Buried in a flood of corporate results on Wall Street on Friday was another emerging scandal for America’s most scandalised bank, Wells Fargo which has provided Warren Buffett with yet another headache about one of his biggest investments that has just had to endure months of bad publicity about the 2.1 million false deposit and credit card accounts rort.
That debacle saw the chairman and CEO, John Stumpf and other board members and senior executives removed, many with a lower payout than normal as punishment. The false accounts scam has cost the bank hundreds of millions of dollars in fines and other costs and it faces numerous legal action from staff falsely terminated and blamed for the disaster.
In fact Wells Fargo paid more than $US 300 million in fines and penalties and to settle a class action ($US180 million for fines and penalties from regulators) and the settlement of a class action through the payment of an extra $US142 million to customers).
Now the bank, which is just under 10% owned by Buffett’s Berkshire Hathaway told the US markets that “inadequate” controls led to customers being billed for car insurance they did not want, with some potentially facing repossession of their vehicles. The problems first emerged in July of 216 when more and more customers started complaining about having to pay for insurance they already had on their cars.
The Bank – one of America’s top 3 – said a review of policies placed between 2012 to 2017 identified 570,000 customers who “may have been impacted and will receive refunds and other payments as compensation.”
The bank said total remediation will be $US80 million (about $A100 million at current exchange rates), with $US64 million in cash set to be sent out in coming months, and $US16 million in account adjustments.
The problem was caused by what’s called collateral protection insurance (CPI) policies. Customers who took out car loans from the bank are required to maintain insurance on their vehicles on behalf of their lender throughout the term of the loan. Wells Fargo would purchase CPI policies on customers’ behalf if there was “no evidence” that they already had such a policy.
But these so-called problems with internal controls and those at third-party vendors meant “customers may have been charged premiums for CPI even if they were paying for their own vehicle insurance, as required, and in some cases the CPI premiums may have contributed to a default that led to their vehicle’s repossession.” In other words, no one at Wells Fargo or at the insurers checked to see if the loan customers had insurance (which should have been noted on the documentation with the bank).
“We take full responsibility for our failure to appropriately manage the CPI programme and are extremely sorry for any harm this caused our customers, who expect and deserve better from us,” said Franklin Codel, head of Wells Fargo Consumer Lending. “Upon our discovery, we acted swiftly to discontinue the program and immediately develop a plan to make impacted customers whole,” he said.
And other reports got to the nub of the problem – poor management oversight. Wells Fargo has been revamping its car loans operation to “better manage risk”. As part of this overhaul, two new executives have named. Dawn Martin Harp, who headed the auto lending business during the sales abuses, retired in April and the deputy, Bill Katafias, also departed.
“Both of those executives, in my view, were held accountable for their actions,” Mr Codel said, including “from a compensation perspective."
Wells Fargo shares fell 2.6% to $US53.310 on Friday, down from the $US59.73 hit on March 1 when it seemed the bank had escaped the worst of the false customer account scandal.
The news however saw Well Fargo dragged back into the sights of some consumer groups and activist shareholders. For example New York City Comptroller Scott Stringer, who controls investment funds that hold Wells Fargo stock, demanded better disclosures about the auto insurance problems and called for a new independent chairman of the board. The board “needs to be overhauled – now,” Stringer said in a statement.
For a bank worth $US264 billion, this would seem to be small beer. But it adds to the problems and the image of an organisation badly run and a management and board not knowing what was happening in its day to day operations.
Some activists in the US have started asking why the bank didn’t reveal the problem late last year when the fake accounts scandal was news. The answer from the bank is that management wanted to nail down the problem and announce a solution at the same time. Others would say that a second multi-million dollar scandal impacting more than half a million customers would have added pressure to the bank to take more radical action.
Berkshire reports its second quarter figures this Friday night, our time.
