Publicly positioning the compliance function may be Wells Fargo’s most important step to re-establish trust in 2018 

By Shelley C. Koltnow,  JD, MBA, FACHE 

Principal Consultant, IntraVires Health Compliance Consultants 

Wells Fargo’s new advertisement expresses its desire to be trustworthy.  Its tag line:  “Established 1852.  Re-established 2018.  With a recommitment to you.”   

Will this work?  Wells Fargo lost substantial trust by the “unprecedented misconduct that lasted for years,”  the Federal Reserve Board of Governors said in 2017.   Indeed, for years, the bank’s endemic cultural deficiencies and misaligned incentive compensation program allowed misconduct to thrive.  The bank’s identified misconduct is jaw-dropping.   

Notably, between 2009 and 2015, Wells Fargo enrolled 528,000 customers in automatic bill pay without their knowledge.  From 2011 through 2016, Wells Fargo’s retail division opened 3.5 million unauthorized consumer credit accounts. The bank also charged 570,000 customers for auto insurance it placed without notice; steered non-white customers into higher cost sub-prime loans; wrongfully back-charged appraisal fees to customers on defaulted mortgages; overcharged for student loan fees, mortgage fees, late fees, appraisal fees, and fees for locking in interest rates; improperly increased foreign exchange rates and transaction fees;  and overcharged veterans for mortgage refinancing costs.    

The phony consumer credit account scandal, touching millions of customers as it did, received wide media attention.  John Stumpf, the CEO at the time, resigned (albeit with a $300 million financial package).  In October 2016, Wells Fargo’s Board made Timothy Sloan, a 30-year tenured executive with the bank, the CEO and member of the Board of Directors.  Some have questioned Sloan’s appointment, given his past roles as the bank’s Chief Financial Officer and, most recently, President and Chief Operating Officer.  During Sloan’s testimony to Congress upon his appointment in October 2016,  Senator Heidi Heitkamp (D. North Dakota) exclaimed, “I do not hear a level of culture change that satisfies me today, and I think that’s something that’s very problematic for Wells Fargo going forward.”   

In an August 2017 interview by CNN’s Poppy Harlow, Sloan tacitly acknowledged that the bank’s shady practices date back at least to 2002, stating that a factor was an “incentive compensation plan that created a culture to sell products rather than provide services.”  Sloan added that the bank’s risk functions were siloed inside its respective divisions, creating “weak checks and balances.”  What happened to their compliance program? 

Sloan told Harlow he believes the bank has taken great strides to change its culture and restore trust, such as centralizing risk management and cracking down on retaliation for reporting problems, stating, “There’s so much going on!”  Sloan was short on details about how the bank would satisfy the consent order’s requirements.  Rebuilding trust will be hard.   

In March 2018, the bank disclosed a new internal investigation of possible overcharges of its wealth management and investor customers, which portends that the cultural problems extend into other divisions of the bank. In April 2018, Wells disclosed in a regulatory filing that the Department of Labor is investigating the bank’s 401k division to determine “whether there have been inappropriate referrals or recommendations, including with respect to rollovers for 401(k) plan participants, certain alternative investments, or referrals of brokerage customers to the company’s investment and fiduciary services business.”    

Wells Fargo is paying a steep price for its long course of misconduct. In addition to the abysmal loss of trust, Wells has been facing a cascade of investigations, litigation, fines, penalties, and judgments tallying over $1 billion. Wells Fargo agreed to unprecedented sanctions in a February 2, 2018 consent order with the Board of Governors of the Federal Reserve System.  Due to the widespread consumer abuses and compliance breakdowns, the consent order requires Wells Fargo to sufficiently improve its governance and controls, replace four Directors, and strengthen the board’s oversight. Each current director was required to sign the consent order. Until the bank improves its governance and risk management processes, it may not grow beyond its asset size at the end of 2017.  Janet Yellin (then Chair of the Federal Reserve Board) 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.”  This inspired cautions by industry pundits to the Wells Fargo board and boards at other banks to be more vigilant.  

The aura of distrust is impacting Wells Fargo in numerous ways aside from the Federal Reserve’s “shock and awe” sanctions for misconduct and compliance failures.   

Eight bank executives, including Sloan, did not receive their anticipated cash bonuses in 2016. Sloan predicted that the bank’s 2018 profits will dip by $300 – $400 million, almost 2% less than 2017. Wells Fargo’s shares sank about 7.5% after the sanctions announcement. The bank’s consumer loans, retail credit, mortgage, and home equity lines of credit are stagnant. Congress has wondered if the pervasive misconduct should require regulators to shutter the bank.  Several states have also sanctioned Wells Fargo, including California, its home state, Ohio, New York, Illinois, and Massachusetts. The bank has made restitutions to customers.  More investigations may occur. 

This will take a lot to fix. It’s not clear why so much time passed before the corrective efforts began.  

According to Wells Fargo’s website, the bank promises, “We are committed to meeting the requirements of the new consent order agreement with the Federal Reserve thoroughly and as quickly as possible.”  However, actions may speak louder than words.  

A year after signing the consent order, on October 3, 2017, Sloan faced the Senate Banking Committee to update them on the bank’s progress. Senator Heitkamp’s comments back in 2016 proved prophetic.  

Sloan turned in a poor performance that did not convince the Senators that enough had been done to reform the bank.  Senator Elizabeth Warren (D. Massachusetts) told Sloan, “Wells Fargo is not going to change with you in charge…you should be fired.” Sen. John Kennedy (R. Louisiana) asked Sloan, “What in God’s name were you thinking? I’m against a business practice that has Wells Fargo first, customers second.”  Senator Sherrod Brown (D. Ohio) opined that under Sloan’s leadership, the bank had not shown progress toward changing its culture from one “that is willing to abuse its customers and employees in an effort to pad its numbers and increase executive compensation.”  Harsh words, emphatically said.   

Since that hearing, on January 17, 2018, the bank’s Chief Risk Officer since 2008, and several other risk management executives, left the bank. Also in early January 2018, Mike Roemer joined Wells Fargo as its Chief Compliance Officer, tasked with building a stronger compliance program.  Roemer comes with years of experience in audit and compliance in financial organizations, including JP Morgan Chase & Co. 

Also in early 2018, the bank centralized risk and control functions, removing them from divisional siloes. On May 7, 2018, the bank named Amanda Norton as its new Chief Risk Officer, reporting to Sloan. Norton held a similar role within consumer and community banking at JP Morgan Chase & Co.  At Wells Fargo, though, Norton oversees all the bank’s risks in credit, markets, operations, compliance, audit, information security, and risks of misconduct.   

Going forward, Wells should consider giving Roemer, its new compliance officer, autonomy to develop the compliance program at a level equivalent status to Norton’s. Aside from managing risks of non-compliance, which can and should be coordinated among all control functions involved, the compliance program’s main objective is to develop an ethical, just, and compliant culture that identifies and prevents instances of misconduct.  Clearly, publicly positioning the compliance function this way may be an important feature in the bank’s ability to shape a future where its constituents can trust it.     

It is also striking that important changes in managing risk at Wells Fargo did not occur until 2018. Although GRC (Governance, Risk and Compliance) has reportedly been reorganized and strengthened, the tone at the top may not fully reflect the culture change the change order contemplated.  The bank is in the throes of a crisis.   

Much of the damage to Wells Fargo, its shareholders, and its customers, due to the bank’s stunning pattern of misconduct could have been avoided or mitigated by a stronger compliance program, where reporting and responding to reported misconduct would be encouraged and investigated and any findings promptly addressed. This was not the case at Wells Fargo, where fear of retaliation was reported to be rampant.  

Steven Beck of cg42 Consulting doubts the bank’s new “Trust” advertising will convince customers that Wells Fargo has changed.  He said, “It’s always easy to run an ad campaign.  It’s hard to change a culture.  Consumers are smart enough to now that advertising is not to be trusted.”