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A year on, Wells Fargo cannot shake off its mis-selling scandal

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ON SEPTEMBER 8th 2016, Wells Fargo’s reputation plummeted abruptly from that of America’s finest bank to that of yet another dodgy company. It was revealed to have opened an enormous number of potentially unauthorised retail deposit, current (checking) and credit-card accounts. A year on, two questions have yet to be put to rest. How much harm did Wells do to its customers? And how much did the scandal hurt the bank itself?

Wells has not been passive in its response. It has produced report after report on its misdeeds and submitted to investigations by two federal regulators, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency. It has purged its chief executive and the head of its retail bank, clawed back executive bonuses, transformed its board and simplified its formerly decentralised structure. It has created a comprehensive process for restitution and settled a class-action suit.

Yet it cannot put the scandal behind it. In July it was reported that up to 570,000 car-loan customers may have been forced to buy unneeded insurance. On August 31st a new report on the initial scandal increased the number of potentially unauthorised accounts from 2.1m to 3.5m (excluding the years from 2002 to 2009, which could not be examined because of changes to the bank’s systems). In the latest investigation, an entirely new concern emerged: another 528,000 potentially unauthorised accounts for online-bill payment.

That is unlikely to be the end of it. The full report was not made public, adding to concerns that other embarrassing problems have been found. The Department of Justice has launched an investigation; New York’s attorney-general has requested details about the forced car insurance. Criminal charges are not inconceivable. Nor are fines of almost any magnitude; since the financial crisis America’s regulators have proved adept at extracting large payments from financial institutions. Private suits are also on the cards. A husband and wife who were fired have filed suit, alleging they were punished for whistle-blowing. Others among the 5,300 sacked over the account-creation scandal may take action, too, claiming they were merely executing orders. And of course customers could also go to court. California’s government, for one, may be on the verge of making it easier for them to do so.

Yet the scandal has done remarkably little damage to Wells’s franchise. Over the past year, Apple and JPMorgan Chase are the only American firms to have made more money. Wells’s return on equity is not particularly high, but that is true for banks in general. Compared with its peers in the industry, it has had good results. Customers have not been fleeing. Deposits have risen and Wells has the leading market share in some businesses that require institutional trust, such as processing automated clearing-house (ACH) payments, which underpin credit-card, payroll and all manner of other transactions.

The scandal forced Wells to dump the strategy seen as the secret of its success—to see a branch as a shop and a financial product as a type of retail good. It now says shareholder returns are only the last of six “core values”, after innovation, community service and others. But it still monitors the profitability of client relationships. Despite the distractions of the past year, it has improved the technology in its branches, with cardless ATM withdrawals and automated warnings if accounts fall below a customer-selected level. These are hardly radical innovations but are new to American finance, and they matter to customers.

The direct costs of its troubles have been relatively trivial (though its legal bill may not seem so to lawyers). It is in the process of paying $11m for refunds and compensation tied to the account openings, $80m for the unwanted car insurance, $185m for fines and $142m to settle a class-action suit. A bit more than 40% that has already been clawed back from various executives. The biggest cost to Wells has probably been paid by its share price. If it traded at an earnings multiple closer to that of JPMorgan Chase it would be worth tens of billions of dollars more. That is the price not so much of shame, as of uncertainty.

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Julio Marchi ©

Publisher / Editor at BS News & Media Services
A free thinker, not labelled as anything, not associated with any party, not part of any group or engaged with any religion... A simple guy tired of the nowadays bullshit who decided to promote more serious debates about what is really happening hoping to bring back intelligence to the superficial and shallow news & headlines that unfortunately took over the existing media scene.
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