All of us remember DSB Bank. In 2009 DSB Bank faced allegations of mis selling of financial products by employees to customers. Mortgage loans exceeded by far the execution value of the underlying real estate and life insurance policies were sold (combined with the mortgage), thereby charging up to 80%(!) provision. The rest is history. DSB Bank faced a bank run and was subsequently declared bankrupt. In addition, several claim foundations became active and the AFM fined DSB Bank in relation to the above facts.

For those who are wondering how such a culture could come into existence, it is interesting to read the report of the “Independent Directors of the Board of Wells Fargo & Company” (“Wells Fargo”) dated 10 April 2017.

Wells Fargo fired over 5,000 (!) employees in the last years for creating secretly millions of unauthorized bank and credit card accounts, without the knowledge of their customers. This has resulted in a fine for Wells Fargo of USD 117 mio. A thorough investigation was conducted including interviews with over 100 employees. The report tries to establish how this culture could exist and more importantly how it could stay in place for such a long period. Key characteristics are a “sales” oriented culture and a decentralized corporate structure. Aided by a culture of strong deference to management of the lines of business embodied in the often repeated “run it like you own it” mantra. The banks seniors leader distorted the sales model and performance management system, fostering on an atmosphere that prompted low quality sales and improper and unethical behaviour. A sales model like this generally calls for significant annual growth in the numbers of products sold each year. Management however failed to consider that low quality accounts could be indicative of unauthorised accounts and as sales goals became harder to achieve the number of allegations and terminations of staff increased.

When Wells Fargo did identify misconduct its solution generally was to simply terminate the offending employee without considering the underlying causes. Employees who engaged in misconduct, most frequently associated their behaviour with sales pressure rather than compensation incentives. On 21 February 2017 the board announced termination of the Group Risk Officer, the Head of Strategic Planning and Finance and two senior regional banking leaders.

The risk function was highly decentralised at Wells Fargo. The line of business risk managers were responsible principally to the heads of their businesses and took the lead in assessing and addressing risk within their discrete legal problems as they arose. Audit merely reviewed relevant control and processes and largely found them to be effective, however, whilst it had access to sales practice concerns, it did not view its role to include analysing more broadly the course of this misbehaviour.

Finally, until as late as 2015 (even when sales practices were labelled high risk in materials provided to the risk committee of the board) there was a general perception within Wells Fargo control functions that sales practices abuses were a problem of relatively modest significance; the equivalent of a tolerable number of minor infractions of victimless crimes. This under-reaction to sale practice issues resulted in part from the incorrect believe that improper practices did not cause any customer harm and customer harm itself was construed to constitute only financial harms such as fees and penalties.

So again, decentralized organisations with a high focus on turnover/profits run a large risk of improper behaviour by employees. Apart from DSB Bank, another proper Dutch example of these kinds of elements is Imtech (yearly increase of profits and very decentralised governance structure).

Last but not least it is particularly interesting for General Counsel to read the section in the mentioned report about the (lacking) role of the Law Department in the culture at Wells Fargo. (see pages 72-78) “The Law Department’s focus was principally on quantifiable monetary costs — damages, fines, penalties, restitution. Confident those costs would be relatively modest, the Law Department did not appreciate that sales integrity issues reflected a systemic breakdown in Wells Fargo’s culture and values and an ongoing failure to correct the widespread breaches of trust in the misuse of customers’ personal data and financial information.” So worth reading if you are creating a culture of compliance.


About the author:

Hannema_EpEp Hannema is a corporate lawyer and partner at the offices of Norton Rose Fulbright in Amsterdam. He is active in private equity and M&A with a particular focus on the financial institutions and retail- and food sector. Ep has worked on several major transactions on behalf of Dutch insurance companies. In addition, he represents all large Dutch insurance companies in the ongoing restructuring of the Dutch Aviation Pool and has also been involved with the DSB Insurance companies.

Questions? You can give Ep a call on: T:+31 20 462 9413