The action limits WFC's growth (it prohibits WFC from increasing its total assets) and requires that it implement substantial corporate governance and risk management actions including strengthening the effectiveness of board oversight. Three supervisory letters, 'emphasizing the need for improved director oversight of the firm' were also issued by the Federal Reserve to the current board, to the former Chairman and CEO and to the past lead independent director. In addition, the Federal Reserve announced that WFC will replace three current board members by April and a fourth board member by the end of the year.

Former Federal Reserve Chair Janet Yellen commented: '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…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.'

Key points

The Federal Reserve stated that: 'In recent years, Wells Fargo pursued a business strategy that prioritized its overall growth without ensuring appropriate management of all key risks. The firm did not have an effective firm-wide risk management framework in place that covered all key risks. This prevented the proper escalation of serious compliance breakdowns to the board of directors'. The Federal Reserve added that the action would restrict WFC's growth until 'its governance and risk management sufficiently improves but will not require the firm to cease current activities, including accepting customer deposits or making consumer loans'.

In its enforcement action, the Federal Reserve required that WFC:

• Submit detailed plans (to the Federal Reserve) outlining how it will enhance the board’s effectiveness in carrying out its oversight and governance functions and improve its firm-wide compliance and risk management programs. The Federal Reserve specified a number of minimum requirements as to what should be included in the plans.

• Once the Federal Reserve has approved these plans, and WFC has implemented them, WFC is then required to arrange an independent review of the improvements that have been made. This must be completed by 30 September.

• WFC must then make arrangements for a second independent review to assess the efficacy and sustainability of the improvements.
• Until the initial independent review is completed and approved by the Federal Reserve, WFC is prohibited from expanding: 'WFC shall not, without the prior written approval of the Reserve Bank, with the concurrence of the Director of the Division of Supervision and Regulation, take any action that would cause the average of WFC’s total consolidated assets…for the current calendar quarter and the immediate preceding calendar quarter to exceed the total consolidated assets reported as of December 31, 2017'.

  The Harvard Law School Forum comments that:

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  The actions by the Federal Reserve are a 'sharp departure from precedent, both in their severity and their public nature'. Though bank regulators have previously issued enforcement actions limiting banks from increasing their total assets, the article comments, these actions have been 'reserved for deeply troubled institutions with severe capital and credit issues' rather than for 'financially strong institutions' like WFC.
• In addition, the article comments that the action comes after WFC had already implemented a number of actions to improve governance (after the 2006 accounts scandal) including the appointment of a former Federal Reserve governor as independent chair and the replacement of a number of independent directors as well as its general counsel.
• The article suggests that it's likely the Federal Reserve likely to this 'unusual step because Wells was already barred from making acquisitions as a result of other legal and regulatory restrictions. Nevertheless, Wells Fargo acquired a large portion of the assets of GE Capital in 2016 structured in a manner to avoid its regulatory bar on acquisitions, and this may have been a further impetus for the Federal Reserve’s action'.

• The article puts forward the view that the action is significant in several respects including (among others) the fact that the Federal Reserve characterised compliance breakdowns at WFC as failures of governance and board oversight; the public censuring of current and former directors (the release of the supervisory letters by the Federal Reserve); and the replacement of directors. Overall, the article argues that the Federal Reserve's expectation that governance should underpin business strategy and effective/compliance risk management serves to 'underscore' the challenges facing corporate boards: 'all companies should reflect on the increased expectations on board leaders and the board as a whole with respect to assuring that appropriate risk management and escalation systems are in place'.

Media reports

The enforcement action has been widely reported in the media.

• Board accountability: According to the WSJ, the Federal Reserve's action 'sends a message that directors, not just management, will be held accountable for mismanaging risk' and notes that WFC shares fell steeply (7.8%) after the Federal Reserve's announcement. The WSJ adds that despite the fact that Janet Yellen has now been succeeded by Jerome Powell as Chair of the Federal Reserve, banks 'shouldn't necessarily think' he will change course, noting that he has previously expressed the view that expectations of boards are higher now than they have been at any point in the past.
• A 'wake up call' for Australian banks? The AFR suggest that the action against WFC, and the CBA's half year profit decline, should serve as a 'wake up call' for Australian banks: 'The market-leading US and Australian banks are now in the crosshairs of regulators and their bottom lines are starting to hurt…[recent events at the CBA and WFC] underline the risks to shareholders when financial institutions fall short of customer and regulator expectations'.
• 'Manageable' impact on profits: Reuters reports that WFC CEO, Tim Sloan has said that the impact on WFC profits will be 'manageable' and should not impact the bank's plans to return capital to shareholders this year. Reportedly, Mr Sloan added that the action by the Federal Reserve was the latest step in a risk-management and corporate governance overhaul that Wells Fargo began some time ago, when it realised it had a serious problem with sales practices.