Wells Fargo, the nation’s largest bank, scrambled on Friday to contain the fallout from an investigation that found its employees set up 2 million fake accounts that customers didn’t ask for to get bonuses. The bank took out full-page ads in some newspapers to apologize and promised to change the culture that allowed the scheme to fester.
But a Federal Reserve Board member, while not addressing the company’s case specifically, said the banking industry at large isn’t doing enough to prevent unethical behavior among its employees.
“What I have seen is that too many banks, instead of putting in place a comprehensive system for assuring that all their employees understand what is legal and ethical across the board, only respond when there is a particular problem,” Fed Gov. Daniel Tarullo said in an interview with CNBC on Friday.
U.S. banks, including Wells Fargo, have paid billions of dollars in fines for various misdeeds since the 2008 financial crisis. Last month, regulators fined the San Francisco-based bank $4 million for charging illegal fees to student-loan borrowers.
But this case, which regulators said involved pervasive misconduct involving thousands of bank employees, raised new questions about whether federal authorities have done enough to detect and punish bad behavior.
Democratic presidential nominee Hillary Clinton pounced on the case to criticize her opponent, Republican nominee Donald Trump, who has said he would dismantle some of the financial-industry regulations put in place in recent years.
The Wells Fargo settlement “ is a stark reminder of why we need a strong consumer watchdog to safeguard against unfair and deceptive practices,” Clinton said in a statement.
On Thursday, Wells Fargo agreed to pay $185 million to settle the case and said it had dismissed 5,300 employees for their conduct over the last five years.
“If you fire 5,300 people because they’ve opened up 2 million accounts inappropriately, then there’s something wrong with the institution,” said Richard Bove, a bank analyst for Rafferty Capital Markets, who downgraded Wells Fargo’s stock to a “sell” rating after the news broke.
The investigation was led by federal regulators at the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, as well as by authorities in Los Angeles, where the allegations first surfaced. As part of the settlement, Wells Fargo admitted no wrongdoing and no high-level Wells Fargo executives were singled-out for prosecution. The size of the fine also pales in comparison to Wells Fargo’s profits of more than $20 billion last year.
“There is a need, I think, for focus on individuals as well as the fines put on the institutions,” Tarullo said. There are “things that do need to be pursued in order to make the point that there is individual culpability, as well as collective.”
Rather than pursuing what would have been relatively minor criminal charges against individual bank employees, the Los Angeles City Attorney’s Office said it pursued a civil case because it was focused on compensating bank customers. (Wells Fargo says it has already repaid customers more than $2 million in overdraft and other fees linked to the fraudulent accounts.)
Criminal cases “get more difficult to prove as you go up [the executive ladder],” said Frank Mateljan, a spokesman at the Los Angeles City Attorney’s Office. “Our focus was definitely getting the culture to change and for there to be some monetary fines for allowing this to happen.”
Legal experts say the potential for criminal charges probably was limited. Authorities may have been able to nab low-level employees for fraud or theft, but showing a direct link to senior Wells Fargo executives would have been difficult, they said.
Wells Fargo was accused of fostering an environment that incentivized employees to “cross-sell” existing customers with additional services, prompting some to go too far to claim their bonuses.
The conduct dated back to at least 2011 and involved more than 1.5 million checking and savings accounts and about 500,000 credit-card accounts, with many customers getting hit with unexpected fees, according to federal officials.
Employee incentive programs were popular in the late 1990s and early 2000s at large banks, but not so much anymore, said Sudhir Suchak, a clinical assistant professor of finance at the University at Buffalo School of Management who spent 30 years at British bank HSBC.
“I’m not aware of many incentive programs going on much anymore and I think this is why. . . . It’s quite surprising a bank of this size would have that,” Suchak said.
The allegations immediately drew recriminations from consumer advocates and even some banking industry officials.
“Not only is this conduct appalling and harmful to American consumers and communities, it also contributes to the growth of excessive regulation that needlessly burdens the local community banks that do right by their customers,” said Camden R. Fine, president of the Independent Community Bankers of America. “While Wells Fargo has the luxury of throwing money at the problem to make it go away without its board or senior management being held accountable, the individuals and local institutions affected by its actions will continue to suffer for years to come.”
Wells Fargo has lowered its sales goals since the fraudulent accounts were discovered, said Richele Messick, a company spokeswoman. She declined to say when the changes were made. Wells Fargo has also declined to comment on whether any senior executives were punished internally for the conduct, or were included among the 5,300 fired.
“We are making fundamental changes,” she said. “We have looked at and worked hard to improve our sales practices. We have been on a path for the last several years of making these changes.”
Kevin Barker, a senior equity analyst for the investment bank Piper Jaffray, said the settlement could lead to “an outsized amount of scrutiny” of Wells Fargo from other regulators, including state attorney generals, Barker said. It could also open the door for regulators to review the practices at other banks, he said.
“The optics aren’t great,” Barker said.