Wells Fargo's latest troubles suggest tougher stance by OCC

Wells Fargo shareholders are anxiously monitoring the bank’s progress toward lifting an asset cap that the Federal Reserve imposed in February — and for good reason.

The unprecedented order to cap assets at $1.95 trillion until Wells proves it is a changed company has eaten into the bank’s bottom line and forced senior leaders and the board to address a host of managerial and risk-control problems.

So far, the Fed has been dissatisfied with the steps Wells’ has taken to prevent additional consumer abuses, according to a Reuters report published Thursday. The setback is seen as likely to increase the amount of time that the San Francisco bank spends in the Fed’s penalty box.

But a second regulatory agreement that the scandal-plagued bank signed earlier this year — a consent order with the Office of the Comptroller of the Currency — has drawn far less attention, even though it may also prove to be highly consequential.

The agreement appears to have been a key factor in some important recent changes at Wells. In fact, there is reason to believe that the OCC is now forcing Wells to grapple more deeply than it did previously with the many failures that led to its unauthorized account-opening scandal.

After that scandal burst into public view in 2016, the OCC’s failures to take strong action sooner drew close scrutiny.

The Treasury Department’s inspector general found that the OCC’s top examiner at Wells improperly disclosed to the bank the existence of a government investigation, as American Banker was first to report.

The OCC has owned up to some shortcomings. In 2017, the agency acknowledged that it provided untimely and ineffective supervision of complaints by consumers and Wells employees, and that it missed chances to address concerns about financial incentives that the bank offered to branch employees as part of the effort to boost sales.

But as more misdeeds have surfaced, there are signs that the OCC has gotten tougher on Wells.

In April, the OCC and the Consumer Financial Protection Bureau fined Wells Fargo $1 billion in connection with two separate scandals involving abuses in the bank’s auto lending and mortgage businesses.

The 10-digit penalty was the focus of most news coverage, with the accompanying OCC consent order eliciting little commentary.

But in the 35-page order, the OCC found that Wells had failed to implement and maintain a compliance risk management program commensurate with its size, complexity and risk profile.

More specifically, the agency identified what it described as inadequate reporting to the Wells’ board regarding the bank’s efforts to correct problems.

Wells was required to develop a plan for compliance risk management. The document also laid out specific timelines for actions to be completed.

For example, the order stated that Wells had to submit its compliance risk management plan by late June. Assuming the OCC did not object to that plan, Wells Fargo’s internal audit department then got another 120 days to complete an assessment of the bank’s progress.

Those timelines appear to offer important context for certain recent developments involving Wells and the OCC.

In October, Wells Fargo announced that Chief Administrative Officer Hope Hardison and Chief Auditor David Julian were taking leaves of absence. Bloomberg later reported that the two executives were placed on leave after receiving letters from the OCC saying that the agency intended to pursue sanctions against them.

Hardison has faced scrutiny regarding the company’s treatment of employees who blew the whistle. Wells Fargo’s board found in a report last year that she had been aware of problems involving sales practices since 2010.

Then on Wednesday, the Wall Street Journal reported that Wells Fargo is firing approximately three dozen district managers for failures related to the 2016 sales scandal. The story, which cited anonymous sources, stated that Wells consumer banking head Mary Mack has briefed the OCC on the firings.

District managers were spared during earlier rounds of firings, even though Wells Fargo’s board cited nine specific instances where employees who were under investigation for misconduct accused district managers of explicitly directing the bad behavior.

At an industry conference earlier this week, Wells Fargo CEO Tim Sloan noted that during 2018 the company has hired a new chief risk officer, a chief compliance officer, a head of regulatory relations and a chief operational risk officer.

“We are working hard to transform how we manage risk at Wells Fargo, and our goal is not only to meet, but exceed, regulatory expectations so that we have the best risk management in the industry,” Sloan said.

“We continue to have constructive dialogue with our regulators, and we are taking their detailed feedback and making changes and compliance risk management structure,” he added.

A Wells Fargo spokesman said Thursday that Wells Fargo’s frequent talks with its regulators include discussions regarding consent orders, and added that the bank works diligently to address feedback from regulators. “This is an ongoing, iterative process,” the spokesman said.

An OCC spokesman declined to comment for this article.
One former senior regulatory official predicted that the OCC will keep pushing for changes at Wells until the agency’s leadership becomes convinced that the bank’s problems are resolved and its culture has changed.

“It’s hard for a regulator to run a business,” the former senior regulatory official said. “The problem with Wells is, everyone always underestimates the scope of the problem.”

Kate Berry contributed to this story.

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