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Risk management shakeup at Wells reflects intensifying regulatory pressure


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Risk management shakeup at Wells reflects intensifying regulatory pressure

In parting company with several risk-management executives, Wells Fargo & Co. stepped up efforts to demonstrate to the public and its federal regulators that it is bolstering internal controls following a series of customer-service indiscretions.

The San Francisco-based company told employees last week that top executives overseeing four key areas of risk management would retire in conjunction with a reorganization of the ways that Wells guards against excessive risk-taking. The Wall Street Journal first reported the changes, and Wells confirmed the shakeup to S&P Global Market Intelligence.

"Strengthening and transforming how we manage risk is a top priority," the company said in an emailed statement. In addition to leadership changes, it is giving its corporate risk team greater capacity to halt or change questionable business activities. Wells declined to provide detail on who would replace the outgoing leaders, but added that "more work is under way."

The executives stepping down include Kevin Oden, head of operational risk and compliance; Keb Byers, head of enterprise risk; Vic Albrecht, head of community banking risk; and Jim Richards, head of financial crimes risk management. The four are respectively slated to retire between April and June.

"It's become clear that regulators were not satisfied with changes made earlier, so it is not surprising to see more steps, and pretty aggressive management turnover," Morningstar analyst James Sinegal said in an interview.

The changes are tied to a sales-fraud debacle that became public in September 2016, when regulators fined the bank after discovering that its retail staffers opened millions of fake accounts in customers' names to reach lofty goals. Subsequent reviews have found problems in Wells' mortgage, auto insurance and wealth management businesses, among other areas.

Wells had already pushed out its former CEO as well as the head of its community banking operation, where the fraudulent accounts were opened, along with several other managers. It also made numerous changes to its board, including naming a new chairman, and it is expected to bring on up to four new directors this year to deepen banking expertise and broaden risk-assessment oversight.

But, to Sinegal's point, regulators at the Federal Reserve determined that Wells had much more progress to make. This year they imposed an unprecedented penalty on the megabank by indefinitely limiting its total assets to the level at which it finished 2017 — just under $2 trillion.

The public denunciation requires Wells to prove to regulators that its governance issues are fully addressed before the order is lifted.

The Journal further reported that the Office of the Comptroller of the Currency is considering a risk control-related enforcement action and civil penalty against Wells that could total tens of millions of dollars. The newspaper said officials from the OCC and the Fed had discussed with Wells the risk management retirements.

"There is an ongoing purging of management" at Wells, "and some of it is to try to create a perception that they are making headway, and some of it is to make public the faces of change as they work with their regulators," analyst Christopher Marinac of FIG Partners said in an interview.

Charles Peabody, an analyst at Compass Point Research & Trading, said in a report that three of the four retirements in risk management were clearly tied to the known customer service woes at Wells, as they spanned operational, enterprise and retail banking functions. But the departure of Richards from financial crimes risk management stands out, as that area typically oversees compliance with Bank Secrecy Act and anti-money laundering, or BSA/AML, laws.

"To date, we are not aware that [Wells] has violated any of these laws, or has been sanctioned with financial crime wrongdoings," Peabody wrote. "Thus, we suspect that some sort of sanctions may be forthcoming in this area."

Morningstar's Sinegal called that "reasonable" conjecture, given both Wells' recent spate of unearthing new problems and the fact that BSA/AML compliance has proven a thorny area for several other banks.

"We've seen several enforcement actions on that front in the last couple years," Sinegal said. "The regulators obviously have not been happy" with Wells, "and they are likely to push for even more changes. ... The question becomes, how far do you go with this, especially with management?"