Loyola University Chicago School of Law J.D. 2019
Following the 2016 Wells Fargo scandal in which the bank opened millions of unauthorized bank and credit card accounts to collect fees, federal regulators have worked to address and respond to the corporation’s illegal conduct. On February 2nd, 2018, the U.S. Federal Reserve imposed unprecedented restrictions against Wells Fargo & Co. when it capped the bank’s growth for 2018 such that it could not exceed the total assets owned at the end of 2017. This restriction marks a substantial departure from previous penalties issued for improper compliance. Changes in policies and procedures and this novel punishment reflect a notable shift in the national bank’s expectations of corporate directors.
History of the Wells Fargo Scandal
In 2016, the Consumer Financial Protection Bureau (“CFPB”) and the Office of the Comptroller of the Currency reported fraudulent account openings at Wells Fargo. In an attempt to meet internal sales goals, Wells Fargo encouraged employees to open additional accounts for their existing customers by using funds from primary accounts to pad the new accounts. More than three million deposit and credit accounts were opened without consumer permission. Beyond the creation of the fraudulent accounts, Wells Fargo charged the owners of these accounts for insufficient funds and overdraft penalties due to the reduced balances in the primary accounts.
Wells Fargo reached an agreement with the CFPB and offered restitution to their customers in addition to a $185 million-dollar settlement to the bureau. In addition to paying the CFPB a settlement, Wells Fargo committed to restructuring the corporation and replaced 3,500 employees during the following year.
Federal Reserve Sanctions in 2018
Despite the payment of a settlement to the CFPB, the U.S. Federal Reserve imposed a new, harsh sanction against Wells Fargo for its prior actions. On February 2nd, the Federal Reserve issued an unprecedented restriction capping Wells Fargo’s profits during 2018. At the end of 2017, Wells Fargo reported a balance of $1.95 trillion in assets, and under the new restrictions, Wells Fargo could not grow its business beyond this asset cap. In addition to restricting the corporate assets, the Federal Reserve indicated that they will be replacing four members of Wells Fargo’s board of directors.
Wells Fargo estimates that its annual profits will be impaired between $300 million and $400 million by the end of the year. Nonetheless, the bank intends to push forward despite the novel sanctions; CEO Tim Sloan called the impact manageable and stated that the bank will continue to operate as usual under the restrictions.
The most notable punishment is a requirement for Wells Fargo to submit a plan to the Federal Reserve detailing how the corporation intends to improve oversight over its directors and how it will develop improved compliance and risk management functions. Pending approval from the Federal Reserve, Wells Fargo will be allowed to hire a third-party company to oversee the implementation of this plan in accordance with Federal guidance.
Impact of the Sanctions on Corporate Compliance
While the Federal Reserve’s targeting of Wells Fargo is pointed, this punishment reflects a change in regulator policy regarding the expected oversight of corporate directors. Federal Chairwoman Janet Yellen wrote a letter on Friday detailing the Federal Reserve’s policy changes to the industry. In this letter, Yellen writes that the Federal Reserve is raising its expectations for all boards of directors across the banking industry. Within the letter, Yellen cited to a previous guidance letter where she had written that this “marks the first time that the Federal Reserve has issued stand-alone expectations for boards of directors as distinct from management.” The letter further indicated that the primary role of a board of directors is to ensure the function of risk management and internal auditing.
This note of policy change from Janet Yellen follows similar policy changes found across many administrative agencies in recent years. An increasing number of governmental agencies are turning their sights towards director supervision with an expectation that directors must be accountable for the decisions and risks taken by their company.
The Future of Director Oversight
It is unlikely that this policy of administrative oversight is temporary. While many administrative agencies are currently undergoing forms of deregulation, it seems likely that increased oversight of corporate directors will continue under President Trump’s administration. Federal Chairwoman Janet Yellen served her last day in office on February 2nd, yet, her successor, Jerome Powell, seems likely to follow in Yellen’s administrative footsteps. While serving as governor of the Federal Reserve, Powell stated in 2017 that “we expect much more of boards of directors than ever before, and there is no reason to expect that to change.”
While serving as federal governor, Powell supported removing specific regulations on directors in favor of allowing directors to focus on risk management and the greater picture. On this note he said, “The sense…is not at all to lighten the workload of directors or make their life easier,” and “…It is an attempt to get them out of the weeds and focusing on the big issues.”
Under Powell’s direction, it seems that the Federal Reserve will continue to expect greater oversight from corporate directors while deemphasizing black letter regulation. This policy aim follows Janet Yellen’s writings as chairwoman of the Federal Reserve, and the punishments against Wells Fargo should serve as a wake-up call for noncompliance with federal regulators.