In an extraordinary action, with significant ramifications for the financial industry, the Federal Reserve recently announced a series of enforcement actions against Wells Fargo.

On Friday, February 2, 2018, which was then-Chairwoman Yellen’s last day in office, the Federal Reserve announced an enforcement action against Wells Fargo for its corporate governance failures and poor record of remediation. (The Press Release and Enforcement Documents are Here).

Specifically, the Federal Reserve and Wells Fargo entered into a Consent Order reflecting the Federal Reserve’s dissatisfaction with Wells Fargo’s board of directors’ performance, risk management practices and its compliance program.

In particular, the Federal Reserve noted the Consent Orders previously issued by the Office of the Comptroller and the Consumer Financial Protection Bureau focused on Wells Fargo commercial bank sales practices and risk management.  Also, it noted that, in recent months, Wells Fargo had charged hundreds of thousands of borrowers for unneeded guaranteed auto protection or collateral protection insurance.  Additionally, the Federal Reserve identified deficiencies in Wells Fargo’s risk management and compliance program which Wells Fargo has yet to correct.

As a result, the Consent Order lays out a comprehensive remediation plan that requires Wells Fargo to address its board of directors and governance deficiencies, problems with its risk management operations and its compliance program.

In perhaps the most extraordinary aspect of the enforcement action, the Federal Reserve restricted Wells Fargo’s ability to grow its business until the remedial actions are completed.  Specifically, Wells Fargo cannot take any action that would cause the average of its total consolidated assets to increase over the same quarter’s total consolidated assets for the year 2017.

The restrictions will remain in place until: (1) Wells Fargo submits the written plans to improve the Board’s effectiveness and Risk Management; (2) the Federal Reserve approves the written plans; (3) the Bank adopts and implements the plans and programs and the Initial Risk Management Review is completed to the Federal Reserve’s satisfaction; and (4) the Federal Reserve provides written notice that the above 3 conditions have been met.

It is worthwhile to take a step back and remember how Wells Fargo ended up here in this fine mess.

Under a Wells Fargo sales incentive program, local managers and bank officers were required to meet stringent sales targets built on the assumption of eight accounts (e.g. checking, credit card, cds) for each customer. As a result, Wells Fargo personnel created nearly 2 million (yes, two million) fake accounts to meet these ridiculous sales targets.

After much hand-wringing and delays, Wells Fargo’s board launched a major internal investigation of the incident, including serious issues raised about its handling of whistleblowers, several of whom were fired after raising concerns about the program.

The Independent Directors in April 2017 issued a scathing report around the Wells Fargo scandal.  Based on its findings, Wells Fargo’s independent board took steps to clawback an additional $75 million from former CEO Stumpf and head of Community Banking Carrie Tolstedt for sales abuses resulting from the sales incentives program.

The directors found that the root cause of the sales practice failures was a decentralized management structure, coupled with an aggressive sales program directed and controlled by senior management in the Community Banking operation. As a result, employees sold unwanted and even unauthorized accounts to customers to meet management sales targets.

The Federal Reserve’s Consent Order requires Wells Fargo in 60 days to submit three separate written plans.

The first is to improve its Board of Directors effectiveness.

The second is to improve its firm wide compliance and operational risk management program.

The third requires Wells Fargo to conduct and complete by September 30, 2018 an independent review of its Board’s improvements in effective oversight and governance and enhancements to its compliance and operational risk management program.

Following the integration of the improvements required by the Order, the Bank is required to conduct a second independent review to assess the efficacy and sustainability of the improvements.  The Federal Reserve shall approve the third-party expert required to conduct the review.

For other major banks under regulatory supervision, the Wells Fargo action is a major development and indication that the government will intervene when necessary to ensure proper governance and compliance actions are taken, and that remediation is enacted quickly and effectively in the aftermath of a scandal.