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Wells Fargo (WFC) Scraps Brokers' Bonus for Selling Loans

Amid mounting troubles for Wells Fargo & CompanyWFC , following the bank's $185-million settlement in Sep 2016 to resolve regulators' claims of illegally opening millions of unauthorized accounts, the U.S. lender has scrapped bonuses for brokers for selling loans. Precisely, the brokers who used to convince clients to take out loans including mortgages, securities-backed loans or lines of credit will not be paid bonus.

Wells Fargo's brokerage arm will keep the pay grid unchanged for 2017, accounting most of the broker's pay. However, bonuses for persuading clients to take on loans will be scrapped. Notably, such bonus amount is paid in the form of deferred compensation, increasing a broker's annual pay by thousands of dollars. A percentage of the fees and commissions generated from servicing customer accounts are paid by brokerage grids.

The bank's move is expected to bring the brokerage in line with the main bank, where sales incentives have already been changed. Further, through elimination of bonuses, the bank intends to evade further problems and gain back brokers' and clients' confidence in the bank.

Further, Wells Fargo has increased the minimum amount of assets in an account for a broker to be paid full compensation. The amount of assets has been raised to $100,000 from $65,000, effective Jan 2017. The household having less than $100,000 in assets in the account will decrease the broker's pay by flat 20%. However, brokers will be safeguarded from pay cut from those small households if 75% of their clients account in $250,000 or more in assets.

In addition, brokers have been offered awards for transferring clients also. Precisely, transferring clients to local financial relationship advisers, brokers will be paid $2,000 per household and $100,000 in total. Further, more will be paid who have 65% or more of their households with more than $250,000 in assets.

On the other side, the Financial Industry Regulatory Authority (FINRA), the brokerage industry's self regulator, is investigating the scandal's impact on the bank's brokerage unit. Notably, the brokerage employees, who have been laid off by Wells Fargo, have been contacted by FINRA to discuss the reasons of their retrenchment. The regulators want to be sure whether these employees' dismissals are related to the scandal or have been mishandled by Wells Fargo.

Wells Fargo fired around 5,300 employees, who acted against the bank's values and promised to compensate the affected customers following the disclosure of scandal.

Among others, Morgan StanleyMS and BofA Merrill Lynch - a unit of Bank of America Corp.BAC - will continue to pay bonus, next year, to brokers for selling debt products to customers.

Conclusion

After the disclosure of malpractices related to opening of around two million bank and credit card accounts without customers' consent, Wells Fargo has been facing issues with clients as they are reluctant to conduct business with the lender.

Further, investors' disappointment was reflected in the share price movement. The shares, with a growth rate of 1.5% year to date, underperformed 19.2% growth for the Zacks categorized Banks - Major Regional industry.

The allegation led to many setbacks, including the bank's shattered image, numerous lawsuits; triggered federal and state investigations, and congressional hearings.

In addition, the Office of the Comptroller of the Currency (OCC) intimated the bank about taking regulatory approvals before making business decisions. Particularly, Wells Fargo is restricted from making "golden parachute" payments to its departing executives. Moreover, the board of directors will require prior approval from the OCC, for hiring or laying off senior executives, as well as bringing changes in business plans.

Recently, Wells Fargo has been suspended for two years from conducting broker-dealer services in commercial banking and commercial paper, in its own birthplace, San Francisco. Further, the city has barred the bank from securities investments and counterparty/repurchasing agreements for two years.

However, the bank has undertaken many steps to restore its reputation post exposure of the scam. It initiated an internal probe and hired a consultant to review its sales practices. Additionally, management proposed to eliminate sales goals for its retail banking business, earlier than planned.

While the current crisis at Wells Fargo will take some time to alleviate, we believe that continued growth in loans and deposits, and expansion moves should support its growth profile, going forward.

Wells Fargo currently carries a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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