Republicans and Democrats alike offer harsh criticism for Wells CEO Stumpf; Curry says OCC is reviewing sales and incentive pay practices at large and mid-size banks;

Democrats focus on mandatory arbitration causes in bank's contracts

The Senate Banking Committee on September 20, held a hearing titled "An Examination of Wells Fargo's Unauthorized Accounts and the Regulatory Response." The first panel's only witness was John Stumpf, chairman and CEO of Wells Fargo & Co. The second panel featured James Clark, chief deputy in the Los Angeles City Attorney's Office; Thomas Curry, Comptroller of the Currency; and Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB).

Testimony from the hearing is posted here. Attached with this alert is a PDF of Wells Fargo's response to a letter from a group of Senate Democrats inquiring about whether the bank would try to recover compensation given to any senior executives.

Among other issues, banking regulators at the hearing said they were re-evaluating cross-selling practices and sales quotas at large and mid-size banks. The OCC's Curry urged the prompt completion of a pending interagency rule allowing clawbacks of incentive compensation in certain situations. Democratic senators said mandatory arbitration clauses in bank contracts had allowed Wells Fargo to effectively conceal abuses customers had complained about.

In his opening statement, Chairman Richard Shelby (R-AL) said he wanted to know when exactly Stumpf and other Wells Fargo executives became aware of hundreds of thousands of accounts being opened without customers' permission at the retail bank. Shelby asked "where were the federal regulators?" when Los Angeles city prosecutors and the Los Angeles Times were pursuing their investigation from 2013 onward. He said it was "unclear if the CFPB had any role in discovering or investigating the bank's conduct."

In his statement, Ranking Member Sherrod Brown (D-OH) said the pattern of deception at Wells Fargo should be described as fraud, whereas the bank has described the scandal simply as customers getting services they didn't need. Brown said the 5,300 employees who were fired by the bank for such practices were mostly earning low wages and came under pressure to sell, whereas senior executives who got bonuses for hitting "cross-selling" targets have not been held accountable. Carrie Tolstedt, the vice president in charge of Wells Fargo's retail bank who was allowed to retire over the summer, "walks away with up to $120 million" in compensation though she did not alert the CEO or the bank's board of the complaints she had received. "Banks need better controls because if you pay people based on what they sell, that's what they'll do," Brown said.

In his statement, Wells Fargo CEO John Stumpf said he is "deeply sorry that we failed in our responsibility to customers, team members and the American public." He said the wrongful sales practices in the retail bank "go against everything regarding our principles and our core culture." Stumpf said he accepted "full responsibility for all unethical sales practices … and I am fully committed to fixing these issues, fixing our culture and taking actions to restore customers' trust." The bank's board of directors is "actively engaged in these issues" and "has the tools to hold senior management accountable, including me and Carrie Tolstedt." He offered a broad timeline of the bank's responses to the emerging problems starting in 2012, and said Wells is voluntarily extending its look-back to 2009 and 2010, which were not included in the probes launched by Los Angeles and federal regulators. Stumpf said the bank is now reaching out to hundreds of thousands of account holders to verify that they want to retain any products or accounts they hold with Wells.

Questions — first panel

Chairman Shelby asked if the sales problems dated to 2011 or started earlier than that. Stumpf said he couldn't guarantee that there had not been earlier problems, which was "why I announced that we are going back to 2009, when we put the Wachovia and Wells teams together." When Shelby pressed him as to when he first learned of the problems, Stumpf said he was alerted in 2013, when evidence was presented to the bank holding company and the compliance division — what he called "the second line of defense." When Shelby asked how executive Carrie Tolstedt could be allowed to retire with such a generous package, given the problems in the retail bank she supervised, Stumpf said Tolstedt "had a lot of requirements that her performance was measured on," such as incorporating Wachovia's business after the merger. After the scandal broke, Stumpf said, "The chief operating officer and I decided we would go in a different direction. But to be clear, Carrie … chose to retire and she got no severance benefits — that compensation she had earned in the past, some of which is not yet vested. And other compensation will be considered by board in an independent process that they have."

Ranking Member Brown said the bank's emphasis on cross-selling dates back to its merger with Norwest in 1998 and pressed Stumpf to push the bank's own investigation even earlier than 2009. Brown said Tolstedt could receive as much as $120 million in compensation, and asked Stumpf if he would recommend to the board's compensation panel that "a significant amount" of that should be clawed back. Stumpf said he did not want to "prejudice their activity in any way." When Brown said most of the employees who were fired had earned low wages, Stumpf said, "the people who lost their jobs were bankers, bank managers, even an area president — their average pay was $35,000 to $60,000." Brown expressed amazement that Stumpf had done nothing to address the situation until recently, though the bank had already fired 1,000 people for sales abuses in 2011 and the Los Angeles Times had published a series of stories about the problems at Wells Fargo in 2014. But Stumpf said the story had been prompted by the fact that Wells Fargo had dismissed a number of people.

Bob Corker (R-TN) said that "to not invoke some sort of clawback for you and others would be committing malpractice." He said he was surprised that the bank's compliance officers had not detected the problems: "This is something you would think would be flagged and jump out at them." When Corker asked what exactly had happened with Tolstedt after 27 years at the bank, Stumpf said he and the COO "wanted to take a different direction and focus more on these issues; she was eligible to retire and decided to." Jack Reed (D-RI) took Stumpf to task for offering only broad ethical instructions in webcasts to the bank's workforce. "It seems the emphasis on cross-selling and sales goals was unremitting. You had specific examples of things that should not be happening, but you gave a generic speech about making the goals but in the right way … It just seems like it took too many months, years, for some simple steps to be taken."

Pat Toomey (R-PA) said Stumpf should acknowledge that what happened at the bank constituted fraud, but Stumpf said he was not a lawyer and that the offenders broke the bank's code of ethics and were "dishonest": "We found this out and got rid of those people." Toomey said it seemed like there was an "orchestrated effort" by the bank to use fraudulent tactics to reach sales goals: "When thousands of people do the same sort of activity, it's hard to believe that they all did it independently." Toomey asked when Wells Fargo had disclosed on its SEC filings "that you had these material problems that could damage your reputation?" Stumpf said he didn't know; Toomey said the committee has not been able to find such a disclosure.

Robert Menendez (D-NJ) said he found it "despicable" that Stumpf and the bank had blamed low-level employees for the sales problems. "It is not the work of 5,300 bad apples," he said. "You sowed the seed that rotted the entire orchard. You created an environment in which this culture of deception and deceit thrived."

Jon Tester (D-MT) focused on the consequences the unauthorized accounts may have had for customers' credit history: "This is a big deal. If information was sent to credit bureaus because of these accounts, the impacts are far more than the fees and fines associated with that." Stumpf repeated that Wells Fargo is now contacting hundreds of thousands or cardholders to find out "if this is a card they truly wanted."

Heidi Heitkamp (D-ND) told Stumpf, "Nobody here believes that 5,000 employees independently acted with impunity and dishonesty. This is a behavior created by the culture that was allowed … But the one person who was responsible directly to make sure this doesn't happen isn't here — she walked off with a pretty good deal. The board should already have acted to claw back these salaries."

Jeff Merkley (D-OR) said, "You would have to be willfully ignorant to believe these [sales] goals are achievable through any other means. You created a culture of cross-selling that pushed everybody to the maximum, but you say there was no coaching, no management strategy? You were at the top of this for a very long time. 2005, 2007, 2010. Major promotions with cross-selling at the heart of it, but you blame the little person. Isn't that a failure to accept responsibility?" When Stumpf replied that he had begun by accepting responsibility, Merkley said, "accepting responsibility would be to resign and return the compensation."

Elizabeth Warren (D-MA) wondered how Stumpf could maintain that he was accountable for the mistakes at the bank, when he had not resigned, had not fired "a single executive," had not returned "a nickel" of his compensation and had blamed the problems on "lower-level employees who don't have a PR firm … It's gutless leadership." Warren recited a series of quotes that Stumpf had said on regular earnings calls with analysts, all of them touting the bank's high cross-selling numbers. "So that was very good for you personally, wasn't it? Your stock holdings in Wells Fargo gained while this scam was under way … You personally held an average of 6.75 million shares of Wells stock. The share price during this period went up by $30. That is $200 million in gains for you personally … but you squeezed your employees to the breaking point so they could cheat customers … and when it all blew up, you kept your job and your bonuses and blamed thousands of $12-an-hour employees for cross-sell quotas that made you rich. You should resign, you should give back the money and be criminally investigated by the Department of Justice and the SEC."

Second panel

During the second panel, which was attended only by Chairman Shelby and handful of Democratic senators, Comptroller of the Currency Thomas Curry said he has asked the OCC's senior deputy comptroller to do a "postmortem" of the Wells Fargo matter to "identify gaps" in supervision and assess any lessons the agency can learn. "We need to finalize the interagency incentive compensation rule sooner rather than later," he said. "It will allow clawbacks and forfeitures to hold senior employees accountable. I support prompt completion of the final rule." During questions, Curry said, "We look at compensation at an institution in general. In this case we have directed a horizontal review — we are looking at sales and compensation practices at all large and mid-size banks," as well as "the adequacy of controls."

CFPB Director Richard Cordray said that Wells Fargo had sought the Los Angeles complaints from public view, and that the bank's fraudulent conduct occurred on "massive scale. " "Wells Fargo is in a position to lead by example," Cordray said. "Much bank growth occurs by cross-selling products … but banks should focus on strong customer service with high satisfaction. The wrong way is to have unchecked incentives and an uncaring culture of high sales targets, incentive pay structures, and little compliance monitoring … We have seen the risks such programs pose across the entire financial sector, such as credit card add-on products."

During the Q&A, Chairman Shelby asked Cordray a series of questions probing what proportion of the years-long investigation had actually been managed by the CFPB as opposed to the City of Los Angeles or the OCC. "These investigations merged over time," Cordray said. "We initiated our own efforts in our office in mid-2013 through whistleblower tips. The LA Times series confirmed there were issues in this industry — we were looking at financial incentive programs, debt collection, looking at them in all the banks and non-bank financial companies … . [The Los Angeles City Attorney's Office] did various parts of the investigation, the OCC did some, we did some, and we turned it into nationwide relief for consumers, which Los Angeles was not able do."

Ranking Member Brown asked Cordray if a group of Wells Fargo customers who sought compensation in 2013 would have been able to do better if the CFPB had already issued its recent rules on mandatory arbitration clauses. "Typically these products did carry an arbitration clause," Cordray said. "It will be very difficult to get any relief other than through a class action." Cordray later added, "It bothered me that the bank alerted the OCC in 2013 but did not contact the CFPB until 2015. If any institution feels that they can divide and conquer among regulators, they should know that is a mistake … . Wells Fargo was the industry leader in aggressive cross-selling of products. We are all, as regulators, going back to think more about what we can do to change the culture at these banks."

Sen. Warren, Sen. Merkley and other Democrats said the positive role played by the CFPB in the Wells Fargo case highlighted the need to defend the agency from attacks by Republicans on its budget and its structure. Warren also said the mandatory arbitration clauses in the bank's contracts "made it easier for Wells Fargo to cover up their conduct and get away with abusing their customers … If we'd had this change in 2009, 2010 the problem would never have gotten this far."

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ATTACHMENTS

Wells Fargo Senate Response

Curry testimony