Recently, attention has been paid to corporate culture, “tone at the top,” and the impact that these have on organizational outcomes. Rather than put its customers first, Wells Fargo built and sustained a cross-selling program where the bank and many of its employees served themselves instead, violating the basic ethics of a banking institution including the key norm of trust. Did this disconnect contribute to a failure to recognize the problem earlier? 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. Before MagnifyMoney I spent my career in banking at Citibank and…. If the branch did not hit its targets, the shortfall was added to the next day’s goals. principally on quantifiable monetary costs—damages, fines, penalties, restitution. It also maintained a whistleblower hotline to notify senior management of violations. Would the program have worked better if structured differently? And that is unfortunate. A basic introductory underwriting course for a college graduate would have been sufficient to reject the majority of mortgages that were being approved, packaged and sold before the crisis. Incentives can have a powerful impact on the decisions people make. People will cheat. In February 2018, citing “widespread consumer abuses,” the Federal Reserve Board took the unprecedented action of placing a strict limit on the company’s asset size, forbidding the bank from growing past the $1.95 trillion in assets it had at year end until it demonstrated an improvement in corporate controls. It was one of the largest clawbacks of CEO pay in history and the largest of a financial institution. The bank announced a number of actions and remedies, several of which had been put in place in preceding years. The bigger the size of the reward, the greater the temptation for bad actors to cheat. According to one executive, “The story line is worse than the economics at this point.”. 5,300 employees were terminated over a five-year period. The board stipulated that additional clawbacks might occur. Is this assessment correct? The incentives were enormous and the cultures were lax. In 2012, Fintech startups are challenging the big banks—and already saving people thousands. The goal of the federal financial regulators has been to curb imprudent or undue risk-taking—unfortunately, with scandals like that at Wells Fargo, we and many financial institutions grow concerned that regulation and enforcement regarding incentive compensation and sales culture will go further than necessary and inhibit legitimate business decisions that drive profitability. generally found that processes and controls designed to detect, investigate and remediate sales practice violations were effective at mitigating sales practices-related risks. Nevertheless, although the financial impact was trivial, the reputational damage proved to be enormous. Richard Cordray, director of the Consumer Financial Protection Bureau, criticized the bank for failing to: … monitor its program carefully, allowing thousands of employees to game the system and inflate their sales figures to meet their sales targets and claim higher bonuses under extreme pressure. We now see that the structure of incentive compensation at the lower levels can just as greatly affect the risk for the entire institution. And yet no one recognized the systemic nature of the problem or took the necessary steps to address it. A… It’s about building lifelong relationships one customer at a time. Education and preparation are the only ways to defend your interests and get the best deal. That’s a false narrative. #200 Pleasanton, CA 94588, Interagency Proposed Rule on Incentive Compensation. Even senior leaders within the Community Bank were frequently afraid of or discouraged from airing contrary views. According to Stumpf, “[Our vision] is at the center of our culture, it’s important to our success, and frankly it’s been probably the most significant contributor to our long-term performance.” … “If I have any one job here, it’s keeper for the culture.”. News of the fraud became widely known in late 2016 after various regulatory bodies, including the Consumer Financial Protection Bureau, fined the company a combined US$185 million as a result … Following the lawsuit by the Los Angeles City Attorney, the board hired a third-party consultant to investigate sales practices and conduct an analysis of potential customer harm. Lucrative compensation created a culture of highly educated but willfully ignorant employees. $2.6 million was refunded to customers for fees associated with those accounts. had a great deal of information recorded in its systems, [but] it had not developed the means to consolidate information on sales practices issues and to report on them. There is no manager at Wells Fargo who is responsible for reputation risk. For much of the time since the Great Recession, including in the 2016 Interagency Proposed Rule on Incentive Compensation (the “Proposed Rule”) and in much of our firm’s past commentary, attention has been placed on incentive compensation for executives—people who individually have the ability to drive risk decisions.