After it was revealed that the bank had opened 2 million unauthorized accounts to boost sales, many employees came forward and said the bank set sales goals that basically forced employees to cheat customers. The phony accounts opened by Wells Fargo employees generated fees and charges to existing customers. Bank employees also applied for more than half a million credit cards without customers’ knowledge or consent.
At least one state is trying to legislate a solution to the problem. New York Gov. Andrew Cuomo announced this week that the state’s Department of Financial Services has directed all state-regulated banks to “ensure any employee incentive arrangements do not encourage inappropriate corporate practices.”
“The inappropriate behavior we have seen at institutions like Wells Fargo are the same ones that led to the 2007 financial crisis, and there must be zero tolerance for reckless policies that foster greed and put New Yorkers' financial futures at risk,” Cuomo said. “State charters banks are now on notice of their obligations, and it is their responsibility to ensure their employees are acting in the best interests of their customers.”
Under the new DFS guidance, state-regulated banks can’t offer incentive compensation tied to employee performance without effective risk management, oversight and control. And any incentive compensation plan at a bank must meet, at a minimum, the following guidelines:
- Incentive compensation must “appropriately balance” risk and reward in a way “that does not encourage employees to expose their organizations to imprudent risks.”
- A bank’s risk management processes “must reinforce and support the development and maintenance” of any incentive compensation programs.
- Incentive programs “must be supported by strong corporate governance.”
“DFS will take swift enforcement action against financial institutions with misaligned incentive compensation schemes that foster improper behavior among their employees,” said DFS Superintendent Maria T. Vullo. “Board members and executive staff at regulated banks are responsible for making certain that sufficient controls are in place to safeguard against the inherent risks and conflicts of interest associated with cross-selling and referral bonus arrangements.”
The Wells Fargo scandal drew wide criticism for – among many, many other things – incentivizing employees, in essence, to commit fraud.