Senate Banking Hearing on Wells Fargo
Senate Committee on Banking, Housing, & Urban Affairs
“An Examination of Wells Fargo’s Unauthorized
Accounts and the Regulatory Response”
Tuesday, September 20, 2016
Key Topics & Takeaways
- Clawbacks: Several Senate Banking Committee members urged Wells Fargo to impose clawbacks on compensation for senior executives who oversaw the creation of unauthorized customer accounts.
- Accountability: Sen. Elizabeth Warren (D-Mass.) called for “tough new laws” including criminal liability to hold senior executives accountable for misconduct, and denounced Wall Street as a whole, stating that “the only way Wall Street will change is when executives are held personally accountable.” She said that until this personal accountability is enforced, it will be “business as usual” with firms “cheating” both customers and employees.
- Incentive Compensation: Comptroller of the Currency Thomas Curry expressed his support for and the need to finalize the interagency incentive compensation rule “sooner rather than later,” which he claimed will provide a clear direction regarding “sound” incentive compensation programs, include clawbacks and forfeitures, and hold senior executives accountable.
Witnesses
- John G. Stumpf, Chairman and Chief Executive Officer, Wells Fargo & Company
- James Clark, Chief Deputy, Office of the Los Angeles City Attorney
- Thomas Curry, Comptroller of the Currency
- Richard Cordray, Director of the Consumer Financial Protection Bureau
Opening Statements
Chairman Richard Shelby (R-Ala.) briefly outlined the circumstances surrounding the opening of unauthorized accounts for customers of Wells Fargo, blaming the intense pressure placed on employees to meet sales quotas. He said these actions break the trust that is vital to the banking industry. Shelby expressed interest in learning when the creation of unauthorized accounts began, when senior management was made aware, and whether “all appropriate employees” have been held accountable. Additionally, he stated his desire to hear about when regulators were made aware of the situation, and where they were over the years of the violations.
Ranking Member Sherrod Brown (D-Ohio) was very critical of Wells Fargo, claiming that it did not treat the situation seriously until the issue was written about in newspapers. He stated that low-paid employees opened “fraudulent” accounts to keep their jobs and pay the salaries of executives, and lamented that senior executives were not held accountable.
Brown then shifted to a criticism of the banking industry more broadly, saying that the biggest banks have not learned the lessons of the crisis, as evidenced by the announcement of new lawsuits or enforcement actions “every week.” He argued that the culture at banks must change, with executives held accountable and better controls put in place to protect customers.
Panel One Testimony
John G. Stumpf, Chairman and Chief Executive Officer, Wells Fargo & Company
In his testimony, Stumpf apologized, stating that Wells Fargo had failed in its responsibility to customers, team members and the American public, and commenting that wrongful sales practices go against the firm’s core principles, ethics and culture. He said he accepted “full responsibility” for the misconduct and that the Board of Directors has the tools necessary to hold senior management accountable. Stumpf announced a series of actions that the bank is taking to reinforce its commitment to its customers, and admitted that more should have been done sooner to address unethical conduct.
Question & Answer
Timeframe
Shelby asked whether the creation of unauthorized accounts dates back before 2011, and when senior management became aware of the violations. Stumpf answered that he cannot guarantee there were no abuses before 2011, and for this reason he has announced that Wells Fargo will look back another two years, to 2009. He continued that he and senior management learned of the violations in 2013, and notified their regulators.
Brown noted that Wells Fargo has announced it will look back to 2009 to review created accounts. He asked why it would stop there, insisting that if the company is committed to “making customers whole” then it should go back as far as possible. Stumpf said he will consider it.
Compensation and Clawbacks
Brown asked if Stumpf would recommend clawing back the compensation of responsible executives. Stumpf explained that he is not on the Board’s compensation committee, and he would not try to prejudice their processes by steering them in one direction or another.
Sen. Bob Corker (R-Tenn.) suggested that not invoking some degree of clawback would be “malpractice” from a public relations standpoint.
Sen. Charles Schumer (D-N.Y.) commented that Wells Fargo has a good reputation overall, and urged it to rescind bonuses of culpable executives who allowed the creation of unauthorized accounts in order to restore its upstanding reputation with customers.
Sen. Warren referenced the letter she and other Senators sent to Wells Fargo last week, inquiring about the firm’s plans to clawback compensation of culpable senior executives, and she criticized the firm’s response as another indication of its lack of accountability for executives’ past wrongdoings.
Executive Accountability
Sen. Robert Menendez (D-N.J.) asserted that senior executives are responsible for the culture of a business, and asked whether any senior executives have suffered financial consequences as a result of this enforcement action. Stumpf answered that the Board has held managers and regional presidents accountable, and has the tools necessary to impose financial penalties against himself and other senior executives.
Sen. Elizabeth Warren (D-Mass.) argued that Stumpf has not demonstrated accountability because he has neither resigned nor returned any of his salary from the past five years. She also called for criminal investigations into possible pressure from management to “squeeze employees to the breaking point” in selling products to customers in order to increase executive bonuses. She then denounced Wall Street as a whole, stating that “the only way Wall Street will change is when executives are held personally accountable.” She said that until this personal accountability is enforced, it will be “business as usual” with firms “cheating” both customers and employees.
Too Big to Manage
Sen. Jon Tester (D-Mont.) argued that every time Stumpf states that 5,300 people were fired, he is “giving ammunition” to people who favor breaking up the big banks.
Sen. David Vitter (R-La.) asked whether the scandal is proof that a business like Wells-Fargo is “too big to manage.” Stumpf responded that this was a problem of focus, not size. Sen. Donnelly (D-Ind.) noted that the “fraudulent” account practices went on for five years before they were addressed, and also expressed concern that the bank “too big” to manage.
Mandatory Arbitration
Brown expressed concern about whether Wells Fargo would continue to enforce mandatory arbitration clauses even for accounts that were potentially opened without their customer’s knowledge. Stumpf responded that he would check with his legal team respond to the Committee.
Consumer Financial Protection
Sen. Schumer argued that this case “exemplifies why the CFPB [Consumer Financial Protection Bureau] was created,” and expressed his support for the Agency as a “cop out on the beat” to protect customers from “unfair or deceptive practices.”
Panel Two Testimony
James Clark, Chief Deputy, Office of the Los Angeles City Attorney
In his testimony, Clark summarized his office’s investigation, which consisted of detective work with current and former bank customers, terminated employees, and consumer complaints from the CFPB and Federal Trade Commission (FTC) databases. He also explained that the bank must now submit audit reports assessing its compliance every six months to his office.
Thomas Curry, Comptroller of the Currency
In his testimony, Curry stated that he has ordered his staff to examine the sales practices for all large and mid-size banks under supervision of the Office of the Comptroller of the Currency (OCC), as the Agency “can and must do better” to root out these practices. He continued that a senior comptroller will be conducting a “postmortem” to identify any gaps, which will then be addressed, and argued that if structural elements had been functioning properly, “it would have prevented the types of abuses” that happened at Wells Fargo. Due to such abuses, Curry explained that there are now heightened standards at the large banks to ensure it does not happen in the future. He stressed his support for and the need to finalize the interagency incentive compensation rule “sooner rather than later,” as it will provide a clear direction regarding “sound” incentive compensation programs, include clawbacks and forfeitures, and hold senior executives accountable.
Richard Cordray, Director of the Consumer Financial Protection Bureau
In his testimony, Cordray gave an overview of the Bureau’s investigation and commented that unchecked incentives can lead to “serious consumer harm,” but that while incentive compensation is common in businesses, companies have to pay attention to their monitoring systems.
Question & Answer
Reporting Requirements
Brown asked Cordray if banks are required to report to the CFPB when they uncover fraud in their own institution, which Cordray explained is a “best practice,” but not a legal requirement. However, he added that banks are “in more trouble when they don’t” proactively report such cases.
Appropriations
Menendez commented on the CFPB’s latest accomplishments, to include recovering and sending back nearly $12 billion to 27 million customers harmed by illegal practices, and asked what it would mean for the Bureau to be subject to the annual appropriations process. Cordray explained that being subject to such a process would compromise the CFPB’s independence and make it harder for the agency to do its job.
Cross-Selling
Menendez then asked how widespread the practice of cross-selling is in the industry. Curry replied that the OCC will conduct a horizontal review to look at sales practices at the largest and mid-size banks. Cordray added that incentive compensation has been a problem across different markets, but that institutions should be focused on customer satisfaction rather than the breadth of products/services used by bank customers.
Forced Arbitration Clauses
Warren criticized forced arbitration clauses due to the secrecy they create, and asked if they are making it easier for big banks to cover up patterns of abusive conduct. Cordray replied that they are.
Warren voiced her support for the CFPB’s proposed new rules that ban forced arbitration clauses that prevent customers from joining together, adding that such rules are “really important.”
For more information on this hearing, please click here.
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Senate Committee on Banking, Housing, & Urban Affairs
“An Examination of Wells Fargo’s Unauthorized
Accounts and the Regulatory Response”
Tuesday, September 20, 2016
Key Topics & Takeaways
- Clawbacks: Several Senate Banking Committee members urged Wells Fargo to impose clawbacks on compensation for senior executives who oversaw the creation of unauthorized customer accounts.
- Accountability: Sen. Elizabeth Warren (D-Mass.) called for “tough new laws” including criminal liability to hold senior executives accountable for misconduct, and denounced Wall Street as a whole, stating that “the only way Wall Street will change is when executives are held personally accountable.” She said that until this personal accountability is enforced, it will be “business as usual” with firms “cheating” both customers and employees.
- Incentive Compensation: Comptroller of the Currency Thomas Curry expressed his support for and the need to finalize the interagency incentive compensation rule “sooner rather than later,” which he claimed will provide a clear direction regarding “sound” incentive compensation programs, include clawbacks and forfeitures, and hold senior executives accountable.
Witnesses
- John G. Stumpf, Chairman and Chief Executive Officer, Wells Fargo & Company
- James Clark, Chief Deputy, Office of the Los Angeles City Attorney
- Thomas Curry, Comptroller of the Currency
- Richard Cordray, Director of the Consumer Financial Protection Bureau
Opening Statements
Chairman Richard Shelby (R-Ala.) briefly outlined the circumstances surrounding the opening of unauthorized accounts for customers of Wells Fargo, blaming the intense pressure placed on employees to meet sales quotas. He said these actions break the trust that is vital to the banking industry. Shelby expressed interest in learning when the creation of unauthorized accounts began, when senior management was made aware, and whether “all appropriate employees” have been held accountable. Additionally, he stated his desire to hear about when regulators were made aware of the situation, and where they were over the years of the violations.
Ranking Member Sherrod Brown (D-Ohio) was very critical of Wells Fargo, claiming that it did not treat the situation seriously until the issue was written about in newspapers. He stated that low-paid employees opened “fraudulent” accounts to keep their jobs and pay the salaries of executives, and lamented that senior executives were not held accountable.
Brown then shifted to a criticism of the banking industry more broadly, saying that the biggest banks have not learned the lessons of the crisis, as evidenced by the announcement of new lawsuits or enforcement actions “every week.” He argued that the culture at banks must change, with executives held accountable and better controls put in place to protect customers.
Panel One Testimony
John G. Stumpf, Chairman and Chief Executive Officer, Wells Fargo & Company
In his testimony, Stumpf apologized, stating that Wells Fargo had failed in its responsibility to customers, team members and the American public, and commenting that wrongful sales practices go against the firm’s core principles, ethics and culture. He said he accepted “full responsibility” for the misconduct and that the Board of Directors has the tools necessary to hold senior management accountable. Stumpf announced a series of actions that the bank is taking to reinforce its commitment to its customers, and admitted that more should have been done sooner to address unethical conduct.
Question & Answer
Timeframe
Shelby asked whether the creation of unauthorized accounts dates back before 2011, and when senior management became aware of the violations. Stumpf answered that he cannot guarantee there were no abuses before 2011, and for this reason he has announced that Wells Fargo will look back another two years, to 2009. He continued that he and senior management learned of the violations in 2013, and notified their regulators.
Brown noted that Wells Fargo has announced it will look back to 2009 to review created accounts. He asked why it would stop there, insisting that if the company is committed to “making customers whole” then it should go back as far as possible. Stumpf said he will consider it.
Compensation and Clawbacks
Brown asked if Stumpf would recommend clawing back the compensation of responsible executives. Stumpf explained that he is not on the Board’s compensation committee, and he would not try to prejudice their processes by steering them in one direction or another.
Sen. Bob Corker (R-Tenn.) suggested that not invoking some degree of clawback would be “malpractice” from a public relations standpoint.
Sen. Charles Schumer (D-N.Y.) commented that Wells Fargo has a good reputation overall, and urged it to rescind bonuses of culpable executives who allowed the creation of unauthorized accounts in order to restore its upstanding reputation with customers.
Sen. Warren referenced the letter she and other Senators sent to Wells Fargo last week, inquiring about the firm’s plans to clawback compensation of culpable senior executives, and she criticized the firm’s response as another indication of its lack of accountability for executives’ past wrongdoings.
Executive Accountability
Sen. Robert Menendez (D-N.J.) asserted that senior executives are responsible for the culture of a business, and asked whether any senior executives have suffered financial consequences as a result of this enforcement action. Stumpf answered that the Board has held managers and regional presidents accountable, and has the tools necessary to impose financial penalties against himself and other senior executives.
Sen. Elizabeth Warren (D-Mass.) argued that Stumpf has not demonstrated accountability because he has neither resigned nor returned any of his salary from the past five years. She also called for criminal investigations into possible pressure from management to “squeeze employees to the breaking point” in selling products to customers in order to increase executive bonuses. She then denounced Wall Street as a whole, stating that “the only way Wall Street will change is when executives are held personally accountable.” She said that until this personal accountability is enforced, it will be “business as usual” with firms “cheating” both customers and employees.
Too Big to Manage
Sen. Jon Tester (D-Mont.) argued that every time Stumpf states that 5,300 people were fired, he is “giving ammunition” to people who favor breaking up the big banks.
Sen. David Vitter (R-La.) asked whether the scandal is proof that a business like Wells-Fargo is “too big to manage.” Stumpf responded that this was a problem of focus, not size. Sen. Donnelly (D-Ind.) noted that the “fraudulent” account practices went on for five years before they were addressed, and also expressed concern that the bank “too big” to manage.
Mandatory Arbitration
Brown expressed concern about whether Wells Fargo would continue to enforce mandatory arbitration clauses even for accounts that were potentially opened without their customer’s knowledge. Stumpf responded that he would check with his legal team respond to the Committee.
Consumer Financial Protection
Sen. Schumer argued that this case “exemplifies why the CFPB [Consumer Financial Protection Bureau] was created,” and expressed his support for the Agency as a “cop out on the beat” to protect customers from “unfair or deceptive practices.”
Panel Two Testimony
James Clark, Chief Deputy, Office of the Los Angeles City Attorney
In his testimony, Clark summarized his office’s investigation, which consisted of detective work with current and former bank customers, terminated employees, and consumer complaints from the CFPB and Federal Trade Commission (FTC) databases. He also explained that the bank must now submit audit reports assessing its compliance every six months to his office.
Thomas Curry, Comptroller of the Currency
In his testimony, Curry stated that he has ordered his staff to examine the sales practices for all large and mid-size banks under supervision of the Office of the Comptroller of the Currency (OCC), as the Agency “can and must do better” to root out these practices. He continued that a senior comptroller will be conducting a “postmortem” to identify any gaps, which will then be addressed, and argued that if structural elements had been functioning properly, “it would have prevented the types of abuses” that happened at Wells Fargo. Due to such abuses, Curry explained that there are now heightened standards at the large banks to ensure it does not happen in the future. He stressed his support for and the need to finalize the interagency incentive compensation rule “sooner rather than later,” as it will provide a clear direction regarding “sound” incentive compensation programs, include clawbacks and forfeitures, and hold senior executives accountable.
Richard Cordray, Director of the Consumer Financial Protection Bureau
In his testimony, Cordray gave an overview of the Bureau’s investigation and commented that unchecked incentives can lead to “serious consumer harm,” but that while incentive compensation is common in businesses, companies have to pay attention to their monitoring systems.
Question & Answer
Reporting Requirements
Brown asked Cordray if banks are required to report to the CFPB when they uncover fraud in their own institution, which Cordray explained is a “best practice,” but not a legal requirement. However, he added that banks are “in more trouble when they don’t” proactively report such cases.
Appropriations
Menendez commented on the CFPB’s latest accomplishments, to include recovering and sending back nearly $12 billion to 27 million customers harmed by illegal practices, and asked what it would mean for the Bureau to be subject to the annual appropriations process. Cordray explained that being subject to such a process would compromise the CFPB’s independence and make it harder for the agency to do its job.
Cross-Selling
Menendez then asked how widespread the practice of cross-selling is in the industry. Curry replied that the OCC will conduct a horizontal review to look at sales practices at the largest and mid-size banks. Cordray added that incentive compensation has been a problem across different markets, but that institutions should be focused on customer satisfaction rather than the breadth of products/services used by bank customers.
Forced Arbitration Clauses
Warren criticized forced arbitration clauses due to the secrecy they create, and asked if they are making it easier for big banks to cover up patterns of abusive conduct. Cordray replied that they are.
Warren voiced her support for the CFPB’s proposed new rules that ban forced arbitration clauses that prevent customers from joining together, adding that such rules are “really important.”
For more information on this hearing, please click here.