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Wells Fargo Facing Repercussions of $190M Fine from CFPB
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The resolution of unauthorized account opening allegations, last week, did not end the matter for Wells Fargo & Company (WFC - Free Report) . Though a $190 million fine by the Consumer Financial Protection Bureau (CFPB) will have no material impact on the company’s financials, it has come under fire from several quarters.
Penalty Credit Negative: Moody’s
This fine has led to a significant embarrassment for Wells Fargo, which, until now, had good consumer satisfaction scores. According to Moody’s Investors Service – the rating unit of Moody's Corp. (MCO - Free Report) – the company’s reputation will see some damage.
“The regulators’ findings are consequential for a bank such as Wells Fargo, which historically has had strong customer satisfaction scores and a reputation for sound risk management,” Moody’s analyst Allen Tischler wrote. “We do expect some immediate damage to Wells Fargo’s reputation from this embarrassing episode.”
Further, Moody’s noted, “…[T]he regulators’ revelations are highly disturbing; they highlight that Wells Fargo’s vaunted cross-selling capabilities were inflated, its incentive structure had led to pervasive inappropriate practices, and its retail banking sales process lacked adequate and effective oversight. As such, the implications of this announcement are credit negative.”
Additionally, the rating agency expects Wells Fargo to improve its risk management and sales oversight. Nonetheless, Moody’s did not announce any ratings changes.
Currently, Moody’s has an A2 rating on Wells Fargo’s long-term debt with a stable outlook. The rating is one notch higher than that of JPMorgan Chase & Co. (JPM - Free Report) and two notches above that of Bank of America Corp. (BAC - Free Report) .
CEO to Testify In Front of Senate Panel
Following the announcement of penalty last week, Democratic senators – including Elizabeth Warren and Sherrod Brown – wrote a letter to the U.S. Senate Banking Committee Chairman Richard Shelby, calling for an investigation of the matter and asking Wells Fargo CEO John Stumpf to testify.
The Senate Banking Committee now plans to hold a hearing on Sep 20, 2016. The CEO, along with other top executives, has been asked to appear before it.
Suspension of Cross-Selling of Financial Products
Wells Fargo has temporarily suspended cross-selling of its financial products to customers by call center workers. This was first reported by the Wall Street Journal.
The company spokeswoman Mary Eshet said, “We asked the team to pause on the sales part of our calls.”
The halting of cross-sell of products is likely to be reviewed later this week, while performance and incentive adjustments will complete by the end of this month. Nonetheless, the suspension does not apply to employees in retail branches.
Also, as part of the settlement deal, Well Fargo had to terminate the services of around 5,300 employees. It anticipated that the penalty should lead to claw-back of compensation from Carrie Tolstedt, the executive who headed community banking, until the company announced her retirement in July.
What's Next for Wells Fargo?
At the time of settling the allegations, in a statement the bank said, “Wells Fargo reached these agreements consistent with our commitment to customers and in the interest of putting this matter behind us. Wells Fargo is committed to putting our customers’ interests first 100 percent of the time, and we regret and take responsibility for any instances where customers may have received a product that they did not request.”
We believe Wells Fargo will have to make significant changes in the ways it sells financial products to its customers. Also, the company is likely to change incentives offered to its employees.
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Wells Fargo Facing Repercussions of $190M Fine from CFPB
The resolution of unauthorized account opening allegations, last week, did not end the matter for Wells Fargo & Company (WFC - Free Report) . Though a $190 million fine by the Consumer Financial Protection Bureau (CFPB) will have no material impact on the company’s financials, it has come under fire from several quarters.
Penalty Credit Negative: Moody’s
This fine has led to a significant embarrassment for Wells Fargo, which, until now, had good consumer satisfaction scores. According to Moody’s Investors Service – the rating unit of Moody's Corp. (MCO - Free Report) – the company’s reputation will see some damage.
“The regulators’ findings are consequential for a bank such as Wells Fargo, which historically has had strong customer satisfaction scores and a reputation for sound risk management,” Moody’s analyst Allen Tischler wrote. “We do expect some immediate damage to Wells Fargo’s reputation from this embarrassing episode.”
Further, Moody’s noted, “…[T]he regulators’ revelations are highly disturbing; they highlight that Wells Fargo’s vaunted cross-selling capabilities were inflated, its incentive structure had led to pervasive inappropriate practices, and its retail banking sales process lacked adequate and effective oversight. As such, the implications of this announcement are credit negative.”
Additionally, the rating agency expects Wells Fargo to improve its risk management and sales oversight. Nonetheless, Moody’s did not announce any ratings changes.
Currently, Moody’s has an A2 rating on Wells Fargo’s long-term debt with a stable outlook. The rating is one notch higher than that of JPMorgan Chase & Co. (JPM - Free Report) and two notches above that of Bank of America Corp. (BAC - Free Report) .
CEO to Testify In Front of Senate Panel
Following the announcement of penalty last week, Democratic senators – including Elizabeth Warren and Sherrod Brown – wrote a letter to the U.S. Senate Banking Committee Chairman Richard Shelby, calling for an investigation of the matter and asking Wells Fargo CEO John Stumpf to testify.
The Senate Banking Committee now plans to hold a hearing on Sep 20, 2016. The CEO, along with other top executives, has been asked to appear before it.
Suspension of Cross-Selling of Financial Products
Wells Fargo has temporarily suspended cross-selling of its financial products to customers by call center workers. This was first reported by the Wall Street Journal.
The company spokeswoman Mary Eshet said, “We asked the team to pause on the sales part of our calls.”
The halting of cross-sell of products is likely to be reviewed later this week, while performance and incentive adjustments will complete by the end of this month. Nonetheless, the suspension does not apply to employees in retail branches.
Also, as part of the settlement deal, Well Fargo had to terminate the services of around 5,300 employees. It anticipated that the penalty should lead to claw-back of compensation from Carrie Tolstedt, the executive who headed community banking, until the company announced her retirement in July.
What's Next for Wells Fargo?
At the time of settling the allegations, in a statement the bank said, “Wells Fargo reached these agreements consistent with our commitment to customers and in the interest of putting this matter behind us. Wells Fargo is committed to putting our customers’ interests first 100 percent of the time, and we regret and take responsibility for any instances where customers may have received a product that they did not request.”
We believe Wells Fargo will have to make significant changes in the ways it sells financial products to its customers. Also, the company is likely to change incentives offered to its employees.
Currently, Wells Fargo carries a Zacks Rank #3 (Hold). In case you wish to find some better-ranked stocks from banking as well as other industries, you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>