Banking and Finance Law Daily Treasury IG audit report suggests OCC could have identified Wells Fargo improper practices sooner
Thursday, October 1, 2020

Treasury IG audit report suggests OCC could have identified Wells Fargo improper practices sooner

By Donielle Tigay Stutland, J.D.

The report reveals that: the OCC missed enforcement opportunities; the bank’s compliance team was understaffed; there were competing priorities, with deposits being considered a low-risk area of large bank supervision; and Wells Fargo’s reputation contributed to enforcement action not being taken sooner.

On Sept. 28, 2020, the Department of the Treasury Inspector General released an audit report which was undertaken in order to assess: (1) the Office of the Comptroller of the Currency’s supervision of incentive-based compensation structures within Wells Fargo Bank, N.A.; and (2) the timeliness and adequacy of the OCC’s supervisory and other actions taken related to Wells Fargo’s sales practices, including the opening of accounts. The scope of the audit was from January 2009 through May 2017. The auditors’ methods included interviewing OCC officials and current and former members of the Wells Fargo examination team, as well as reviewing relevant OCC documentation. The Treasury IG’s audit concluded that the OCC (and its examiners) missed opportunities from 2010 to 2014 specifically to analyze and address issues within Wells Fargo’s incentive-based compensation structures. Further, while OCC assessed Wells Fargo’s governance and risk management practices related to compliance and operational risk during this period; it did not assess the bank’s oversight and governance of sales practices until 2015. The auditors believe that this was due, in part, to OCC examiners not sufficiently reviewing Wells Fargo’s internal complaint data.

Audit Findings. With respect to the issue of Wells Fargo’s incentive-based compensation, the audit suggests that the OCC missed opportunities to identify and address issues sooner. For example, as early as December 2009 an OCC examiner reviewed a Wells Fargo "EthicsLine" report (where Wells Fargo team members could internally report ethics violations) that showed 521 alleged complaints of sales integrity violations. In January 2010, when the examiner met with Wells Fargo, OCC meeting minutes show that a Wells Fargo Senior Executive Vice President indicated that there was a high number because the Wells Fargo culture encourages such complaints and Wells Fargo will investigate and address valid complaints. Additionally, in 2011, an OCC examiner reported that it did not issue a supervisory letter because Wells Fargo indicated it would proactively address the OCC’s recommendations with respect to fraud and corporate risk management.

The audit suggests that had the OCC determined the root cause of the EthicsLine complaints sooner, with more follow-up, the OCC could have identified the larger magnitude of the issue and addressed the inappropriate sales practices sooner.

Factors that Contributed to OCC lack of supervision. The audit reported several explanations as to why the OCC did not assess the magnitude of the Wells Fargo supervisory issues or take supervisory action sooner. The OCC identified five areas in particular: supervision by risk, competing priorities, staff resources, supervisory process, and the bank’s reputation.

The report noted that the OCC employs a supervision-by-risk approach, and under such, deposits and sales practices had not been of high-risk practices. Additionally, given the sheer size of Wells Fargo and its large number of employees, the full magnitude of the problem was unknown when the Los Angeles Times published an article detailing Wells Fargo’s’ practices in December 2013.

Additionally, the OCC reported competing priorities that take precedence over low-risk areas coming out of the 2009 financial crisis. OCC examiners also indicated that the Wells Fargo compliance examination team was understaffed. The OCC also reported that the rigid supervisory practice, which does not allow for changes in scheduled examination timeframes and lack of fluency with respect to changes to the examination timeframe for emerging risks was also a contributing factor.

OCC Actions to Address Recommendations. As a follow up to a Treasury inquiry in January 2020, the OCC reported the following corrective actions that it has already taken to address the recommendations. First, the OCC updated and implemented large bank supervision (LBS) processes with respect to analyzing complaints and whistleblower actions. The OCC also developed an agency-wide whistleblower process with an updated public interface to inform the public or other government agencies how to inform the OCC of whistleblower complaints. The OCC updated its LBS Compliance Management Systems booklets from its Comptroller’s Handbook to require an analysis and assessment of complaints and whistleblower cases at least annually.

Additionally, some of the other corrective actions the OCC described as being taken include, but are not limited to: (1) enhancing its supervisory strategy and associated quality control processes to include the review of canceled or deferred supervisory activities in subsequent strategy planning cycles, independent reviews by lead experts and risk specialists in the Systemic Risk Identification Support and Specialty Supervision unit during the strategy development process, and the implementation of risk escalation processes; (2) requiring staff to take MRA training and enhancing its MRA tracking tools; (3) updating its standard operating procedures and conducting training to ensure appropriate supervisory documentation is maintained; and (4) the LBS enhancing its coordination and collaboration with other business units by regularly including them in meetings and expanding the membership of the Large Bank Risk Committee.

OCC Comments. While the OCC did not provide a written response to the report, in an email response, the OCC’s management stated that they agree with the findings and that they are consistent with what the OCC identified it its own 2017 lessons-learned report.

Companies: Wells Fargo Bank, N.A.

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