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Here We Go Again: Wells Fargo Is Under Investigation For Gouging Clients

Courtesy of ZeroHedge. View original post here.

After reporting last month that Wells Fargo’s foreign-exchange unit was being investigated by regulators and that the bank had fired four employees – and demoted another – after discovering certain unspecified improprieties in its FX shop, more details about the exact nature of the bank’s latest scandal – which follows revelations that the bank’s retail division created millions of fake customer accounts, and its auto lending unit overcharged borrows – have finally been unearthed by the Wall Street Journal.

WSJ reports that the bank's FX sales desk routinely gouged customers by charging them up to eight times as much as the industrywide standard. Furthermore, when confronted by clients about the high fees, traders and salespeople were encouraged to lie about the reasoning for them.

And once again, it appears Wells Fargo’s idiosyncratic incentives encouraged traders and salespeople on the bank’s foreign-exchange desk to take advantage of their clients’ ignorance and gouge them with exorbitant fees. Those who remember the cross-selling scandal that precipitated the resignation of CEO John Stumpf last year will recall that the 5,000 or so branch employees who were fired by the bank reportedly blamed management’s unrealistic quotas for their behavior.

Foreign-exchange employees got bonuses based solely on how much revenue they brought in, say more than a dozen current or former Wells Fargo employees. No other big bank in the U.S. calculated bonuses of currency traders in such a defined and individual way. Wells Fargo said Monday that it began making changes to those compensation plans earlier this year.

The bank also charged some of the highest trading fees around, according to current and former employees. For more than a decade, customers were sometimes charged anywhere from 1% to 4% on basic transactions such as converting euros to dollars and complicated trades like hedging.

Those percentages can be at least two to eight times higher than the industrywide average of 0.15% to 0.5%, depending on the trade, customer and volume, according to foreign-exchange bankers throughout the industry.

For what it’s worth, Wells Fargo contests WSJ’s description…

Wells Fargo disputes the descriptions of its foreign-exchange fees by current and former employees. The bank said Monday its fees in 2016 had a weighted average of 0.09 percentage point across all transaction sizes. Clients served by its middle-market banking team were charged a weighted average of 0.18 percentage point, according to Wells Fargo.

Some foreign-exchange bankers at Wells Fargo relied on the fact that customers often didn’t bother to double-check how much they were charged, fee levels weren’t straightforward, and complaints could be batted away, the current and former employees say.

As WSJ had previously reported, a “large trade” involving Restaurant Brands International – the food-service conglomerate that owns Tim Hortons, Burger King and Popeyes – initially aroused regulators’ suspicions.

Amazingly, the price-gouging on the trade was apparently so egregious it resulted in a loss to the company. The Ontario-based company complained about the size of its trading fee and…well…the rest is history.

While WSJ didn’t offer many details about the transaction, the restaurant chain has been on something of an M&A spree in recent years: First the company bought Tim Hortons in 2014, then famously purchased Popeyes Louisiana Chicken last year.

Apparently, none of the traders’ traditional tactics for dealing with customer complaints worked on RBI. One manager told WSJ the sales desk would tell customers – in a stunning feat of mendacity worthy of their rivals at Goldman Sachs – that the higher fee was due to a “time fluctuation” when the trade was executed, or some other such nonsense. The dispute was resolved when the bank refunded RBI nearly $1 million. Inside the bank, the incident even has its own nickname: “the Burger King trade”.

One former Wells Fargo manager says employees would tell customers who expressed surprise at the size of a trading fee that market prices were different at the moment when the transaction was executed and blame “time fluctuation” for any difference.

The bank’s foreign-exchange customers have included telecommunications firm CenturyLinkInc., vehicle-parts supplier Federal-Mogul Holdings Corp. and nonprofit groups such as the National Bone Marrow Donor Program.

Regulators have been investigating the foreign-exchange business at Wells Fargo, including a big trade involving Restaurant Brands International Inc., the owner of Burger King, Tim Hortons and Popeyes Louisiana Kitchen, according to people familiar with the matter.

The trade resulted in a loss to Restaurant Brands, people familiar with the matter have said, which led to a dispute between the Oakville, Ontario, company and the bank. The dispute centered on how bank employees handled the trade, rather than its pricing. Wells Fargo refunded about $900,000 to Restaurant Brands, people familiar with the refund say.

In addition to blaming market fluctuations, Wells Fargo traders devised another brilliant excuse: Blame the machines.

Wells Fargo’s foreign-exchange business also charged unusually high fees for trades with different currency conversions, known as “Bswift” transactions, current and former employees say.

“And if anybody did complain, it was an easy tap dance,” one former employee says. He says employees would say the pricing had been done automatically by the bank’s computer system so “there’s no accountability for the spread."

Wells Fargo sent an internal email Nov. 2 detailing new guidelines for Bswift transactions, according to a copy of the email reviewed by the Journal. The guidelines include specific handling and pricing procedures for those trades.

According to WSJ’s account, it isn’t clear exactly how regulators became involved – presumably RBI tipped them off, but it’s possible senior executives at the bank, hoping to get out in front of the scandal, decided to come clean. Early this year, a restructuring at the bank moved its foreign-exchange desk from its international division into its capital markets division. Once the new management took over and began reviewing internal controls at the desk, they discovered malfeasance that apparently goes beyond the infamous RBI trade.

The business was moved in early 2017 from Wells Fargo’s international division into its investment-banking and capital-markets operation. Since then, executives have changed internal systems, added more stringent rules around pricing and required more frequent compliance checks, current and former employees say.

Issues with the Burger King trade were found following those checks and customer complaints, people familiar with the matter say. The continuing internal review of Wells Fargo’s foreign-exchange operation is separate from the review sparked by the sales scandal, some of the people said.

A compliance training session in early November detailed what Wells Fargo called “approved margins” for different volumes of foreign-exchange transactions, according to an internal document reviewed by The Wall Street Journal.

Employees say fee levels remain higher than industry norms, and some compensation practices aren’t due to change until next year.

Both the Fed and the Comptroller of the Currency are involved in investigating the Burger King trade. The US Attorney from the Northern District of California is also looking into it.

As WSJ explains, bonuses in Wells’ FX shop were based on a system that essentially allows salespeople to eat what they kill.

Current and former bank employees say its pricing practices were rooted in a culture and compensation system that looked to maximize revenue. Bonuses were defined as 10% of revenues exceeding revenue targets.

If a banker’s revenue target was $5 million and the person brought in $6 million, he or she would earn a $100,000 bonus, or 10% of the additional $1 million in revenue. Bankers typically received such bonuses twice a year in cash, rather than stock, as part of a signed contract, they added.

It’s rare among foreign-exchange groups in other banks to have so-called defined-bonus plans focused on individual earnings, according to people in the industry.

After Wells Fargo moved the foreign-exchange business into its investment bank earlier this year, managers began telling employees that bonuses would become “discretionary” by the end of 2017. Under this more typical arrangement, management would decide employee bonuses, and bankers wouldn’t know exactly how much they would receive. It would be based on a variety of factors, not just revenue.

Wells Fargo has 18 foreign-exchange sales and trading offices, including in New York, San Francisco, Charlotte, N.C., London and Hong Kong. A few hundred people work in the group world-wide.

Current and former employees say Wells Fargo’s foreign-exchange customers are largely midsize businesses that don’t trade often or in large volumes and therefore lack “market insight."

However, RBI isn’t the only Wells client that has complained about gouging. In November 2016, Ecolab Inc., a water, hygiene and energy company based in St. Paul, Minn., complained after the bank took a hefty 1% fee on a $100 million swap deal. Like RBI, Ecolab also received a refund.

In another example, data-management firm Veritas Technologies LLC had a fee agreement already worked out with Wells. But after making one trade on behalf of Veritas, Wells Fargo bankers told Veritas that the bank’s fee was 0.05 percentage point higher than the agreed rate. Veritas was, understandably, not pleased.

One of the most damning details in the story – and something sure to draw the ire of regulators – is that one former employee who spoke out about the fee gouging was demoted and eventually pushed out of the bank.

During a meeting of foreign-exchange managers in the mid-2000s, Cathy Witt said it wasn’t right to celebrate high fees by ringing a bell, people familiar with the situation say. Ms. Witt, an employee in the bank’s Chicago foreign-exchange group, warned that Wells Fargo could become known as a “bucket shop,” a derisive term for a disreputable finance firm, some of the people say.

A few weeks later, Ms. Witt was summoned to a meeting in St. Louis, told that her comments had been offensive and demoted on the spot, according to people familiar with the matter. She also was told to apologize to other managers for her unprofessional behavior, the people say. She later left the bank.

For such a small shop, the Wells Fargo traders reportedly did quite a bit of celebrating. Management would publicly praise traders for locking in large fees in emails to the entire desk. Traders in San Francisco were reportedly encouraged to ring a brass bell every time they sealed a trade.

In what was perhaps the most hilarious detail in the story, the FX traders even charged exorbitant fees to other Wells Fargo businesses like Wells Fargo rail – all to help pad their bonuses.

The operation also charged high fees to other parts of Wells Fargo. Wells Fargo Rail, which leases locomotives and railcars, and the bank’s corporate-trust division are often charged 1% to 1.5% on currency transactions, according to current and former employees.

Of course, the timing of this revelation couldn’t be worse for Wells: It comes just as new CEO Tim Sloane – who recently appeared before a Congressional hearing, where he was told by Massachusetts Senator Elizabeth Warren that he should resign, just like she told his predecessor – has been making themedia rounds to try and rehabilitate the bank’s image after the cross-selling scandal. And the fact that its breaking only months after the bank was forced to refund customers whom it deceived into buying unnecessary auto insurance isn’t helping.

However, Wells has one thing going for it: Most of the working public don’t understand what the foreign exchange market – or even that there is a foreign exchange market – much less how it works and how one might go about cheating clients. The unceasing wave of FX scandals hardly did anything to dent the reputation of BNY Mellon, or Barclays, or DB in the eyes of the public.

But given Wells’ recent track record, retail customers might make an exception.


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