Wells Fargo Remains ‘Confident’ Following Growth-Limiting Fed Order
February 07, 2018 / Source: Bank News
February 6 — As promised in a December 2017 tweet by President Donald Trump, the Federal Reserve came down hard on Wells Fargo last week. In an unprecedented move, the Fed restricted the bank’s growth until such time as it is deemed it has sufficiently improved its governance and controls. It also mandated that the firm replace four current board members by the end of the year. Despite stiff penalties and falling stock prices, Wells Fargo has expressed confidence in its ability to address the Fed’s concerns and move forward.
Creating roughly 3.5 million fake accounts to improve sales numbers and forcing as many as 570,000 customers into unnecessary auto insurance placed the financial industry giant in the Fed’s crosshairs.
“We cannot tolerate pervasive and persistent misconduct at any bank, and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again,” Fed chair Janet L. Yellen said. “The enforcement action we are taking… will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers.”
“In the past, it’s been the CEO or C-suite executives or shareholders that have taken the pain and the boardroom has been largely shielded from regulatory action,” said Ed Mills, a Washington policy analyst at brokerage Raymond James Financial Inc. “This is the Fed taking a big step into the boardroom and telling all directors that their actions are going to have consequences. I think you’re going to see a change in the makeup of some boards to make sure they have the expertise necessary to perform their oversight functions of these companies.”
In response to the assessed penalties, Wells and the board of governors of the Federal Reserve have agreed to a consent order that contains the following requirements:
Within 60 days, the company’s board will submit a plan to further enhance the board’s effectiveness in carrying out its oversight and governance of the company and will submit a plan to further improve the company’s firm-wide compliance and operational risk management program.
After Fed approval, Wells will engage independent third-parties to conduct a review to be completed no later than Sept. 30 to confirm adoption and implementation of the plans.
The asset limitation will remain in effect until third-party reviews have been completed to the satisfaction of the Fed.
After removal of the limits on asset growth, a second third-party review will be conducted to assess the efficacy and sustainability of the risk management improvements.
“We take this order seriously and are focused on addressing all of the Federal Reserve’s concerns,” said Timothy J. Sloan, president and CEO of Wells Fargo. “It is important to note that the consent order is not related to any new matters, but to prior issues where we have already made significant progress… In addition, the order is not related to Wells Fargo’s financial condition — we remain in a strong financial position and stand ready to serve the varied financial needs of our customers.”
Still, others have a slightly different take on the matter: “The bank is lucky it is too big to shut down,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “A smaller bank might have lost its banking licenses.”
The consent order also acknowledges changes Wells has made in the past year to improve governance and risk management in the wake of the fake accounts scandal:
Separating the roles of chairman and CEO and amending the company’s by-laws to require an independent chair.
Electing six new independent directors in 2017 as five directors retired, bringing the total number of directors elected since 2015 to eight. Wells plans to refresh an additional four directors in 2018.
Enhancing the overall capabilities and experience represented on the board, including financial services, risk management, cyber, technology, regulatory, human capital management, finance, accounting and consumer and social responsibility.
Reviewing the board’s committee structure and leadership, amending committee charters to enhance risk oversight and refreshing the chairs of certain key committees, including the risk and governance and nominating committee.
Conducting a board self-evaluation in 2017 facilitated by Mary Jo White, a senior partner at Debevoise & Plimpton LLP and former chair of the Securities and Exchange Commission. This evaluation informed the board’s changes in structure, composition and governance practices.
Centralizing critical control functions (including HR, finance and technology) to improve enterprise visibility, consistency and control.
Centralizing all risk management functions to accelerate the design and implementation of a fully integrated operating model for risk management.
Developing and executing comprehensive plans that addressed compliance and operational risk management programs, organizations, processes, technology and controls.
Hiring externally for critical risk management leadership roles such as chief operational risk officer, chief compliance officer and head of regulatory relations (a newly created position).
Forming new centralized enterprise functions dedicated to key risk control areas including the conduct management office (formed in January 2017), enterprise data management function (formed September 2017) and comprehensive customer remediation group (formed November 2017).
“Our board is committed to meeting the expectations of our regulators and protecting and serving the interests of our shareholders, customers, team members and the community,” said Betsy Duke, independent chair of Wells’ board of directors and former member of the Board of Governors of the Federal Reserve. “Every change we’ve made this year reflects this… Moving forward, we’ll continue to be focused on maintaining the appropriate mix of professional experiences and diverse perspectives necessary to govern a franchise as important as Wells Fargo.”