A Second Look at Wells Fargo

The fallout from the Wells Fargo ethical disaster continues. Boardrooms around the country are abuzz, and Retail Directors and HR executives are poring over their incentive programs to ensure they did not encourage deception as the Wells Fargo plans did. Further, the OCC has initiated a horizontal review of the large and midsize banks to ascertain how widespread these practices have been throughout the industry.

The question is: How do you avoid overreacting and throw the baby out with the bathwater? How do you continue to fully serve your customers without exerting undue pressure on your sales force to do the wrong thing?

Below is an outline of a process which, I believe, can help bank managements and boards examine their own practices while affirming their values and commitment to doing the right thing without causing too much disruption to their organization.

Consider putting together a document with the following table of contents:

1. THE FACTS  WHAT HAPPENED. Wells Fargo's practices and associated consent orders from the OCC and CFPB
2. THE FACTS  WHAT WE THINK WILL HAPPEN NEXT. Regulatory actions  underway and anticipated
3. HOW WE ARE DIFFERENT. Key differences between the your bank's sales program and the Wells Fargo sales program
4. OUR SALES PROGRAM. Describe the key attributes of your sales program candidly and comprehensively
5. CONTROLS. Key controls surrounding your sales program
6. CUSTOMER COMPLAINTS. Sales program-related complaints  what are our customers telling us?
7. FAIRNESS. Highlight quantitative and qualitative indicators of the fairness of your sales program
8. LEARNINGS AND AN ACTION PLAN. Share possible changes to consider for your sales program
9. REVIEW THE BANK'S OTHER INCENTIVE PROGRAMS. Non-retail sales incentive programs

1. THE FACTS  WHAT HAPPENED. Wells Fargo's practices and associated consent orders from the OCC and CFPB

Wells Fargo has entered into agreements with federal regulators and the City of Los Angeles on behalf of the State of California to settle allegations of widespread opening of consumer products and services, including deposit accounts, credit cards, online banking and debit cards, without customer consent. The OCC Consent Order alleges that from May, 2011 to July, 2015, Wells Fargo opened 1,534,280 deposit accounts that may not have been authorized, including transferring funds from some customer accounts without their knowledge or consent. Additionally, Wells Fargo initiated applications for 565,443 credit card accounts that may not have been authorized by using consumers' information without their knowledge or consent. The actions resulted in unauthorized fees charged to consumers and inquiries on consumers' credit.

In addition to taking specific actions outlined in each of the orders (discussed below), Wells Fargo agreed to pay restitution to affected customers along with civil penalties totaling $185 million: $50 million to the State of California, $35 million to the OCC, and $100 million to the CFPB.

The OCC identified the following unsafe or unsound practices in Wells Fargo's sales practices risk management and oversight:

1. Incentive compensation program and plans within the Community Bank Group at Wells Fargo were not aligned properly with local branch traffic, staff turnover, or customer demand, and they fostered unsafe and unsound sales practices.
2. Wells Fargo lacked an enterprise-wide sales practices oversight program and thus failed to provide sufficient oversight to prevent and detect unsafe or unsound sales practices.
3. Wells Fargo lacked a comprehensive customer complaint monitoring process that impeded the bank's ability to (i) assess customer complaint activity across the bank; (ii) adequately monitor, manage and report on customer complaints; and (iii) analyze and understand the potential sales practices risk.
4. Wells Fargo's Community Bank Group failed to adequately oversee sales practices and failed to adequately test and monitor branch employee sales practices.
5. The bank's audit coverage was inadequate because it failed to include in its scope an enterprise-wide view of the bank's sales practices.

Wells Fargo agreed to the following actions:

1. Develop and submit for approval a comprehensive action plan to achieve compliance with the consent orders.
2. Retain an independent consultant to conduct a review of the bank's enterprise-wide governance and risk management of sales practices related to deposit accounts, credit card accounts, unsecured lines of credit and related services ("Sales Practices Risk Review") and to prepare a report with findings and recommendations.
3. Develop an enterprise-wide sales practices risk management and oversight program.
4. Conduct an enterprise-wide assessment of policies and procedures for tracking, managing and reporting customer complaints.
5. Develop a formal testing and monitoring program for complaint management and ethics line (e.g., whistleblower) programs.
6. Develop and execute a reimbursement plan for affected customers.

2. THE FACTS  WHAT WE THINK WILL HAPPEN NEXT. Regulatory actions  underway and anticipated

Consent orders and public comments from OCC and CFPB officials over the past weeks provide a good framework for anticipated regulatory response and future expectations. On September 20, 2016, Thomas Curry, Comptroller of the Currency, testified before the United States Senate Committee on Banking, Housing and Urban Affairs. In his comments, Curry stated the OCC's heightened standards for large banks will help ensure that the OCC has "the governance and controls necessary to prevent these sorts of [improper sales] practices in the future" and supported prompt completion of the proposed interagency incentive compensation rule. Curry stated the rule "would provide clear direction regarding the application of sound incentive compensation programs, including claw backs, forfeiture, and other mechanisms to hold senior executives and other employees with significant responsibilities accountable."

Also before the Senate Committee, CFPB Director Richard Cordray acknowledged the role of cross-selling and incentive compensation programs, stating "Much bank growth these days occurs by cross-selling customers on more products and services. This approach should lead banks to focus on strong customer service that produces high levels of customer satisfaction, which in turn should generate repeat business from existing customers and positive word of mouth to others." Cordray continued, "Incentive compensation structures are common in businesses and they can motivate positive behavior." However, Cordray qualified those remarks, stating "unchecked incentives and an unrealistic and uncaring culture of high-pressure sales targets can lead to serious consumer harm." Cordray encouraged companies to pay close attention to compliance monitoring systems and implement incentive compensation structures in a way that doesn't harm consumers or lead to violations of law.

The OCC has publicly stated its intention to conduct a horizontal review of sales and marketing practices across their large and midsize bank portfolios. On October 12, as part of the horizontal examination for midsize banks, MidFirst received notice of the first of three phases of the exam. Phase 1 fieldwork is scheduled to begin on October 31 with an expected completion date of December 9, with the second and third phases to begin in January. Each of the three phases is briefly described below:

• Phase 1: Determine if there are systemic or bank-specific issues with regard to bank employees opening accounts on behalf of consumer and small business customers without the customer's consent.
• Phase 2: Evaluate sales goals, strategies, and incentive compensation programs to ensure they appropriately balance sales and revenue targets with risk management and customer satisfaction.
• Phase 3: Determine if banks have risk governance frameworks that effectively control the risks associated with sales practices and incentive compensation programs.

The scope of questions included in Phase 1 is quite broad, crossing lines of business and including all accounts, products and services offered to consumers and small businesses for which incentives have been offered to employees. Enterprise Risk Management should engage with the appropriate business units to compile responses to the OCC's request in advance of the October 31 Phase 1 deadline if you're a midsize bank. But, even if you're not, I'd recommend conducting this review for your own edification.

3. HOW WE ARE DIFFERENT. Key differences between your bank's sales program and the Wells Fargo sales program

While we do not know all of the specifics of the Wells Fargo incentive program that contributed to the OCC and CFPB consent orders, it is our understanding Wells' program included both product and relationship-driven goals. For example, Wells Fargo's program required its personal bankers to generate X funded loans and refer Y products to other lines of business within a given quarter for an opportunity to earn an incentive. Does your incentive program include only relationship-driven goals, providing your personal bankers the opportunity to earn incentive compensation for selling ONLY the products a customer needs? That's an important differentiator between Wells Fargo's plan and others which are more customer-centric.

We also understand Wells Fargo had very high sales volume goals for their banking center employees, encapsulated in their "8 is Great" mantra, meaning personal bankers at Wells were expected to achieve 13 product sales per day and build an 8 product and service share of wallet with their customers. Are your goals less demanding? It is also important verify that. Volume should be but one of several factors considered in conjunction with the personal banker role. As mentioned in my first article on the subject, I believe the product-specific sales volume goals utilized at Wells Fargo, combined with a highly aggressive sales culture, led to the types of behavior that, when unchecked, ultimately resulted in doing the wrong thing.

4. YOUR SALES PROGRAM. Describe the key attributes of your sales program candidly and comprehensively

The most important aspect of this section is your bank's culture and values. Your mission, values and sales philosophy should speak to the responsibility your employees have to customers, the Bank and to one another. These statements represent the foundation on which your Sales Program is built. When the culture is customer-centric and where ethical behavior trumps all other considerations, the appropriate sales culture will follow.

Many banks have a mission statement, a vision statement and values. Not all actually live their culture and values, a topic I have written about extensively. In addition, it is critical to clearly articulate your own sales philosophy to ensure every single team member understands your definition of success.

Your sales program should be focused on customer needs, as identified through interactions with those customers. Your products and services exist because of needs among your customers. Customer needs exist because of life events and changes occurring in your customers' lives. When your bankers effectively match a product or service to a customer's need, you accomplish your goal of serving the customer on their terms and promoting long-term relationships.

The mission, values and retail sales philosophy should not only be presented during new employee orientation, but must be continuously reinforced by all levels of management through direct contact with your entire salesforce. I'm a huge proponent of candid town-hall meetings which create such direct contact and benefit both employees and executive management. Employees get to ask anonymously the questions they really want answers to, and management gets an unfettered view of what's happening in the field.

The sales philosophy also should be explained and reinforced also through training well beyond initial employee orientation. You need to ensure your training curriculum brings this to bear and that it is refreshed and reinforced annually.

5. CONTROLS. Key controls surrounding your sales program

Your recognition and incentives program should reward the behaviors and activities which most closely align with our goal to create long-term customer relationships. A clear description of the behaviors and goals to be rewarded by each position should be included in the incentive plans, and connected to the organization's sales philosophy and ethical underpinnings. Note that cross-selling, when performed in alignment with a well-articulated sales philosophy, promotes the best possible outcome for the customer, the bank and the employee by ensuring that customer's needs are effectively matched to your bank products and services .

A combination of metrics rather than a single indicator separates needs-based sales organizations from their product-focused brethren. The combination helps ensure sales behaviors, activities and results align with the needs of your customers, your bank and your employees. Ensure that incentives are not paid based on the sales of individual products or services (e.g., Banking Center A must sell twenty-five checking accounts this month.) Instead, take a relationship-driven approach, providing incentive compensation for sales of any product or service where a customer need has been identified, a product acquired and the product is being used. It is critical to define what is an actively used product, and to disqualify unused products from incentive and recognition counts.

Creating long-term customer relationships requires not only acquisition, but strong account retention. Solid incentive plans emphasize the importance of extraordinary service "after the sale" by all banking center employees resulting in the retention of deposit accounts. Including retention in your incentive programs will facilitate attention to the back door rather than too much focus on customer acquisition.

It is also useful to examine how many employees failed to achieve your sales goals and were terminated as a result. At Wells, some people say, employees knew that if they do not meet those very high goals they will be let go, and that fear drove them to unethical behaviors. Regardless to the "carrots" provided by your incentive and recognition programs, the "stick" should be reasonably applied.

Rounding off your performance appraisals beyond simple sales results is also helpful in establishing an ethical sales culture. Performance appraisals should include a number of major job responsibilities, including critical behaviors (e.g., integrity, communication, teamwork, leadership) along with sales, service and operational metrics. Sales program metrics for acquisition and retention are also normally included in the appraisal score. Their weights as components of the incentive programs should be examined.

You should also consider disciplinary actions resulting from improper sales behavior  your history, controls and future safeguards. What happens when your controls identify violations of mission, values, retail sales philosophy or policy and procedure? Establish a process whereby management and Human Resources partner to evaluate the related behavior and consistently apply formal counseling, as appropriate.

Another question to ask is, how informed is your board of your incentive programs and sales practices. Quarterly reporting at the board level is prudent. Possible reporting elements include:

1. Retail Sales Metrics, including sales velocity and cross-sell measurements
2. Account Retention
3. Products Per Household
4. Percent of inactive accounts
5. Number of bankers who are not able to meet minimum sales goals.

6. CUSTOMER COMPLAINTS. Sales program-related complaints  what are our customers telling us?

Given the importance of conducting business fairly and ethically, one should ensure appropriate oversight and monitoring of the sales program to prevent violations of the law and unfair, deceptive and/or abusive practices.

Both the recent consent orders and public comments from OCC and CFPB officials relating to the Wells Fargo experience provide a framework for sales program oversight and monitoring expectations. Installing effective oversight of sales practices is the right thing to do regardless of regulatory expectations.

As in other risk areas, a bank should employ three levels of control with respect to sales program oversight and monitoring  front-line business units (first line of defense), independent risk management (second line of defense) and Internal Audit (third line of defense). Again clarity is key  you need to know what you expect from each line of defense when it comes to this oversight, both at the salesforce level and at the enterprise level.

Comprehensive External Complaint Monitoring Process

If you don't have a robust complaint management program to assess consumer complaint activity across the bank, get one. Complaints should be recorded, resolutions documented and complaints analyzed for trends. Complaints involving the sales program or alleged improper sales practices should be escalated to senior management and Human Resources for investigation and disciplinary action, as appropriate. Monthly summaries of these complaints should be submitted to the appropriate executives, including Director of Compliance and Director of Enterprise Risk Management.

Retail Management should review patterns emerging in your customer complaints and seek the root causes for these issues. In cases where unethical sales practices are the driving force behind these complaints, timely corrective action is essential to send a message throughout the organization. As I used to say: "I love to win, but I'd rather lose than win the wrong way".

7. FAIRNESS. Highlight quantitative and qualitative indicators of the fairness of your sales program

Your sales program must benefit your customers, your shareholders and your employees. The sales program should be designed to allow employees to succeed, and their success should be validated by our customers' feedback.

Sales capacity needs to be based on market demand (as per the Wells Fargo consent order).

Banking center staffing levels are predicated on customer transaction volumes and household counts, with more active banking centers naturally receiving increased staffing to meet customer demand. This philosophy and method of staffing aligns sales capacity with the needs of the customer base. An even greater balance can be realized as the sales program incentive strategy does not establish product quotas, but rather provides banking center employees the flexibility to deliver the products and services that serve the needs of their customers. By doing the right thing and effectively designing your products, the shareholders will benefit as well  from loyal, long-term customers and appropriate product usage.

Also ensure that sales incentive thresholds are designed to avoid undue pressure. While sales program incentive levels are consistent across a market within retail, a number of adjustments should be considered in order to avoid placing undue pressure on employees.

It is important to examine your account retention statistics; if they are below industry averages it is a cause for concern. Similarly, mystery shop results (when conducted effectively) can tell volumes as to customer satisfaction and well -being.

8. LEARNINGS AND AN ACTION PLAN. Share possible changes to consider for your sales program

Following this assessment, consider whether any changes are needed to your program,

In summary, the goal of making your sales and incentive program more effective for all major constituencies  customers, employees and shareholders  is the primary objective of providing incentives in the first place. The very presence of such incentives can create bad behavior, and when management exerts pressure on employees to deliver sheer numbers, that temptation is enhanced. Using common sense and aligning your incentives with customer needs and shareholder value is the key to success; at the end, though, trust-but-verify is the word of the day.