WASHINGTON — The Federal Reserve voted unanimously Friday to impose an unprecedented enforcement action against Wells Fargo in response to its phony-accounts scandal, restricting the bank’s future growth, while Wells said it would remove four members of its board of directors.
“Responding to recent and widespread consumer abuses and other compliance breakdowns by Wells Fargo, the Federal Reserve Board on Friday announced that it would restrict the growth of the firm until it sufficiently improves its governance and controls,” the Fed said in a Friday evening release.
“Concurrently with the Board’s action, Wells Fargo will replace three current board members by April and a fourth board member by the end of the year.”
The order, which was approved by a vote of 3-0, bars Wells from growing beyond its asset size as of the end of 2017; the bank held $1.95 trillion on Dec. 31. Vice Chairman for Supervision Randal Quarles abstained from the vote because he had recused himself from supervisory matters related to Wells Fargo in December.
Fed Chair Janet Yellen — whose last day leading the Fed is Feb. 3 — said in a statement that the enforcement action is meant to send a signal to other banks that the agency is serious about corrective action against banks guilty of the kinds of customer abuses it uncovered in its investigation of Wells.
“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,” Yellen said. “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.”
In a statement, Wells said that the firm is “confident it will satisfy the requirements of the consent order” and that it intends to file its report to the Fed within 60 days with its plans to come into compliance. The report will include “what already has been done, and is planned, to further enhance the board’s governance oversight, and the company’s compliance and operational risk management,” the company said.
Wells Fargo’s stock price tumbled by 5.9% in after-hours trading.
Neither the Fed nor the bank would identify the four board members who will be ousted. “We have no detail on that,” a Wells spokeswoman said.
Federal regulators filed an enforcement action against Wells in September 2016, saying that thousands of employees, under pressure to meet sales goals, had opened up as many as 2.1 million fake accountss.
Then-CEO John Stumpf tried to contain the fallout, but his appearances on Capitol Hill helped lead to his ouster. Tim Sloan, formerly the bank's chief financial officer, has led the bank since October of 2016.
Since then, the unauthorized account scandal has grown — the bank’s most recent estimate is that as many as 3.5 million accounts were opened without customer consent — and new scandals have emerged.
For example, Wells Fargo has agreed to refund fees to mortgage customers who were improperly charged to extend the period of time in which they had locked in a specific interest rate. The bank is also expected to get hit with fines related to borrowers who were forced to take out auto insurance that they did not need.
Despite a massive marketing campaign and a shakeup in its management, Wells has struggled to escape the shadow of the scandals, which have led critics to declare the bank "too big to manage."
The Fed’s order requires the board of directors to take a number of concrete actions including steps to ensure that the firm’s “strategy and risk tolerance are clear and aligned,” actions to ensure that its composition and governance structures are “aligned with its risk tolerance,” and a plan to ensure “that no roles or responsibilities of the Board are unfulfilled for an undue period of time following the departure of any member of the Board.” A third party will also be required to review the bank’s progress and report on it by Sept. 30.
Sen. Elizabeth Warren, D-Mass., has led the charge for the Fed to take further action against Wells as a result of the scandal, including firing board members who were at the bank during the time the bogus accounts were opened.
"I really want to see the Fed step up here. The Fed has the power to do it. They just need to step up and do it," she told CNBC in September.
The Fed also sent letters to former Wells CEO John Stumpf and former lead independent director of the Wells board, Stephen Sanger, criticizing their leadership as unacceptable. In the letter to Stumpf, the Fed said that he personally was responsible for overseeing an insufficient compliance regime and that he failed to take timely action to prevent abuses.
“[Wells] pursued business strategies and goals that motivated compliance violations and improper practices without ensuring its risk management programs were sufficiently robust to prevent such behavior,” the letter said. “In short, appropriate and timely action was not taken and the compliance and conduct failures continued.”
The letter to Sanger said that there were “many pervasive and serious compliance and conduct failures” during his tenure and that he failed to elevate abuses to the rest of the board of directors when he was made aware of them.
“This lack of inquiry and lack of demand for additional information are not consistent with the duties and responsibilities of the Lead Director as described in the firm’s Corporate Governance Guidelines between 2013 and 2016,” the letter said. “Your performance in that role is an example of ineffective oversight that is not consistent with the Federal Reserve’s expectations for a firm of WFC’s size and scope of operations.”
A Fed official said that it was a coincidence that the consent order came on Yellen’s last day as Fed chair, and noted that the asset cap is an unprecedented step for a Fed enforcement action. The order will require the bank to effectively stop growing beyond its $1.95 trillion asset size, and the Fed will assess the bank’s asset size over a two-quarter average to ensure that it remains below the threshold. The bank can continue to take deposits and function normally.
The official added that the evaluation of Wells’ compliance with the order will be determined jointly by Michael Gibson, director of the program direction section of the Fed Board’s Division of Supervision and Regulation, and supervisory officials at the Federal Reserve Bank of San Francisco. Gibson’s oversight of the third-party compliance report is routine, Fed officials said, and not related to Quarles’ recusal.
Wells Fargo said the asset limit will remain in place until the Fed is satisfied with the third-party review. Then, after the limit on asset growth is removed, another third-party review will be conducted to assess the risk management changes that Wells has made.
The San Francisco bank also provided some information about how it plans to prevent its asset size from growing beyond its current level.
“We will continue to serve our customers’ financial needs, including saving, borrowing and investing,” Wells stated in an investor presentation that was released late Friday. “We have flexibility to manage our balance sheet by optimizing certain activities, which could include temporarily pulling back from some activities focused on providing liquidity to market participants, including other financial institutions.”
Kevin Wack contributed reporting to this article.