The US central bank, the Federal Reserve, which regulates the country’s financial institutions, has restricted the growth of Wells Fargo following “recent and widespread consumer abuses and other compliance breakdowns”. The restriction on the bank is to continue “until it sufficiently improves its governance and controls”.
The Federal Reserve Board (FRB) issued a cease and desist order with Wells Fargo which meant that in addition to the growth restriction the firm is required to improve its governance and risk management processes, including strengthening the effectiveness of oversight by its board of directors.
Until the firm makes sufficient improvements, it will be restricted from growing any larger than its total asset size as of the end of 2017. The FRB required each current director to sign the cease and desist order. Additionally, the FRB ordered Wells Fargo to replace three current board members by April and a fourth board member by the end of the year.
In 2016 then the chairman and chief Executive of Wells Fargo, John Stumpf, was forced to quit following admissions by the bank of fraudulent activities, including the opening of customer accounts without permission, which were uncovered by the US Consumer Financial Protection Bureau. Investors showed their discontent with the board with low votes in favour of Wells Fargo directors at its AGM last year.
Emphasising the need for improved director oversight of the firm, the FRB sent letters to each current Wells Fargo board member confirming that the firm’s board of directors, during the period of compliance breakdowns, did not meet supervisory expectations. Letters were also sent to Stumpf and past lead independent director Stephen Sanger stating that their performance in those roles, in particular, did not meet the Federal Reserve’s expectations.
FRB chair Janet Yellen said: “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. The enforcement action we are taking today 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.“
Wells Fargo responded by listing the governance changes it has made since 2016 indicating that within 60 days it would submit a plan to the FRB to further enhance the board’s effectiveness in carrying out its oversight and governance of the company. and a plan to further improve the company’s firm-wide compliance and operational risk management program.
In respect of board governance, the company has changed its by-laws so it is obliged to have an independent chair – a position now held by Elizabeth Duke who is a former member of the FRB. Additionally, six new independent directors were elected in 2017 as five directors retired, bringing to eight the total number of directors elected since 2015. Wells Fargo added that four directors would be appointed in 2018, as three others retired.
The current president and chief executive of the bank, Timothy Sloan, said: “We take this order seriously and are focused on addressing all of the Federal Reserve’s concerns. 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. We appreciate the Federal Reserve’s acknowledgement of our actions to date. 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.”Last Updated: 9 February 2018