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A man passes by a Wells Fargo bank office in Oakland, Calif. Regulators announced Sept. 8 that Wells Fargo is being fined $185 million for illegally opening millions of unauthorized accounts for their customers in order to meet aggressive sales goals.

An express lesson for Wells Fargo and other banks

Reform of the world financial system since 2008 has made it stronger, yet a massive scandal at Wells Fargo highlights the ongoing need to build ethical resilience into the industry.

Since the global financial crisis in 2008, many countries have tightened rules for banks to improve their integrity and prevent another crisis. Yet last year Federal Reserve Chair Janet Yellen spoke of “pervasive shortcomings” in values at financial firms. And Bank of England governor Mark Carney said more bank scandals would create “a perception of ethical drift.” Their disquiet was prescient. On Thursday, the US watchdog for consumer finance imposed its largest fine ever on one of the nation’s largest banks, Wells Fargo.

The bank was fined $185 million for opening millions of checking and credit-card accounts for customers without telling them. Staff transferred money into the accounts and made up email addresses and PIN numbers, all to meet internal goals and earn extra compensation for generating new business. Many customers were hit with extra fees.

Not only was the operation illegal, according to the federal Consumer Financial Protection Bureau, but its scale revealed a giant ethical lapse. After the practice was exposed, some 5,300 Wells Fargo employees were fired. The massive purge was an attempt to instill a clean culture and refocus the bank on customer needs and less so on incentive compensation schemes and sales targets. The bank expressed regret and is taking responsibility in making amends.

The scandal was not big enough to cause another market meltdown. Yet along with other recent banking scandals in the US, Britain, Germany, and elsewhere, it revealed the need for further reforms aimed at building ethical resiliency into financial firms. Last month, Mr. Carney, who also serves as head of the global forum of national regulators – the Financial Stability Board (FSB) – issued this warning: “The incidence of financial sector misconduct has risen to a level that has the potential to create systemic risks by undermining trust in both financial institutions and markets.”

The FSB is now studying various ways to hold individuals in financial firms more accountable for bad behavior. The industry is stronger and more stable as a result of recent reforms, Carney said. But more work is needed on whether banks’ compensation structures encourage employees to rig markets, lie to customers, or engage in similar conduct. Wells Fargo’s executives would know what he means.

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