On February 28, 2019, a $240 million (U.S. dollar) settlement reached between Wells Fargo executives and directors and the bank’s U.S. shareholders, concerning the creation of millions of unauthorized customer accounts by bank employees, was filed in federal court in San Francisco. The settlement, which requires court approval, would resolve claims that the executives and directors breached their fiduciary duties by knowing about or willfully disregarding, and failing to stop the creation of, the unauthorized accounts.
Background
Wells Fargo has been plagued by controversy over revelations concerning its sales practices. In September 2016, the San Francisco-based bank was fined $185 million by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the City and County of Los Angeles for the creation of 1.5 million unauthorized deposit accounts and 500,000 unauthorized credit card accounts.
In the aftermath of the initial fine, John Stumpf stepped down as Wells Fargo’s CEO, with the bank “clawing back” $41 million of his compensation.
Other revelations concerning the bank’s sales practices have since surfaced, including the charging of unnecessary automobile insurance and the imposition of excessive mortgage fees.
The settlement
As part of the settlement, the insurers for 20 current and former bank officials, including Stumpf and current CEO Tim Sloan, will pay $240 million to Wells Fargo. The bank officials deny any wrongdoing.
The U.S. shareholders in the settlement were led by pension plans in Colorado (the Fire & Police Pension Association of Colorado) and Alabama (The City of Birmingham). According to their counsel, this is the largest ever insurer-funded cash settlement in a U.S. shareholder derivative lawsuit. Shareholders bring derivative lawsuits on a corporation’s behalf – normally against the corporation’s officers or directors as defendants – with the proceeds of the suit going to the corporation.
The terms of the settlement also include a slate of remedial measures to be implemented by Wells Fargo, including a shuffle of the bank’s executives and board of directors, as well as implementing more robust internal controls and risk management systems. In addition, the bank will reduce compensation and “clawback” past payments to certain officials.
In January 2019, Wells Fargo issued a progress report announcing that it had “taken a series of steps to address improper sales practices”, including eliminating product sales goals for retail bankers and creating a centralized conduct management office to handle internal investigations and oversight of ethics, complaints, and sales practices.
Evolving regulatory landscape
The events surrounding Wells Fargo had wide-ranging impacts in the United States as well as on the Canadian side of the border. As we have previously reported, Canadian regulators launched several reviews of the financial industry in the aftermath of the revelations about Wells Fargo’s sales practices.
In particular, the Office of the Superintendent of Financial Institutions and the Financial Consumer Agency of Canada (FCAC) undertook concurrent but separate reviews of Canadian banks’ sales practices. The FCAC’s review, which took place from May 2017 to the end of November 2017, culminated in a report released in March 2018.
Subsequently, the federal government announced that FCAC will conduct a review by June 2019 to assess banks’ complaints handling processes and the effectiveness of external complaints bodies, such as the Ombudsman for Banking Services and Investment.
Osler will continue to monitor and report on developments in the financial regulatory landscape.
