Wells Fargo case highlights need to monitor employees with stressful performance goals

September 22, 2016
One of the more difficult tasks for compliance officers is to question employee success, even if those achievements come against almost insurmountable odds. The disclosure that Wells Fargo employees, in order to meet sales targets, signed up more than 2 million of its customers for new accounts and credit cards without their knowledge, is an example of employee performance that should be questioned even though the impulse is often to look the other way.

“The key is that few people ever question good news,” says Walt Pavlo, co-founder of Prisonology, a consulting firm that supports legal professionals and defendants. Pavlo, who has written widely on compliance issues, adds: “If the news is good it typically lowers our level of professional skepticism . . . and makes it difficult for compliance to challenge the news, even if they should.” On Tuesday (Sept. 13) Wells Fargo, the largest U.S. bank by market capitalization, said it would eliminate all product sales goals in retail banking, starting next year. The move comes days after the Consumer Financial Protection Bureau (CFPB) and two other regulators fined the bank $185 million over its abusive sales practices.One of the other regulators, the Office of the Comptroller of the Currency, said in the agency’s consent order that the bank “lacked an enterprise-wide sales practices oversight program and thus failed to provide sufficient oversight to prevent and detect the unsafe or unsound sales practices . . . and failed to mitigate the risks that resulted from such sales practices.”While such an oversight program clearly should have been in place, there are other facets to the Wells Fargo case that apply across the industry, particularly in an environment where many employees are under stress to meet performance goals that may actually be designed for failure. At root, the problem rests with behavior and accountability.”I don’t think (bank behavior) has changed enough,” said Federal Reserve governor Dan Tarullo in an interview with the CNBC network, citing the Wells Fargo case.”There is a need for a focus on individuals as well the fines on institutions. In appropriate cases, I think that fines against individuals, prohibition orders, and … Justice Department prosecutions are things that do need to be pursued,” Tarullo said.

Employees under growing pressure to perform

While Wells Fargo illustrates what may still be lacking in the cultural reform of large banks, a contributing factor to the temptation by employees to cut corners is the workplace they are operating in. Among some of the largest U.S. financial institutions there has been a growing tendency to avoid mass redundancies amid an environment of shrinking margins and need to control costs. Instead, what some industry participants point to is a more selective process, where certain employees are continually forced to achieve ever higher performance goals, whether in sales or trading. The hope is, say some, that the frustration will build to such an extent that the employee will simply leave the firm.

“Nobody wants to let go of thousands (of employees) if they can avoid it,” said one senior employment recruiter at a large New York firm. “What you tend to see more are small groups – two or three – leaving a firm, or individuals quietly giving up.” By giving up the bank or firm can avoid severance packages, which are often quite expensive if the employee has numerous years of service.

“Especially in sales, a lot of people are put under massive pressure, to the point where what they are being asked to do simply can’t be done,” said a senior fixed-income trader at a large New York investment bank.

In such a competitive environment, where one’s career is essentially on the line with few options of returning to the industry once you’re out the door, there is a risk that employees might resort to actions that are fraudulent in order to deliver their expected performance results, say experts.

“The great check on people’s ethical impulses is that you are going to be around for a while,” said Donald Langevoort, law professor at Georgetown University. “The more short-term you think your time is the more you are able to rationalize little steps towards a bad line.”

“Given the stresses, given the competition, you probably have to worry about this more than in any other industry,” he added, noting that healthcare was another sector under similar regulatory and competitive strains.

Compliance surveillance of those under stress

The Wells Fargo case has the added, and somewhat astounding, feature of the number of individuals involved. The bank said it dismissed 5,300 staff who were involved in the fraudulent cross-selling of products. Such a high number suggests that senior management were well aware of what was going on, and perhaps even encouraged the activity, say observers, albeit they might have resorted to communications with staff that was not specific, but left enough leeway for interpretation.

“It’s hard to fathom that senior people were unaware of what so many were doing,” said a legal expert at a New York law firm. “In that sense, I think (Fed governor) Tarullo has a very valid point.”

Yet from a compliance perspective, the Wells Fargo case also raises questions. What did compliance know about a business practice that was going on for years, according to regulators? Were compliance staff complicit as well, or did they lack the tools, as the OCC suggests, to effectively monitor the activities of the sales staff?

With technology surveillance capabilities now widespread across the industry, it would seem that many compliance functions need to focus on individuals who might be exhibiting stress and facing a high bar when it comes to performance objectives. Systems can also monitor all those new accounts that were established, and flag troubling patterns of low balances and inactivity.

Langevoort of Georgetown says there are two types of employees one needs to perhaps keep a close eye on: one, is someone who might have personal issues, such as health, and are looking at a year-end bonus to help pay extraordinary medical expenses, and second, is the employee who is very close to meeting their financial targets and feels entitled or justified to do something that gets them across the finish line.

“To to make up that last bit of difference people will go to almost any extremes,” he said. “But if a company has the kind of compliance resources to do desktop surveillance to keep a watch, it’s a no brainer that you can identify those who you want to devote greater human attention to.”

 

(Henry Engler is a North American Regulatory Intelligence Editor for Thomson Reuters Regulatory Intelligence. He is a former financial industry compliance consultant and executive, and earlier served as a financial journalist with Reuters. Email Henry at henry.engler@thomsonreuters.com)

(This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Sept. 14. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters)

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