At the core of the fake account scandal surrounding Wells Fargo right now is the fact that more than 5,000 of the bank’s former employees opened more than 2 million fake accounts to get sales bonuses.
As the Wells Fargo situation works it way through various political and legal machinations, the state of New York is taking measures to ensure that similar behavior, which led to a $185 million fine for Wells Fargo, doesn’t happen again.
New York Gov. Andrew Cuomo announced Tuesday that the state’s financial regulator, the New York Department of Financial Services, is issuing “new guidance” designed to restrict incentive pay for bank employees, requiring banks to tie those incentives to proper corporate behavior.
According to Cuomo’s office, the NYDFS guidance directs all state-regulated banks in New York to ensure any employee incentive arrangements do not encourage “inappropriate corporate practices.”
Specifically, Cuomo’s office notes, all regulated banking institutions in the state are being notified that no incentive compensation may be tied to “employee performance indicators,” like the number of accounts opened or the number of products sold per customer, without “effective risk management, oversight and control.”
According to the NYDFS, the guidance is designed to “emphasize that incentive compensation arrangements must be devised, if at all, so that employees are not provided incentives to engage in unacceptable practices or conduct.”
The NYDFS also said that “particular attention” should be paid to controls around cross-selling or referral bonus arrangements, because those kinds of arrangements have “inherent risks, including the possibility of conflicts of interest and inexperienced or unlicensed personnel selling, or supervising the sale of, affiliates’ products.”
The guidance, according to both Cuomo and the NYDFS, should protect consumers in the state from actions that harken back to the financial crisis.
“The inappropriate behavior we have seen at institutions like Wells Fargo are the same ones that led to the 2007 financial crisis and there must be zero tolerance for reckless policies that foster greed and put New Yorkers' financial futures at risk,” Cuomo said. “State charters banks are now on notice of their obligations and it is their responsibility to ensure their employees are acting in the best interests of their customers.”
Additionally, the NYDFS said that bank’s incentive compensation arrangements must meet the following principles, at a minimum:
- Balance Between Risks and Rewards: Any incentive compensation arrangement must appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risks
- Effective Controls and Risk Management: A banking institution's risk management processes and internal controls must reinforce and support the development and maintenance of any incentive compensation arrangements
- Effective Corporate Governance: Incentive compensation arrangements must be supported by strong corporate governance, including active and effective oversight by the organization's board of directors
According to Cuomo’s office, these new guidelines apply to New York's 121 state chartered commercial banks, savings banks, and bank holding companies, 17 state chartered credit unions, 88 foreign branches, 14 foreign agencies, and 35 representative offices, all of which have assets totaling more than $2.5 trillion.
“Lack of compliance with this guidance will be reflected in a bank’s regulatory examination rating and may subject an institution to additional regulatory action,” Cuomo’s office said.
“Misaligned incentive compensation arrangements and unacceptable corporate or individual conduct that result in consumer harm or other unsafe and unsound practices will be acted upon by the Department,” the NYDFS said.
“DFS will take swift enforcement action against financial institutions with misaligned incentive compensation schemes that foster improper behavior among their employees,” NYDFS Superintendent Maria Vullo said. “Board members and executive staff at regulated banks are responsible for making certain that sufficient controls are in place to safeguard against the inherent risks and conflicts of interest associated with cross-selling and referral bonus arrangements.”
