrong in Wells Fargo’s corporate culture.
Six months, 100 current and former employees’ interviews and a review of 35 million documents later, and the report is back — all 113 scathing pages. The conclusion? The problems were obvious: The bank was too decentralized to notice or quickly respond, and the sales culture was both dangerously toxic and non-responsive to ethical questions.
The root cause of sales practice failures was the distortion of the Community Bank’s sales culture and performance management system, which, when combined with aggressive sales management, created pressure on employees to sell unwanted or unneeded products to customers and, in some cases, to open unauthorized accounts. Wells Fargo’s decentralized corporate structure gave too much autonomy to the Community Bank’s senior leadership, who were unwilling to change the sales model or even recognize it as the root cause of the problem. Community Bank leadership resisted and impeded outside scrutiny or oversight and, when forced to report, minimized the scale and nature of the problem.
That is how the report began, and it only gets more descriptive from there.
Community Banking — Ground Zero
The report was particularly focused on the actions of two executives in the Wells Fargo organization — CEO John Stumpf and the woman he once called “the best banker in America,” Carrie Tolstedt, former head of Wells Fargo’s Community Bank unit.
The report paints Tolstedt as one of many department heads at Wells Fargo tasked to “run it like you own it” in regards to community banking. Tolstedt and her team took advantage of that broad authority to shake off questions — or in some cases actively mislead superiors, subordinates or lateral colleagues. This became important as Tolstedt repeatedly ignored requests and warnings from regional managers who complained sales goals were unrealistic and ultimately bad for business.
“Even when challenged by their regional leaders, the senior leadership of the Community Bank failed to appreciate or accept that their sales goals were too high and becoming increasingly untenable,” the report noted.
The report further documented ways in which Community Banking increasingly defined itself as a “sales organization, like department or retail stores, rather than a service-oriented financial institution.”
“Community Bank’s senior leaders distorted the sales model and performance management system, fostering an atmosphere that prompted low quality sales and improper and unethical behavior.
Further, Ms. Tolstedt was said to have kept hidden the true number of people who were fired for setting up false accounts — as well as the underlying issues with the sales culture.
There was a disinclination among the Community Bank’s senior leadership, regardless of the scope of improper behavior or the number of terminated employees, to see the problem as systemic. It was convenient instead to blame the problem of low quality and unauthorized accounts and other employee misconduct on individual wrongdoers.
Ms. Tolstedt has offered no official response to the accusations that the problems stemmed from a Community Banking organization run amok — or that she was the driving force behind the “pressure cooker” atmosphere.
Reuters quoted attorneys for the former executive as saying “we strongly disagree with the report and its attempt to lay blame with Ms. Tolstedt. A full examination of the facts will produce ‘a different conclusion.’”
Though the Community Banking leadership in general — and Carrie Tolstedt specifically — take a lot of the blame, there remains plenty to go around. The report also notes that Wells Fargo knew there was a problem in Community Banking (or at least should have known) long before it ever moved to act on the issue.
Much of the problem — the report stated again and again — was Wells Fargo’s unusually decentralized model.
“Wells Fargo’s decentralized organizational structure meant that centralized functions had parallel units in the Community Bank, which impeded corporate-level insight into and influence over the Community Bank.”
Though Wells Fargo did begin a process in 2013 to move toward centralization of more risk functions and substantially grow and enhance Corporate Risk’s ability to oversee the management of risk in the lines of business — as of 2013-2015 when the sales practices in Community Banking were unfolding in real time — Corporate Risk was still in its early days and had almost no authority over Community Banking.
“As problems with sales practices in the Community Bank became more apparent in 2013-2015, Corporate Risk was still a work in progress, and the Chief Risk Officer had limited authority with respect to the Community Bank.”
The report did note that decentralization was not evil in itself and that many organizations make it work.
But in the case of Wells Fargo, things had turned toxic.
“While there is nothing necessarily pernicious about sales goals, a sales-oriented culture or a decentralized corporate structure, these same cultural and structural characteristics unfortunately coalesced and failed dramatically here.”
...And Too Slow
John Stumpf and his working relationship with Carrie Tolstedt was also a central issue in the report. Stumpf was warned as early as 2012 about “numerous” customer and employee complaints about the company’s sales tactics but ignored growing evidence that the problem was pervasive.
After decades of success, Stumpf was Wells Fargo’s principal proponent and champion of the decentralized business model and of cross-sell and the sales culture. His commitment to them colored his response when sales practice issues became more prominent in 2013 and subsequent years and led him to stand back and rely on the Community Bank to fix the problem, even in the face of growing indications that the situation was worsening and threatened substantial reputational harm to Wells Fargo.
Tim Sloan, Wells’ current CEO, was largely exonerated by the report, despite the fact that he was also a career Wells Fargo executive. As president and chief operating officer, he became Ms. Tolstedt’s immediate supervisor in November 2015, and the report confirms he “assessed her performance over several months before deciding that she should not continue to lead the Community Bank.”
But by then the damage was done.
According to the firm that put together the report, this latest data dump concludes nearly all of its investigation. The board has announced that it will be seeking an additional $75 million in compensation clawbacks from Stumpf and Tolstedt — but that no further terminations or compensation clawbacks are expected.
Other investigations — including criminal inquiries by the Justice Department and several state attorneys general — remain in progress.