Wharton's David Zaring, University of Utah's Christopher Lewis Peterson and Cindy Schipani from the University of Michigan discuss Wells Fargo's $1 billion fine.

Wells Fargo will pay $1 billion in fines imposed last week by regulators over accusations of overcharging hundreds of thousands of customers, making it the largest such penalty handed down by government agencies. Eye-popping as the amount seems, experts say it is not necessarily a sufficient deterrent to future malpractices. The Consumer Financial Protection Bureau (CFPB), in coordination with the Office of the Comptroller of the Currency (OCC), announced the fines, and ordered the bank to compensate shortchanged customers and adopt changes in internal practices.

Pointing to repeated violations at Wells Fargo and other large banks, they said what could alter the stakes are changes in corporate culture, the prospect of criminal liabilities on banks and their executives, a regulatory push to get admissions of guilt from banks rather than settlements, and a facilitating policy environment. Although consumers feel cheated in such scandals, the resulting trust deficit does not lead them to switch loyalties to other banks, because it is too cumbersome to move all their accounts, and their choices are limited as most other banks have had similar violations, they added.

Once a trusted part of American households, Wells Fargo earned notoriety in 2016 when it surfaced that its officers had opened millions of customer accounts and charged them fees as they raced to meet sales deadlines and claim bonuses. Discoveries of other violations followed, and the latest is the charge that it forced auto loan customers to buy insurance, and improperly levied fees on home mortgage customers who sought extensions of rate-locks (or fixed rates, as opposed to floating rates) on their loans, besides collecting a variety of other fees it should not have. The CFPB, in coordination with the OCC, investigated those practices, resulting in a settlement that Wells Fargo accepted, but without admitting or denying any of the findings.

Will the banking system be sufficiently tamed by such penalties? “If banks put their customers’ interests ahead of their own or took on new sorts of consumer-friendly or consumer-protective responsibilities, that might make a difference and lead to less of this kind of enforcement action,” said David Zaring, Wharton professor of legal studies and business ethics. “But it’s really hard to change a culture,” he added. “Changing a culture is like asking them to think differently about the profit motive that animates them – and that’s hard to do.”

“Changing a culture is like asking them to think differently about the profit motive that animates them – and that’s hard to do.” –David Zaring

“The billion-dollar fine for a bank of this size is really not a significant sufficient deterrent, and there need to be additional sanctions,” said Christopher Lewis Peterson, senior fellow at the Consumer Federation of America and also a law professor at the University of Utah. He is also a former special adviser to the office of the director of the CFPB. He called for stronger deterrents. “Generally speaking, we need to have more criminal accountability in the financial services sector,” he said.

Although Peterson made the case for criminal action, he noted that it is not clear if the latest Wells Fargo case merited that. However, earlier cases may have warranted action, he said. Referring to its 2014 scandal involving the creation of fake bank accounts, he said, “It is highly likely that there were certainly people high up in the management of the bank that had awareness that this was happening, if not C-suite people.” It may have been possible to prove “criminally indictable fraud” in that case, he added.

“Consumers need to realize [the principle of] ‘Buyer Beware’ – you need to be paying close attention to what’s in your interest because the bankers are paying attention to what’s in theirs,” said Cindy Schipani, professor of business administration and business law at the University of Michigan.

Schipani pointed to news reports of the bank saving $3.7 billion from the latest tax cuts. “So $1 billion is just a little bit off of the windfall they are already getting,” she said. At the same time, “it’s hard to figure out what the right balancing act is as to whether it’s enough or if you’ve got too far,” she said. “You certainly don’t want to execute the death penalty and then have to have innocent bystanders harmed by all of that.”

Zaring, Peterson and Schipani explored how things might change – or not change – in financial regulation on the Knowledge at Wharton show on SiriusXM channel 111. (Listen to the full podcast using the player at the top of this page.)

A Shift in Approach?

Does the Wells Fargo fine mean the CFPB is changing its approach to more aggressively go after bank malpractices? Not necessarily, said Zaring. “I don’t expect the bureau to necessarily do an industry-wide investigation based on what it’s found from Wells Fargo,” he added.

Zaring, however, noted that since the acting director Mick Mulvaney joined the agency last November as acting director, he has “literally not done a single enforcement action.” Therefore, the action in the Wells Fargo case represents an “interesting and dramatically different approach to regulation than [what] we’ve seen before from that director,” he said.

Peterson disagreed. He pointed out that it was not Mulvaney, but his predecessor Richard Cordray, who opened the investigation that resulted in the latest fine. “One thing that may have stiffened the CFPB’s spine was the existence of another regulator (the OCC),” said Zaring. The OCC, which was an equal partner in the probe, gets to keep half the fine slapped on Wells Fargo.

Peterson doubted the CFPB’s commitment to relentlessly pursue banks and other financial institutions accused of improprieties. For example, he said the CFPB recently dropped cases against online tribal payday lenders who were accused of extracting interest rates of 900% on loans they made to an Indian reservation. Cordray had opened that investigation as well. He noted that efforts are already underway in Congress to pare back the powers of the CFPB. He also cited the Senate’s passing of a bank deregulation bill last month as further indication of a weakening system for consumer protection.

What Will Ensure Consumer Protection?

“Culture is huge in all of this, and the culture has to start from the top and it has to be executed all the way through,” said Schipani. She noted that the settlement puts responsibility on Wells Fargo’s board for ensuring that remedial action is taken. “The key is you have to have folks with strong ethical backbones in place, and then you have to have processes in place to avoid the temptation and to test those backbones,” she added.

“The billion-dollar fine for a bank of this size is really not a significant sufficient deterrent, and there need to be additional sanctions.” –Christopher Peterson

A culture change also means the bank’s top management is finely tuned into its operations to spot red flags. “There needs to be a lot more personal accountability, and the folks at the top need to not only be paying attention to results; they need to figure out how those results are achieved,” said Schipani. “When things are too good to be true, then they probably aren’t. And so when they start seeing all of this extra money from all of these fees, they should be looking into how that money is acquired.”

According to Zaring, “lasting change” could come about only if enforcement agencies pursue the implementation of changes in operational practices by Wells Fargo’s middle management as promised in the consent order. “But the devil there is always in the details and in the execution,” he said.

Wells Fargo has shown “a longstanding pattern” of violations, said Peterson. He cited other cases such as the CFPB’s findings of violations in student loan debt collection. “This is happening again and again at the bank. It’s time for significant accountability.”

The CFPB has in fact been somewhat kind to Wells Fargo in one aspect. Peterson noted that in its enforcement cases, the CFPB usually mentions specific dollar amounts that would be paid as restitution to customers that were shortchanged, but that was not done in the latest Wells Fargo case. It is not clear in the consent order that customers who paid extra fees in auto insurance or mortgage interest changes would be made whole, he said. “The order does order the bank to provide restitution to the customers,” he noted. “But the language of the agreement is very different than past CFPB practices, and gives a lot more latitude and discretion to the bank in terms of how to do that.”

Customer Backlash Unlikely

Wells Fargo is also not likely to be deserted by its customers in large numbers in a stinging backlash. Some states such as California and Illinois did react to the 2016 scandal by taking their business away from Wells Fargo, but that is not likely to become widespread, said Zaring.

“There’s no doubt the bank is hurting, the stock price is hurting, and the fines have cut into its profitability,” Zaring said. “But it’s also really hard to change your bank. You’re used to having everything [including] your utility bills paid through your current bank. Once customers are locked into a bank they often find it hard to go down the street and go somewhere else. Wells Fargo seems to be benefiting from that phenomenon that once you’re in and no matter how mad they make you, it is often not worth it to change things.”

For sure, the harm to many customers was considerable. Between 2011 and 2016, Wells Fargo caused hundreds of thousands of consumers to be charged “substantial premiums —typically just over $1,000 a policy — for unnecessary or duplicative Force-Placed Insurance,” the CFPB said in its order. Borrowers in 28% of those cases canceled those forced insurance policies because they already had insurance, the CFPB noted. Also, Wells Fargo has acknowledged that “for at least 27,000 customers, the additional costs of the force-placed insurance could have contributed to a default that resulted in the repossession of their vehicle.”

It is entirely possible that losses or potential losses of such magnitude could turn off customers, said Zaring. “If losing a thousand bucks that you shouldn’t have lost won’t make you change who you bank with, then nothing will,” he added.

“You have to have folks with strong ethical backbones in place, and then you have to have processes in place to avoid the temptation and to test those backbones.” –Cindy Schipani

However, Peterson said “there is no guarantee that after you go through the hassle of switching your bank to some other new bank, that that new bank or credit union is actually going to provide better and more reliable services than your current bank.”

Smaller banks are also not necessarily an option because they are “not subject to CFPB supervision and enforcement,” Peterson said. “So it would just be like leaving a bank that’s had some scandals and going to another bank that’s not even being audited for scandals.”

Getting Banks to Acknowledge Guilt

Schipani is also not comfortable that the consent decrees have the banks refusing to acknowledge guilt. She said she wondered if a change in culture could be brought about if the government pushed more for admission of guilt.

Peterson, drawing upon his experience at the CFPB, described that as “a tough call.” It would be difficult to get banks to agree to admissions of guilt because it would expose them to potential shareholder liability lawsuits and class-action lawsuits, he said. In pushing for admissions of guilt, regulators may have to spend double or triple or more the amount of time they normally would, he added.

Such cases may end up in court trials, and the government ought to be taking that route more often, Peterson said. However, resource constraints at the CFPB would make all that difficult, he said. “It’s a little bit harder to see the potential tradeoffs – like how many cases would you give away in order to fight for that one provision against one financial institution,” he added. “I tend to be a little bit skeptical of [admission of guilt] as a silver bullet.”