Wells Fargo & Co. is banned from getting bigger until it can resolve a pattern of consumer abuses and compliance problems, in what Federal Reserve officials called an unprecedented sanction of one of the largest U.S. banks.
Four members of the company’s board are to be replaced by the end of the year, the Fed said Friday. And until the San Francisco-based lender addresses shortcomings including weak internal oversight, it can’t take any action that would increase its total assets beyond their size at the end of 2017, unless it gets advance permission from the regulator.
“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,” Fed Chair Janet L. Yellen said in a statement. She said the regulator can’t allow “pervasive and persistent misconduct at any bank.”
Wells Fargo rattled shareholders, clients and policy makers with a spate of scandals that erupted in September of 2016, when news broke that branch employees had opened millions of accounts without customer permission to meet aggressive sales targets.
The company kept coming under fire after revealing that auto-loan clients were forced to pay for unwanted car insurance and that mortgage customers were improperly charged fees.
The Fed announced its sanctions for the biggest bank in Yellen’s former home district hours before her term as chair was set to expire. She was president of the San Francisco Fed from 2004 to 2010. Officials at the central bank said they had been working on the order for some time, and that the company first agreed to it on Friday.
Wells Fargo’s assets are now capped at $1.95 trillion. Fed officials say the lender is welcome to continue taking deposits and lending to customers, but it must stay below the cap. The firm’s compliance with the limit will be measured as an average of assets over two quarters, according to the regulator.
The Fed set a Sept. 30 deadline for the bank to outline reforms and have them reviewed by an outside firm. The asset cap can be lifted before the rest of the order is satisfied, officials said.
Wells Fargo said it’s confident it can meet regulators’ demands and that it will keep overhauling the board. It elected six independent directors in 2017 and plans to replace four directors in 2018, including three people who plan to retire before an annual shareholders meeting.
Oscar Suris, a spokesman for the bank, declined to name which directors the bank may seek to replace to comply with the Fed’s demands. Enrique Hernandez, Lloyd Dean and John Chen have been directors for more than a decade.
“We take this order seriously and are focused on addressing all of the Federal Reserve’s concerns,” Chief Executive Officer Timothy Sloan said in a statement. “It is important to note that the consent order is not related to any new matters, but to prior issues where we have already made significant progress.”
The Fed instructed the bank’s board to engage in more intrusive oversight of Wells Fargo’s senior managers and come up with a plan to hold them accountable if they fall short. The board also was ordered to detail its plan to overhaul how the bank pays senior executives and how they’ll be punished if they violate bank policies or government rules, or enable “adverse risk outcomes.”
Wells Fargo’s compensation programs, the Fed said, played a large role in the bank’s compliance failures.
“The firm’s lack of effective oversight and control of compliance and operational risks contributed in material ways to the substantial harm suffered,” the Fed’s supervision director, Michael Gibson, said in a separate letter to the board.
Gibson also sent a letter to the firm’s former lead independent director, Stephen Sanger, who rose to chairman as scandals began to emerge and stepped down at the end of 2017. T
he letter said Sanger was “made aware of sales practices and other compliance issues” while he was lead director but that he “did not appear to initiate any serious investigation or inquiry into the sales practice problems” or propose the board do so, including by asking company managers for more information.
In a third letter, Gibson told former Chairman and CEO John Stumpf that he presided over “pervasive and serious compliance and conduct failures” and didn’t take action to address them, even as he “continued to support the sales goals that were a major cause of the problem.”