Introduction
Wells Fargo is an American international financial service company that is headquartered in San Francisco, California. The company was founded in 1852, and it is currently among the largest organizations in the country. According to Dennison (2022), Wells Fargo was valued at $82.4 billion in 2021, while the 2022 forecast projects better outcomes. The banking company was involved in unethical practices that tainted its reputation in 2015. The scandal referred to unauthorized sales of bank products in the United States, where the bank employees opened accounts for their clients without the consent of the latter. Consequently, the firm received several lawsuits, including that of the Navajo People, with claims of predatory business tactics. In the paper, various legal and ethical issues will be considered and discussed to analyze the case and offer reasonable conclusions. The 2015 scandal violated various legislation pieces, addressed contract fraud, alternative dispute resolution, and illustrative case law, and indicated that businesses could benefit from using a collaborative leadership style and applying cooperative management practices.
Nature of Business
Wells Fargo issues financial services in more than 40 countries with at least 7,200 outlets. The firm mainly proffers banking, mortgage, and investment products and services but also provides its customers with commercial and consumer finance services (“About us,” 2022). Specifically, the multinational company offers checking, credit cards, personal loans, investing, finance education, home loans, auto loans, and other products and services (“About us,” 2022). Wells Fargo is a public corporation with unlimited share capital. Although the business is among the largest financial corporations in America, it experiences tough competition from other big firms in the industry. Some of its contenders are Bank of America, Citigroup, and JPMorgan Chase banks (“About us,” 2022). The firm assumes the corporate responsibility of strengthening economic and financial opportunities in marginalized communities (“About us,” 2022). Wells Fargo advances environmental sustainability by creating safe, comfortable, and healthy workplaces.
Legal Issues and Regulatory Environment: The Federal Consumer Financial Protection Act (CFPA)
The Consumer Financial Protection Act of 2010 is an amendment to the federal consumer protection act enacted by the Obama administration to increase financial oversight and protect consumers. The amendment resulted in the Consumer Financial Protection Bureau (CFPB) being established under Dodd-Frank (Clarkson et al., 2022). The American financial regulatory environment is challenging since lenders compete for borrowers. Thus, the given act was intended to prevent predatory mortgage lending and clarify the mortgage terms for consumers’ easy understanding. The law also deters mortgage brokers from charging high interest on loans borrowed by customers. In addition to that, the act governs other forms of lending, including debit and credit cards, and addresses consumer complaints (Clarkson et al., 2022). The lender is required to disclose lending information in the most understandable way for the borrower.
The Federal Consumer Financial Protection Act is one of those legislations that the plaintiffs used to sue Wells Fargo. In particular, the Navajo Nation claimed that the banking company made them predatory targets over financial malpractice. The bank was accused of targeting elderly and minor non-English speakers and imposing banking-related charges, including unauthorized accounts maintenance fees and various loans. This statement denotes that bank employees went to the minorities’ area and tricked them into opening bank accounts. According to Fox (2019), the Navajo region hosts the largest Native American indigenous community with at least 350,000 members, while the land encompasses territories such as Utah, New Mexico, and Arizona. The multinational firm admitted its guilt, accepted the predatory accusations, and promised to stop the banking-related malpractices directed at the Navajo Nation.
Case Law
Case law is based on official judicial decisions rather than statutes, regulations, or constitutions. The judicial system solves disputes using solid facts from a case under review (Clarkson et al., 2022). Also known as common law, case law refers to a collection of precedents and judgments previously applied by other judges regarding a related matter. If a case does not hold to previous judicial decisions, the judges are mandated to seek conclusive precedents from other jurisdictions. The federal system also plays a significant role in controlling the decisions made in case law. Based on various circuits, precedents are different for each court circuit except for the one made by Supreme Court.
The lawsuit against Wells Fargo could also be solved through the application of case law. Common law is often applied in cases that exist or new facts that are unavailable in statutes or the constitution (Clarkson et al., 2022). Other factors surrounding the cases are also rare, for example, targeting minors and elderly non-English speakers. Therefore, due to the uniqueness of this case, the judicial system was forced to apply precedent decisions. Furthermore, the judges within a jurisdiction are responsible for making new precedents if there are no related decisions from other jurisdictions.
Truth in Lending Act
Truth in Lending Act (TILA) is a consumer protection act that prohibits unjust credit practices. The act requires the lender to disclose all the information about credit rates to the borrower before accepting the loan (Bouchoux & Chung, 2017). The lending information should be conspicuously written in a document that, upon reading, the borrower should sign in agreement. This statement denotes that the debtors should not sign the credit agreement if they are unaware of all its terms. The TILA was enacted to ensure that the borrowers voluntarily enter into a credit contract based on agreeable terms. This legislation piece also emerged to prevent lenders from deluding borrowers into taking unaffordable terms and conditions.
In the case of Wells Fargo, the company deluded the defendant into taking credits they never needed. The firm targeted the minority group, opened accounts without their permission, and issued them with credit cards, loans, and others. The TILA demands that Wells Fargo should have presented the claimant people with precise credit information and established an agreement upon receiving their consent. However, the financial firm proceeded to establish credit agreements with these people even though the latter did not know anything about it. Based on this provision, it was expected that the court found Wells Fargo Bank guilty.
Ethical Dilemma and Two Ethical Frameworks
The ethical dilemma is as follows: the management was torn between predating the Navajo minorities to meet the bank’s allocated sales quotas and firing employees due to failure to achieve the required sales targets. It is possible to suggest that Wells Fargo followed the consequentialist framework in making sales decisions. Consequentialism focuses on the future results of an action by considering who obtains direct or indirect benefits (Sroka & Szántó, 2018). In this framework, the ethical aspect is defined as performing one’s duties to achieve the desired result. In other words, the action is considered ethical if its results bring positive outcomes to the individuals performing their duties. The framework also holds the perspective that the end justifies the means (Sroka & Szántó, 2018). This description demonstrates that actions are deemed ethical as long as they lead to positive outcomes even though negative effects for other people are present.
The application of this framework indicates that the Wells Fargo management never minded how the employees earned daily sales after the required goals were formulated. The multinational bank implemented specific sales quotas, and all managers were expected to meet these targets every day. These managers were forced to account for their failures if the quotas were not met. According to Tayan (2019), sales targets that were not achieved by an employee were transferred to the next day. Therefore, it should be evident that managers were under pressure to meet daily sales targets. As a result, they forced their subordinates to meet these sales quotas on a daily basis, while a failure to reach the expected figure could result in dismissal. That is why the employees decided to use all the possible means to meet the quotas. These individuals then started targeting Navajo Nation people by creating extra accounts for existing customers and making new ones for potential clients, including minors, without notifying them (Fox, 2019). For the Wells Fargo management, targeting the Native Americans was morally right as long as they met the sales targets.
Wells Fargo could have attained different results if they applied a duty framework in their decisions. This approach focuses on duties and obligations in a situation and considers what should not be done (Sroka & Szántó, 2018). The ethical goal of the given framework is doing one’s duty by taking the morally right action. The framework has the advantage because it establishes uniform expectations for all people. Its principles assume that if an act is done as required and is ethically correct, it would then be favorable to all parties. Thus, people performing the duties are encouraged to treat everyone equally, with respect and dignity. The duty framework also focuses on following moral duties and rules regardless of the outcomes (Sroka & Szántó, 2018). According to this approach, individuals are forced to look at their obligations and consider what actions are forbidden.
From the point of view of the duty framework, Wells Fargo operated within the moral values but without considering the outcomes. When the management was torn between meeting the sales target and firing employees, it had the option to act within the organizational abilities. Thus, it was morally wrong to target non-English speaking minorities and force them to purchase bank products. The managers and employees of the firm had the responsibility to stop the predatory practices. In other words, the managers should have weighed the duties given by the bank headquarters prior to implementing them.
These managers should have told the bank representatives that their branches had no capability of meeting such sales quotas. The employees also needed to work within their professional boundaries to meet the allocated sales targets. They should have legally operated with customers who voluntarily sought banking services instead of aggressively targeting the entire community. In this scenario, the employees would not have met the sales target and would probably have been fired. However, the framework requires people to operate within moral boundaries regardless of the consequences.
Other Legal Topics: Contract Fraud
The Wells Fargo scandal also raised a few other legal topics, and contract fraud is the first of them. According to the provision of contract law, fraud happens when one of the parties in the contractual agreement provides deceitful, false, or misleading information to the other party (Bouchoux & Chung, 2017). Fraud in the factum exists when this misbehavior is only related to a particular fact in contrast to the entire contract. In the provided case, the bank used the claimant’s information without their consent to open new accounts, issue credit cards, and offer loans, meaning that the plaintiffs were tricked into new bank contracts. Although the Native Americans received bank notifications, most could not understand them as they were written in English. Thus, Wells Fargo relied on contract fraud and presented the accusers with their existing banking contracts.
Alternative Dispute Resolution
Alternative Dispute Resolution (ADR) law is the second legal topic under consideration and involves various means of settling disputes out of court. There are various types of ADR, with arbitration being among them, and this approach was used by Wells Fargo in the Navajo case. In arbitration, the disputing parties are represented by the legal system or lawyers to negotiate favorable terms (Greenspan et al., 2021). Through their hired lawyers, the organization and the claimants agreed on financial settlements to compensate for predatory acts by the bank. According to Fox (2019), Wells Fargo agreed to pay $6.5 million to the defendants as a settlement. One should emphasize that the arbitration also prevented Wells Fargo from further litigation.
Illustrative Case Law
Illustrative case law, the third topic, focuses on the examples of those cases whose precedent decisions might be applied by the defendants. When the district court of Los Angeles was presented with the case of Navajo Nation v. Wells Fargo, the judge used precedent decisions to conclude it. The judge relied on several precedents, including BP Am., Inc. v. Oklahoma, and Lexmark Int’l, Inc. v. Static Control Components, Inc (Navajo Nation v. Wells Fargo & Co.). These cases allowed the judge to claim that while the tribe had the right to sue the company, it did not have a parental representative. Parent of the people or parens patriae is a doctrine stipulating that the government should represent people in the court if they are unable to do it by themselves. The plaintiffs had parens patriae, but Navajo lacked the legal representation required.
Recommendations
According to the information above, it is possible to offer general recommendations for Wells Fargo and other organizations. A business should adopt a leadership style that considers and relies on employees’ opinions during the decision-making process. The company operates under an authoritarian style of leadership, which denotes that executives impose strict expectations and define the required outcome. The opinions of the managers and employees are not considered in the goal formulating process. The management does not allow its subordinates to raise their thoughts regarding work matters. Although authoritarianism is suitable when results are needed, pushing the employees can result in worse outcomes (Al Khajeh, 2018). Therefore, Wells Fargo should adopt a participative leadership style because it provides the organization with room for democracy and involves team members in the decision-making process.
It is worth stating that the collaborative style helps employees feel engaged, included, and motivated to achieve the set goals. When individual team members participate in decision-making, there is a higher probability that stipulated goals are agreeable and achievable (Al Khajeh, 2018). The team members also make suggestions because they can be better informed about their possibilities, and this approach leads to minimal chances of making unethical decisions by the management.
Another recommendation for successful businesses is a Laissez-faire leadership style. The principles of this leadership approach are opposite to those of the authoritarian style (Al Khajeh, 2018). In particular, leaders entrust employees to make the right decision for the organization, and this hands-off leadership encourages employees to be responsible and accountable for their actions. However, it is worth admitting that this style only works effectively with highly skilled employees (Al Khajeh, 2018). These individuals should also be experienced and self-motivated to ensure that the approach implies positive outcomes. Although Laissez-faire leaders are not involved in daily activities, they provide their subordinates with the tools and resources that they need, which allows employees to make the right decisions for the business.
In addition to that, business managers should have the ability to treat others with fairness because this skill enables managers to respect and earn respect from the employees. Such managers are often considerate in conflicting situations that may cause division among employees. De Araujo et al. (2021) stipulate that effective business leaders should also have good communication skills because they can save the business from poor decisions or actions. By communicating with employees, the leaders table their opinions and allow subordinates to contribute. Being an effective communicator means that a leader can take criticism and make improvements on the highlighted issues.
Business leaders should also know the value of their employees to operate successfully. Many organizations draw much attention to customer value while forgetting the equally critical employees (de Araujo et al., 2021). These internal stakeholders are of high value to the business because they allow organizations to meet customers’ needs. Business leaders who understand the value of employees satisfy their needs through career advancement and increasing compensation (de Araujo et al., 2021). When the workers are valued, they tend to become more motivated and productive. The businesses that rely on such practices also have higher employee retention compared to those that use fear and intimidation.
Conclusion
Wells Fargo experienced an ethical dilemma that involved choosing between targeting a minority group aggressively and firing its employees. Financial malpractices resulted in the fact that the firm violated several laws, including consumer protection-related legislation. In particular, Wells Fargo broke Federal Consumer Financial Protection Act, Truth in Lending Act, contract law, and criminal law. The firm management illustrated inadequate leadership skills, especially by pressuring employees to meet impractical sales targets. Wells Fargo was operating under a consequentialist ethical framework that meant taking all possible actions to attain the stipulated target. The multinational company should have operated under a duty ethical framework for better outcomes. Operating within this approach, Wells Fargo employees would not have targeted the minority group. The Navajo tribe people were right to sue the company for targeting them and selling unnecessary products. Businesses that operate under authoritarian leadership are at risk of failure since such leaders only set specific goals and ignore whether their subordinates have the resources or abilities to achieve these targets. The participative leadership style is highly recommended for organizations seeking to involve employees in the process of making decisions.
References
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Navajo Nation v. Wells Fargo & Co. 344 F. Supp. 3d 1292 (D.N.M. 2018) [United States District Court District of New Mexico] [2018].
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