Securities Regulation Daily Wells Fargo CEO testifies on governance changes following sales-practices scandal
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Tuesday, March 10, 2020

Wells Fargo CEO testifies on governance changes following sales-practices scandal

By Anne Sherry, J.D.

The most frequently asked question at the hearing was "Why would you take this job?"

The new CEO of Wells Fargo, Charles Scharf, testified before the House Financial Services Committee on the governance changes he has implemented to improve compliance and enhance transparency and accountability at the bank. While some members of the committee went easy on the executive and even empathized with his position as the new CEO tasked with rehabilitating such a troubled institution, others criticized him for deflecting questions about conduct occurring before he joined the bank and for failing to fully compensate victims of several practices related to the sales-practices scandal.

Most of the tension within the meeting room came not from substantive disagreement about the culture and practices at the bank that led to the fake accounts scandal and other wrongdoing, but from infighting between Democratic and Republican members about each party’s role and responsibility in bringing Wells Fargo’s conduct to light and obtaining the information that led to multiple committee reports. Representative Brad Sherman (D-Cal) said that it was unfair for Ranking Member Patrick McHenry (R-NC) to attack the committee’s work while also touting the fact that two directors were pressured to resign because of embarrassing revelations; those revelations were a product of the investigation led by Chairwoman Maxine Waters (D-Cal). Waters herself devoted four minutes of her closing remarks to describing the process behind the investigation and the Democrats’ report. But in his remarks, McHenry said that the key findings of fact were bipartisan.

As to those findings, Scharf outlined his actions towards addressing the governance and culture failures that allowed the scandal to occur:

  1. Performing an honest internal and external assessment of significant shortcomings at the bank and the failure to address those shortcomings;
  2. Clarifying that the bank must prioritize regulatory compliance, specifically complying with the consent orders with various regulators;
  3. Making substantial changes to leadership;
  4. Reorganizing to a flatter organizational structure with more direct representation by various business units on the operating committee;
  5. Establishing a new set of processes to review progress against regulatory requirements;
  6. Altering compensation and evaluation practices to bolster accountability; and
  7. Redefining the culture, particularly how employees work together under a centralized controlling structure.

Compensation incentives. Representative Bill Huizenga (R-Mich) asked specifically how the bank’s employees in sales are compensated and whether the bank still uses sales goals. Scharf responded that customer-facing bankers are no longer compensated based on sales goals but instead on a range of criteria that includes customer satisfaction and account balances. The bank currently measures customer satisfaction by employing third parties to conduct mystery shopping, but it will transition to a net promoter score. Representative Sylvia Garcia (D-Tex) sought clarification on how the account-balance metric factors in. Will salespeople score more points if their customers have larger bank balances? Scharf said that different bankers cover different types of customers and that customers are not treated differently based on wealth.

Stock buybacks. Sherman, who also chairs the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, brought up Scharf’s plan to distribute over $31 billion in capital to shareholders. Given Wells Fargo’s status as a bank that is too big to fail, would Scharf commit to suspending dividends and stock buybacks until it is clear what the new coronavirus and the Saudi Arabia-Russia oil war will do to the economy and the solvency of Wells Fargo itself? Scharf declined to make such a commitment. Sherman observed that while Wells Fargo has conducted stress testing, it has not conducted double stress testing where one stressor is occurring in the midst of a coronavirus.

ESG issues. Several committee members raised environmental, social, and governance issues in the hearing. Representative Carolyn Maloney (D-NY) urged Wells Fargo to follow the lead of competitor banks, including Citi and Bank of America, and institute policies on loans to gun manufacturers. Scharf said he shares her concerns but does not know enough about the issue at the moment to commit to doing so. He agreed to report back to the committee after giving it more thought and coming to a decision. Shortly thereafter, Rep. Andy Barr (R-Ky) asked Scharf if Wells Fargo’s policy on financing firearms had anything to do with the sales-practices scandal; Scharf said no. Barr opined that if the bank shifted its focus to political action, it would detract from actual remediation at the bank. Representative Blaine Luetkemeyer (R-Mo) objected to the attempt to intimidate Wells Fargo to change its business model; Waters countered, "it’s not intimidation, it’s standing up."

Other ESG issues raised at the hearing included diversity and inclusion and low wages of rank-and-file employees. Representative Joyce Beatty (D-Ohio) expressed dismay that Scharf had not read the report on Wells Fargo submitted to the Subcommittee on Diversity and Inclusion, which she chairs. Beatty was also dissatisfied with Scharf’s answer that while Wells Fargo has an executive in charge of diversity and inclusion, she does not report directly to him. Scharf did say that he would consider instituting a "Beatty Rule," her version of the Rooney Rule that requires NFL leadership to interview minority candidates. Several representatives, including Katie Porter (D-Cal) and Rashida Tlaib (D-Mich), questioned Scharf on the number of bank tellers that receive public assistance, effectively resulting in taxpayers subsidizing Wells Fargo’s payroll budget. Scharf pointed out that Wells Fargo has raised wages in four categories.

Arbitration and gap insurance. Representative Porter also asked Scharf about the failure to return $600 million in gap insurance premiums that Wells Fargo continued to collect after the underlying loans were paid off. Ed Perlmutter (D-Colo) encouraged Wells Fargo to settle the gap insurance lawsuit, saying that "problems don’t age well" and the bank needs to put the matter behind it. Several representatives also raised the issue of binding arbitration. When Sherman asked if Scharf will continue to enforce arbitration provisions as to phony accounts, Scharf said that most of the claims have already settled but that the bank will continue to pursue arbitration where it available. Representative Sylvia Garcia gave Scharf credit for ending mandatory arbitration for sexual harassment claims but urged him to eliminate it for credit card and consumer account agreements as well. Scharf said that while there is nothing to report now, he will engage with her after investigating further.

Too big to jail? Representative Warren Davidson (R-Ohio) asked whether the conduct behind the fake accounts scandal constituted a crime. Scharf agreed that when the bank settled with the Department of Justice, it admitted that actions by individuals constituted a crime. Representative Al Green (D-Tex), chairman of the Subcommittee on Oversight and Investigations, lamented that no individual has gone to jail and said that fines have become the cost of doing business. On a more hopeful note, Scharf agreed to meet with Green and work with him on a bill of rights for bank employees.

Prior CEOs’ testimony. Scharf is the third Wells Fargo CEO to testify before the Committee since the fake-accounts scandal came to light. Several representatives expressed dismay at the lack of preparedness and evasive answers by Scharf’s predecessors, John Stumpf and Tim Sloan. After the hearing adjourned, Chairwoman Waters announced that she is calling on the Department of Justice to look into whether Sloan’s testimony one year ago was inaccurate or misleading.

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