It doesn't take a genius to figure out that incentive-based compensation like the type featured in Wells Fargo's current and previous consent orders has the potential to encourage fraud and steering of consumers into inappropriate products in order to make sales numbers. Here's the thing: there's little regulation of retail banking employee compensation. Instead, banks are relied upon to self-regulate, to have the good sense not to have unduly coercive incentive compensation and to have internal controls to catch the problems incentive compensation can create. But when a leading bank like Wells Fargo repeatedly fails to have good sense and to have sufficient internal controls, it suggests that it might be time for more directed regulation that will create clearer lines that facilitate compliance.
The CFPB already regulates the compensation of mortgage originators (loan officers and brokers), limiting compensation based on loan terms to 10% of total compensation. But this regulation applies only to mortgage loans. There's no regulation of retail banking employee compensation generally. And there are some big wholes in the CFPB mortgage loan officer compensation regulation. In particular, the CFPB's regulation does not cover compensation based on the number of loans made or the size of the loans, only on the terms of the loans. That leaves the door open for banks to set up compensation schemes that pressure employees to engage in fraud to meet quotas and get bonuses.
So what can be done going forward?