WASHINGTON — Federal Reserve Chair Janet Yellen said that she supports a "thorough investigation" of what led to the Wells Fargo phony-accounts scandal and that the Fed stands prepared, if needed, to take additional action against the firm.
In her semiannual testimony before the Senate Banking Committee, Yellen was questioned at length by Sen. Elizabeth Warren, D-Mass., about the Wells affair. Warren outlined various obligations bank board director must meet under Fed rules, including avoiding compensation packages that incentivize wrongdoing and other risk management requirements.
“Wells Fargo didn’t come close to meeting those requirements,” Warren said. “They established impossible cross-selling goals, and set up compensation structures that put enormous pressure on employees to open new accounts for existing customers."
Questioning Yellen, the senator said, "Can you explain to me how the Wells board can possibly have satisfied its obligations under the Fed’s risk management regulations?”
Yellen agreed that the Wells case was “egregious” and said the agency stands ready to issue any further enforcement actions, including against board members, should the evidence warrant such action.
“I will say that the behavior that we saw was egregious and unacceptable and it is our job to find out what the root causes were to those failures,” Yellen said. “As I’ve agreed, we do have the power, if it proves appropriate, to remove directors.
“A number of actions have already been taken and we need to conduct a thorough investigation to look at the full record to understand the root causes of the problems, and we are certainly prepared to take enforcement actions if those prove to be appropriate,” Yellen added.
Yellen’s comments echo a written exchange with Warren over the matter. Last month, Warren sent Yellen a letter asking her to use the Fed's supervisory authority to remove most of Wells Fargo's board, citing the board’s failure to prevent the cross-selling scandal.
Yellen issued a reply letter to Warren earlier this week, noting that Wells had made “significant changes” in its management, including the removal or replacement of “the CEO and several senior executives,” clawbacks of executive compensation and the separation of the roles of CEO and board chair. But she would not prejudge the outcome of the Fed’s ongoing review.
“As we continue our review of these actions, you may be certain that we will consider the full range of remedial and enforcement steps at our disposal,” Yellen said in the letter.
Thousands of Wells employees across the country were found to have created new accounts for existing customers without their knowledge, resulting in substantial fines for the company and the termination of around 3,500 employees. Yet many critics have asked whether the regulators who oversaw the institution are also to blame.
Wells’ board of directors already has come under fire from shareholders for its oversight of the scandal. The bank’s annual meeting in April was repeatedly disrupted by shareholders demanding accountability. All of the board's existing directors were re-elected, but four only by slim majorities.
Wells said in a statement Thursday that the firm has "taken many actions in response to its retail sales practices issues," including those Yellen referenced in her letter, as well as additional steps "to ensure we make things right with any customer affected by unacceptable sales practices." Wells added that those efforts are "a core part of our efforts to build a better Wells Fargo for the future.”
Yellen has also faced pushback from some House Republicans about the Fed’s oversight, albeit for different reasons. During Yellen’s testimony Wednesday in the House, Rep. Sean Duffy, R-Wis., questioned Yellen about whether members of the Fed board, like members of a corporate board, have fiduciary responsibilities to a bank’s shareholders. Yellen confirmed that they do not.
“You do have a supervisory role and I want you to do a good job,” Duffy said. “But from the feedback that we get, the involvement that the Fed has in our corporate board rooms has far surpassed I think the vision that any of us had in this room. I don’t believe you have the authority to make hiring and firing decisions, and that is feedback that we have had from members.”
For her part, Warren finished her questioning by saying that the outcome of the Fed’s inquiry into the scandal at Wells has the potential to set the cultural tone across the financial system by making executives more accountable for their actions.
“Time after time, big banks cheat their customers and no actual human beings are held accountable,” Warren said. “Instead there is a fine — which is paid for by shareholders, not executives, and certainly by directors of the board — and nothing is going to change at the big banks if that doesn’t change. You have the power to change the culture on Wall Street. … I hope you will use that power.”