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Wells Fargo CEO to face investors amid drawn-out, mounting woe Exclusive

Friday, December 01, 2017 10:43 AM CT
By  Kevin Dobbs

Regulatory scrutiny of Wells Fargo & Co. could escalate as the bank continues to grapple with fraudulent sales tactics, putting its chief executive in a precarious position as he prepares to meet with investors.

Wells President and CEO Timothy Sloan — who has spent the past year trying to resolve extensive problems that range from phony deposit accounts to blunders in Wells’ auto-insurance and mortgage operations — is scheduled to address investors Dec. 5 at a Goldman Sachs conference in New York.

Sloan was promoted to the San Francisco-based bank’s top job shortly after former CEO John Stumpf stepped down in the wake of regulators, in September 2016, fining the bank and alleging that it had allowed employees to open millions of accounts without customers’ permission. Regulators said retail staffers worked in a pressure-cooker environment to meet exceptionally high sales goals.

Sloan has since tried to win back the trust of customers, investors and regulators. During his tenure as CEO, the bank has made changes to its board, fired managers linked to improprieties and reshaped the ways it motivates employees.

But a cloud of scandal continues to hang over the bank, and regulators reportedly are ramping up their scrutiny. That development could further damage Wells’ reputation at a time when the bank is struggling to attract new customers and grow revenue, observers say.

That in turn would worry investors, said Jon Winick, president of bank advisory Clark Street Capital.

“It is remarkable that it’s taking them so long to deal with this,” Winick said in an interview. “What else is there for regulators to find? That’s what everyone is going to ask.”

Wells has acknowledged that its staffers opened up to 3.5 million fake accounts. In its community bank division, where those bogus sales occurred, net income fell in the third quarter, as did Wells’ overall revenue.

Wells also has reported a range of other problems. These include wrongly charging hundreds of thousands of auto loan borrowers for insurance and unjustly charging some mortgage customers fees to extend interest rate commitments.

At issue now: The Office of the Comptroller of the Currency has cautioned Wells that it is considering a formal enforcement action against the bank over the auto-insurance and mortgage issues, according to a Wall Street Journal report. Such an action would involve ordering the bank to correct problems within a set time period, and with that, regulators would bolster their inspections of Wells’ operations, said Kevin Jacques, the finance chair at Baldwin Wallace University.

Heightened supervision would increase the likelihood of regulators unearthing additional problems, and it would surely consume precious time that Wells managers would otherwise devote to growing the business, said Jacques, who spent a decade from the late 1980s to the late 1990s working on risk management matters for the OCC.

“It is much more than a negative headline,” Jacques said in an interview. “When the OCC takes action, it means they are ratcheting up the steps they are taking against a bank, and that kind of progression is exactly what Wells Fargo does not want to see happen.”

According to the Journal report, which cited people familiar with the matter, the OCC wrote a letter to Wells in November accusing it of willingly hurting the auto and mortgage customers and, additionally, of repeatedly failing to address problems in an array of other areas. Also, this week the Journal separately reported that some business clients in Wells’ foreign-exchange operation were overcharged, though the bank disputed that report.

“At Wells, like at all the really big banks, there is a team of regulators onsite year-round,” Jacques said. “If there is an enforcement action, you can be sure it means that onsite team is really digging in, trying to get ahead of problems rather than responding to them.”

Should substantial new problems emerge, pressure on Sloan could mount. When he was promoted from COO to CEO last year, Wells emphasized that Sloan was not responsible for the division in which the sales scandal erupted. But, with problems widening, it could become increasingly difficult for the 30-year company veteran to avoid blame.

Winick said it “could take years for somebody from the outside to get up to speed” as a new CEO, given Wells’ size and complexity. But he also said that, if Wells’ problems worsen, critics may demand a change in leadership and push the bank to look outside for a turnaround expert.

“It is very disappointing, this continuous drip, drip of problems,” Winick said.

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