After facing a civil lawsuit in May 2015, filed by Mike Feuer, attorney of the city of Los Angeles, for the unethical treatment of its employees and customers, Wells Fargo & Company WFC is now under the federal regulators’ investigations. Per a Wall Street Journal report, the Office of the Comptroller of the Currency and the San Francisco Federal Reserve are probing the banking giant’s business practices.
As per the sources, the financial bigwig has been under inquiry for setting impractical sales targets for its employees, inducing them to adopt fraudulent means for meeting the set quotas. The bank’s practices came under the spotlight after a December 2013 Times report, in which several former and present employees of Wells Fargo related their experiences of the tremendous sales pressure at the bank.
The article reported how employees at Wells Fargo adopted fraudulent tactics to achieve the sky-scraping sales targets, including the opening of unauthorized and unnecessary customer accounts, issuing illegal credit cards and lines of credit as well as forging client signatures and charging fees on unwanted accounts of unaware customers.
Additionally, they disclosed that on receiving complaints related to the same, the bank would only partly refund such fees, and later misstate phone numbers of such customers, so as to avoid reaching them for customer satisfaction surveys.
In the same report, a former branch manager was quoted saying, "If you do not make your goal, you are severely chastised and embarrassed in front of 60-plus managers in your area by the community banking president."
However, representatives at the OCC and the San Francisco Fed did not confirm the ongoing investigation.
“We disagree with the allegations in the L.A. City Attorney’s lawsuit and intend to defend ourselves," bank spokeswoman Mary Eshet said on Monday. "Wells Fargo’s culture is focused on the best interests of its customers."
Cross selling financial products has been a major strength for Wells Fargo, which not only enhances its fee-generating capabilities, but also helps in keeping its consumer franchise intact. Such fee income constitutes nearly 48% of the company’s revenue base.
We believe the current low rate environment is somewhat responsible for driving the sales pressure. Evidently, lower interest rates have hit the performance of the financial sector, and to remain competitive, banks have resorted to and depend on fee-generating revenue sources like credit cards and letters of credit.
Like most banks, legal headwinds continue to plague Wells Fargo as well. The bank faces several cases and probes regarding its business conduct. Though it has resolved many litigation issues over the past years, increasing legal hassles will likely weigh upon its financials in the coming quarters.
Currently, Wells Fargo carries a Zacks Rank #3 (Hold). Some better-ranked stocks include Chemical Financial Corporation CHFC, Enterprise Financial Services Corp. EFSC and Old Second Bancorp Inc. OSBC. All three stocks carry a Zacks Rank #2 (Buy).
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