Federal Reserve Hits Wells Fargo with Unprecedented Enforcement Action (Part I of II)

by Michael Volkov
Contact

In an extraordinary action, with significant ramifications for the financial industry, the Federal Reserve recently announced a series of enforcement actions against Wells Fargo.

On Friday, February 2, 2018, which was then-Chairwoman Yellen’s last day in office, the Federal Reserve announced an enforcement action against Wells Fargo for its corporate governance failures and poor record of remediation. (The Press Release and Enforcement Documents are Here).

Specifically, the Federal Reserve and Wells Fargo entered into a Consent Order reflecting the Federal Reserve’s dissatisfaction with Wells Fargo’s board of directors’ performance, risk management practices and its compliance program.

In particular, the Federal Reserve noted the Consent Orders previously issued by the Office of the Comptroller and the Consumer Financial Protection Bureau focused on Wells Fargo commercial bank sales practices and risk management.  Also, it noted that, in recent months, Wells Fargo had charged hundreds of thousands of borrowers for unneeded guaranteed auto protection or collateral protection insurance.  Additionally, the Federal Reserve identified deficiencies in Wells Fargo’s risk management and compliance program which Wells Fargo has yet to correct.

As a result, the Consent Order lays out a comprehensive remediation plan that requires Wells Fargo to address its board of directors and governance deficiencies, problems with its risk management operations and its compliance program.

In perhaps the most extraordinary aspect of the enforcement action, the Federal Reserve restricted Wells Fargo’s ability to grow its business until the remedial actions are completed.  Specifically, Wells Fargo cannot take any action that would cause the average of its total consolidated assets to increase over the same quarter’s total consolidated assets for the year 2017.

The restrictions will remain in place until: (1) Wells Fargo submits the written plans to improve the Board’s effectiveness and Risk Management; (2) the Federal Reserve approves the written plans; (3) the Bank adopts and implements the plans and programs and the Initial Risk Management Review is completed to the Federal Reserve’s satisfaction; and (4) the Federal Reserve provides written notice that the above 3 conditions have been met.

It is worthwhile to take a step back and remember how Wells Fargo ended up here in this fine mess.

Under a Wells Fargo sales incentive program, local managers and bank officers were required to meet stringent sales targets built on the assumption of eight accounts (e.g. checking, credit card, cds) for each customer. As a result, Wells Fargo personnel created nearly 2 million (yes, two million) fake accounts to meet these ridiculous sales targets.

After much hand-wringing and delays, Wells Fargo’s board launched a major internal investigation of the incident, including serious issues raised about its handling of whistleblowers, several of whom were fired after raising concerns about the program.

The Independent Directors in April 2017 issued a scathing report around the Wells Fargo scandal.  Based on its findings, Wells Fargo’s independent board took steps to clawback an additional $75 million from former CEO Stumpf and head of Community Banking Carrie Tolstedt for sales abuses resulting from the sales incentives program.

The directors found that the root cause of the sales practice failures was a decentralized management structure, coupled with an aggressive sales program directed and controlled by senior management in the Community Banking operation. As a result, employees sold unwanted and even unauthorized accounts to customers to meet management sales targets.

The Federal Reserve’s Consent Order requires Wells Fargo in 60 days to submit three separate written plans.

The first is to improve its Board of Directors effectiveness.

The second is to improve its firm wide compliance and operational risk management program.

The third requires Wells Fargo to conduct and complete by September 30, 2018 an independent review of its Board’s improvements in effective oversight and governance and enhancements to its compliance and operational risk management program.

Following the integration of the improvements required by the Order, the Bank is required to conduct a second independent review to assess the efficacy and sustainability of the improvements.  The Federal Reserve shall approve the third-party expert required to conduct the review.

For other major banks under regulatory supervision, the Wells Fargo action is a major development and indication that the government will intervene when necessary to ensure proper governance and compliance actions are taken, and that remediation is enacted quickly and effectively in the aftermath of a scandal.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

Written by:

Michael Volkov
Contact
more
less

The Volkov Law Group on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.