WFC Wells Fargo and Company

By Ryan Tracy and Emily Glazer 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 3, 2018).

Wells Fargo & Co. will replace four board members and face limits on growing its banking business after an unprecedented action announced Friday by the U.S. Federal Reserve, which cited "widespread consumer abuses."

The harsh rebuke of the third-largest U.S. bank by assets came on the last business day of Janet Yellen's tenure as chairwoman of the Fed. It prompted Wells Fargo's stock to fall more than 6% in after-hours trading on Friday. The bank also said it expected the action to reduce 2018 after-tax profit by $300 million to $400 million.

The Fed's enforcement action shows the difficulties Wells Fargo faces in overcoming the sales-practices scandal that engulfed it in 2016. That led to a public and political uproar, the abrupt departure of the bank's former chief executive and numerous governmental investigations.

The Fed has never before imposed such a broad, companywide growth restriction as part of an enforcement action, Fed officials said. Wells Fargo is barred from growing past the $1.95 trillion in assets it had at the end of 2017. Fed officials did say the company can continue to lend and take deposits.

The Fed imposed the penalties after officials concluded Wells Fargo had been growing without proper risk controls in place, the officials said. The central bank has seen some improvement in Wells Fargo's risk management lately but expects the bank to take further steps, they said.

"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," Ms. Yellen said in a statement.

Wells Fargo said it was "confident it will satisfy the requirements of the consent order" that it agreed to with the Fed.

"We take this order seriously and are focused on addressing all of the Federal Reserve's concerns," said CEO Timothy Sloan, adding that they referred to "prior issues where we have already made significant progress."

Wells Fargo recently said its chief risk officer will retire in 2018 and it is also bringing in a former New York Fed official to serve as its regulatory officer beginning in March. Both changes occurred after months of regulatory pressure over the bank's risk management work.

Under the Fed order, the bank agreed to tell the Fed within 60 days what it has already done and how it plans to enhance its board's governance oversight and the bank's compliance and operational risk management.

The Fed said the bank will also replace three current board members by April and fourth by the end of 2018. Wells Fargo has previously said it would add new directors to its 16-member board in 2018, with three directors expected to retire before its April shareholder meeting.

In September 2016, the bank settled allegations that it had years of improper sales practices that resulted in potentially 3.5 million accounts being opened without customers' knowledge. Elsewhere, more than 550,000 auto-loan and mortgage customers were potentially overcharged for products for years as well.

Some members of Congress, in particular Sen. Elizabeth Warren (D., Mass.) have called on the Fed to force the replacement of Wells Fargo's board due to what they said were governance and risk-management failures.

Since September 2016, Wells Fargo has replaced several board directors. More pressure was put on the bank after its annual shareholder meeting in April that year when nine of the bank's directors got votes of less than 75%.

Besides the Fed, the Office of the Comptroller of the Currency has also been weighing a new enforcement action against Wells Fargo related to risk controls, The Wall Street Journal reported earlier in January.

In addition to its enforcement action, the Fed also wrote separate critical letters to former Wells Fargo chairmen John Stumpf and Stephen Sanger. Mr. Sanger became chairman after Mr. Stumpf left the bank in the wake of the sales-practice revelations. Mr. Sanger had previously been the board's lead independent director.

"Your performance ... is an example of ineffective oversight that is not consistent with the Federal Reserve's expectations," wrote Michael Gibson, who directs the Fed's division of supervision and regulation, to Mr. Sanger, who left Wells Fargo's board at the end of 2017.

Messrs. Stumpf and Sanger didn't immediately respond to requests for comment.

The Wall Street Journal reported earlier in January that banking regulators downgraded one part of a secret assessment of bank's health and strength that focuses on Wells Fargo's management and its ability to manage risk.

The downgrade of the assessment, known as a CAMELS score, occurred over the summer of 2017, as Wells Fargo continued to grapple with issues related to how it treats customers.

Write to Ryan Tracy at ryan.tracy@wsj.com and Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

February 03, 2018 02:47 ET (07:47 GMT)

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