SALES CULTURE AT WELLS FARGO UNDER THE MICROSCOPE

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Last week, we all learned that one of the best banks in the US (at least in my view), Wells Fargo & Co., agreed to pay $185 million to banking regulators and state authorities to settle shortfalls in its consumer banking sales practices. This raises for me a whole host of issues about this firm's sales practices, including it risk and compliance control structure monitoring its sales efforts, its incentive systems with management and staff, and its risk appetite for reputational risk-taking.  

Wells has entered into consent orders with the OCC given its unsafe and unsound marketing practices, which includes, unbelievably, the unauthorized opening of 2.1 deposit accounts (or credit facilities) in order to meet sales goals and earn incentive income by its sales teams.  Wells is well known at honing its cross selling efforts to US consumers, which makes this disclosure so disappointing for believers in the firm like myself.  Wells will need to make whole clients for all fees, overdraft charges and other fees that were not appropriately charged to its consumer clients, although such amounts may be well less than $5million reserved for by the bank.  

Wells will want to significantly consider its risk conduct and sales culture in its consumer banking business, in which cross-selling efforts may well have plateaued some time ago. Other banks might also see this as a wake up call too and review their cross-selling practices as well.  

Last night, I watched parts of the congressional hearings from years ago on the JP Morgan Whale episode and was struck how even the most qualified risk oversight teams and risk governance structures can be caught unaware. Now, with this news at Wells Fargo, an institution also of extraordinary quality and reputation, demonstrates again the challenges associated with embeding risk culture and conduct in banking in today's complex banks. I went back to the ground-breaking G30 report from 2015 on bank risk culture and thought about its governance roadmap for achieving desired culture and values, an exercise Wells Fargo's risk committee may be considering too. It focuses on the following key milestones for the board:

  1. Bank banks must be aware on the culture that exists, 
  2. Banks must have sound policies and procedures approved by the board on cross-selling and incentives, perhaps focusing on success stories as well as failures! 
  3. Risk appetite should reflect the triggers and behavioral standards sought, 
  4. The board should be satisfied that management has a sound mitigation strategy in place to guard against future incidents.
We now understand some 5,000 employees have been sacked, but again the board and senior management will need to take the lead in turning this one around.  Further information on this episode can be found at the below links. Warning, some of the below literature is not as gentle as I am!

 http://www.americanbanker.com/bankthink/wells-risk-management-tools-should-have-caught-this-sooner-1091229-1.html








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