HFSC on Holding Wall St Accountable

House
Financial Services Committee

“Holding Wall Street Accountable: Investigating
Wells Fargo’s Opening of Unauthorized Customer Accounts”

Thursday, September 29, 2016

Key
Topics & Takeaways

Too-Big-To-Fail: Reps. Scott Garrett (R-N.J.)
and Roger Williams (R-Texas) expressed concern that the bank could be eligible
for a public bailout under Title II of the Dodd-Frank Act, if it experienced
financial distress.  Reps. Brad Sherman (D-Calif.) and Maxine Waters
(D-Calif.) concluded that the bank should be broken up because it is
“too-big-to-manage.”

Regulatory Accountability: Reps.
Garrett, Luetkemeyer (R-Mo.), Posey (R-Fla.) and Wagner (R-Mo.) alleged that
federal financial regulators were “asleep at the wheel” and failed to uphold
their enforcement obligations.  In contrast, Rep. Bill Foster (D-Ill.)
argued that these “fraudulent” practices demonstrate the need for a “strong and
independent CFPB.”

Compensation: Rep. Terri Sewell (D-Ala.)
suggested that Stumpf’s forfeiture of his 2016 bonus should also apply to
bonuses that were awarded across the time period in which these activities took
place. Foster also suggested that regulatory fines levied against financial
institutions should be paid first by executives’ bonuses, rather than by
shareholders.

Witness

John Stumpf, Chair and Chief
Executive Officer, Wells Fargo 

Opening Remarks

Rep. Jeb Hensarling
(R-Texas), Committee Chairman

In his opening
remarks
, Hensarling recounted that the unauthorized account openings at
Wells Fargo resulted in millions of Americans being “ripped off by their bank
and seemingly let down by their government.”  He noted that the Consumer
Financial Protection Bureau (CFPB) did not initiate a supervisory review until
18 months after the Los Angeles Times began an investigation into these practices,
and suggested that federal regulators may need a “swift kick on the
backside.”  Hensarling called for all “culpable individuals” to “be held
accountable,” and argued that the fine levied by regulators is “tiny” in
comparison to the relatively high cost incurred by customers and former
employees.  He also indicated that this hearing marks “just the beginning”
of the Committee’s investigation.

Rep. Maxine Waters (D-Calif.), Ranking Member

Waters claimed that the unauthorized account
openings constitute “some of the most egregious fraud” experienced since the
financial crisis. She alleged that senior management and the Board of Wells
Fargo “encouraged” and “bragged about” such “fraud,” and argued that the bank
should be investigated by the Department of Justice. 

Testimony

John Stumpf, Chairman and Chief Executive
Officer, Wells Fargo

Stumpf took full accountability for the
unethical sales practices that occurred at Wells Fargo, and admitted that the
management team “should have done more sooner” to avoid these outcomes. 
He underscored the bank’s efforts to “make things right for customers who may
have been harmed” and highlighted several ways that the bank is responding to
this enforcement action, such as eliminating all product sales goals (effective
at the end of the week), contacting credit card customers to confirm they
“wanted” those products, and reporting any mistakes to the credit rating
agencies.  Stumpf reiterated that these sales practices do not reflect the
firm’s culture, and noted that he will be forfeiting salary throughout the
investigation, as well as his 2016 bonus and some of his unvested stock awards.

Question & Answer

Accountability

Hensarling equated the fine assessed to the
bank as a “rounding error,” and expressed concern that regulatory fines are
merely a “cost of doing business” for Wells Fargo.  Stumpf explained that
the bank is conducting a full review of its control functions, spanning the
bank holding company and corporate levels, to ensure similar practices are not
undertaken in other divisions.

Timeline

Waters alleged that senior executives and the
CEO knew of the improper sales practices earlier than they claim, due to
references to such practices in an employee manual and ethics hotline
complaints that date back to 2008. Stumpf acknowledged that in any sales
organization, “not every team member will do everything right, every day” and
mistakes are to be expected. He reiterated that he learned of the problem in
late 2013.

Forced Arbitration

Waters expressed concern that the client
documentation underlying the potentially unauthorized accounts includes forced
arbitration clauses. Stumpf defended the use of arbitration in some cases, but
explained that in this investigation, Wells Fargo will pay for the mediation
services of any customers that were adversely affected by these actions.

Rep. Brad Sherman (D-Calif.) expressed concern
about the forced arbitration clauses and underscored that some parties will
“want their day in court.” In response to whether Wells Fargo would waive
arbitration clauses, Stumpf reiterated that the bank is paying for a mediator
for its affected customers.

Corporate Governance

Rep. Randy Neugebauer (R-Texas) indicated
interest in separating the chief executive officer and chairman of the board
roles.  Stumpf explained that the Board maintains several independent
directors, acts “quite independently” and has the authority to terminate him,
if it so desires.

Rep. John Delaney (D-Md.) requested detailed
examples in which the Board exercised its fiduciary duty and examined how the
firm’s product sales goals affected the culture of the bank. Stumpf agreed to
provide evidence to that effect.

Disclosures

Neugebauer asked why the investigation into the
bank’s product sales practices was not disclosed in 10-K filings.  Stumpf
stated that his firm filed accurate reports but did not disclose this
investigation because it was deemed to be “not material.” Rep. French Hill
(R-Ark.) reminded Stumpf that this is a “big deal” and urged him to address it
in his 2016 letter to shareholders.

Rep. Stephen Lynch (D-Mass.) reminded Stumpf of
his obligation to file suspicious activity reports (SARs), and Stumpf affirmed
that they did everything necessary to abide by applicable regulations. 

Rep. Jim Himes (D-Conn.) questioned Stumpf’s
classification of these practices as immaterial, because they eventually
decreased Wells Fargo’s market capitalization by approximately $25
billion.  Stumpf acknowledged that there has been damage to the bank’s
reputation, and reiterated that he is focused on restoring faith and trust in
the bank.

Review Period

Rep. Carolyn Maloney (D-N.Y.) asked Stumpf to
extend the company’s internal review period to before 2009, to ensure that
customers were not subject to these practices during that time. She highlighted
a wrongful termination suit in Montana that dates back to 2007, and asked that
he take into consideration this evidence and extend the review period. Stumpf
explained that the bank agreed with regulators to look back through 2011, and
they voluntarily decided to review practices in 2010 and 2009.  He agreed
that, if they find that a customer was harmed prior to that, they “will make it
right for that customer.”

Too-Big-To-Fail

Rep. Scott Garrett (R-N.J.) expressed concern
that the bank could be eligible for a public bailout under Title II of the
Dodd-Frank Act, if it experienced financial distress.  He added that H.R.
5983
, the Financial CHOICE Act, would ensure “taxpayers are not on the
hook.”

Sherman argued that some financial institutions
are too-big-to-fail, too-big-to-jail, too-big-to-manage, and too-big-to-regulate,
thus concluding that it is “time to break them up.”  Waters recalled a
list of enforcement actions against Wells Fargo and concluded that it “should
be broken up” because it is “too-big-to-manage.” She pledged to “move forward
to break up” the bank.

Reps. Marlin Stutzman (R-Ind.) and John Carney
(D-Del.) asked whether the bank is “too-big-to-manage,” which Stumpf denied,
explaining that it was instead a “focus problem.” He added that Wells Fargo is
actively contacting all affected customers to “make it right.”

Regulatory
Accountability

Garrett alleged that financial regulators were
“asleep at the wheel as this massive fraud was occurring,” and noted that the
CFPB “only has one job” and “completely blew it.”

Rep. Blaine Luetkemeyer (R-Mo.) argued that
regulators were “oblivious” and failed to uphold their enforcement
obligations.  He added that regulators “ought to be fined as well” since
they were “asleep at the switches.”

Reps. Bill Posey (R-Fla.) and Ann Wagner
(R-Mo.) also alleged that federal regulators were “asleep at the wheel.” 
In contrast, Rep. Bill Foster (D-Ill.) argued that these “fraudulent” practices
demonstrate the need for a “strong and independent CFPB.”

Regulatory Response

Rep. Mick Mulvaney (R-S.C.) expressed
disappointment that these fraudulent practices essentially “validate”
everything that Democrats allege about big banks. While he recognized that this
revelation might present an opportunity to push through a political reform
agenda, he reminded his fellow colleagues that these actions took place after
the CFPB and Dodd-Frank Act were in place.  He added that policymakers
“cannot fully regulate bad actors.” 

Compensation

Rep. Terri Sewell (D-Ala.) suggested that
Stumpf’s forfeiture of his 2016 bonus should also apply to bonuses that were
awarded across the time period in which these activities took place. Stumpf
estimated that he was awarded approximately $18-20 million in bonuses during
that time period. 

Foster suggested that regulatory fines levied
against financial institutions should be paid first by executives’ bonuses,
rather than out of the hands of shareholders.

Additional information about this event can be
accessed here.