Wells Fargo scandal shows the value of regulation

Anyone with a bank account, credit card or mortgage should feel a tremor at the debacle unfolding at Wells Fargo, which was recently found to have scammed 2 million customers by opening phantom accounts without their permission.

Wells Fargo, one of the largest financial institutions in the world, developed an industrywide reputation in recent years for its aggressive sales of what the industry likes to call "products." At its helm was Minnesota-born and raised John G. Stumpf, CEO and chairman of the board, who has spent 34 years in banking, but when questioned by Congress about the fraudulent practices at Wells Fargo often professed ignorance.

That is simply unacceptable. Stumpf is far too highly compensated to escape responsibility for what happened on his watch. He has become the poster child for why this nation should maintain strong — not excessive — regulation and monitoring of the financial institutions so vital to a healthy economy.

Even with the stronger regulations put in place by the Dodd-Frank Act following the Great Recession, the scandal at Wells Fargo remained undetected until the Los Angeles Times broke the story in 2013. Why? Rep. Keith Ellison, D-Minn., who sits on the House Financial Services Committee, said the answer is simple: For all the protections in the act, banks are still allowed to "self-report" irregularities.

Stumpf and senior managers at Wells Fargo failed to alert investors that it had what in banking is called a "material event" because they insisted that defrauding millions of customers with phony accounts did not fall into that category. From the mortgage collapse to ghost accounts, financial institutions have proved over and over that they must be watched carefully. Without proper monitoring, investors, consumers and workers who depend on a stable banking system are all at risk.

Were employees ordered to fabricate accounts or was the pressure to sell, sell, sell so intense that they did so just to keep their jobs? Those questions require further investigation by the Securities and Exchange Commission and Justice Department.

The effort being led by some Republicans to weaken Dodd-Frank and the Consumer Financial Protection Bureau it created must be resisted at all costs. In less than six years, the bureau has fielded more than 700,000 consumer complaints and paid out more than $210 million in compensation to victims of wayward financial institutions from fines collected.

Funded by the Federal Reserve, the board is independent of the political whims of Congress and must remain so, despite efforts by some legislators to have Congress take control of the bureau's appropriations. The bureau has fined Wells Fargo over $100 million — the largest fine in the bureau's short history — some of which will compensate victims.

Ellison, who was among those grilling Stumpf at this week's House hearing, said there is reason to believe that overly aggressive cross-selling, if not outright fabrication, of banking products may not be confined to Wells Fargo. "Wells Fargo is an industry leader," he said. "I believe this is a widespread practice and we need to ask questions of everybody."

Sadly, the scandal is growing. On Thursday, Wells was fined another $24 million to settle allegations that it violated the Servicemembers Civil Relief Act by repossessing more than 400 vehicles belonging to men and women on active military duty and denying them banking protections.

There is no practical way for Americans to protect themselves from unscrupulous or even outright illegal practices against financial giants with armies of lawyers. And this is not just a consumer issue. Investors in these institutions should also be demanding better scrutiny of those who clearly cannot be trusted to police themselves.