Wells Fargo leaders think they can move past scandals. Will customers let them?

On his first day as CEO of Wells Fargo last year, Charlie Scharf said something that would have baffled the bank’s old guard: The regulators, politicians and the public who had criticized the bank for years for its past sales practices — they were right.

“We didn’t always live up to our own standards and have not moved quickly enough to address our shortcomings,” Scharf wrote in an Oct. 21 companywide memo.

It’s a stark turn for the head of a bank that used to obdurately defend its people and practices. But it might be what’s necessary to get the bank growing again. Interviews with Wells’ chief operating officer and industry experts, as well as Scharf’s first steps, offer an early glimpse into how the bank is mapping out a comeback.

Scharf has set out to get the regulators to let the bank grow, resolve the last of the bank’s many investigations into the sham sales and fix the bank’s formerly brutal culture. Analysts say that if he can get those things done, he has a chance to make Wells Fargo one of the more remarkable corporate recoveries in recent memory.

Scharf, who used to run the massive New York-based custodian bank BNY Mellon, took on an unenviable job at Wells Fargo. Early into his tenure, one major band-aid already has been ripped off: In January, the Office of the Comptroller of the Currency, Wells Fargo’s federal regulator, banned former CEO John Stumpf from the industry for life for the fake accounts scandal. Seven other former executives were either charged by or settled with the OCC.

In charging the former officials, regulators crafted a more detailed picture of the scandal than had ever been seen. Over more than a decade, hundreds of thousands of employees took part in sham sales practices, opening millions of fake accounts in customers names to meet unreasonably high sales goals, regulators found.

A poisonous sales culture induced and reinforced the misconduct, and the systems at Wells Fargo to detect and investigate risk caught nearly none of it.

In 2014, some 30,000 employees per month exhibited activity that was a red flag for just one form of misconduct, yet the bank only investigated three per month, regulators said.

‘This bank is going to perform better’

Scott Powell was only in his second month as the bank’s chief operating officer when the OCC announced the charges.

“I think my reaction was the same as most people’s reactions. There’s a lot of disappointing things in there,” he said in one of his first interviews since starting the job. Powell, who began his job in December, is the executive Scharf tasked with handling the bank’s myriad regulatory concerns, including those with the OCC.

“This bank is going to perform better in the future. Better for our investors, better for our employees, better for our customers,” Powell said.

The legacy of the scandal is still felt in the bank’s balance sheet.

Since February 2018, the Federal Reserve has restricted Wells Fargo from growing beyond its 2017 size, about $2 trillion in assets, as punishment. Market share has been lost to rivals Bank of America and JPMorgan Chase. Wells’ stock price is essentially unchanged since 2016, while peers have soared amid an unprecedented multi-year stock market rally.

But the core of the bank remains immensely valuable.

Wells Fargo is still the country’s biggest mortgage and small-business lender. It has the most branches of any bank in the U.S. and $1.3 trillion in deposits. Scharf and Powell are tasked with making that enterprise as valuable as can be. For Powell, that starts with the regulators.

Powell offered three priorities: “Meet the regulatory expectations that are out there, meet our own standards and do a better job delivering for our customers every day.”

Organizational shakeup

One move Scharf made to bring “greater focus and accountability” was a wide-ranging restructuring of the bank, announced Tuesday. He split the company’s lines of business into five, and hired a new head of consumer lending.

The changes make Wells Fargo’s leadership structure look more like that of JPMorgan, where Scharf used to work.

Mary Mack, former head of the consumer bank and Wells’ top Charlotte-based executive, will have consumer lending removed from her portfolio and moved to a new executive, Mike Weinbach. He used to run mortgage banking at JPMorgan Chase. Mack will still oversee branch banking and small business banking.

Mack’s new title is CEO of consumer and small business banking, and Weinbach, who like many of Scharf’s executive hires will be based in New York instead of the bank’s San Francisco headquarters, will be CEO of consumer lending. The two lines of business were run separately until 2017.

The bank also announced it was creating a customer-focused digital team under Mack, as well as a separate new strategy, digital platform and innovation group.

Some in the industry had seen Wells falling behind in the banking technology arms race. Unencumbered by regulators and management upheaval, its rivals invested heavily in technology to attract and hold a customer base that wants to bank online more than ever.

Waiting on the Fed

Yet, for management changes to be as effective as they could be, Wells still needs to confront the Fed’s growth cap, paramount among its regulatory priorities. The cap was an unprecedented punishment when it was meted out and getting rid of it is not easy.

To be able to grow, Wells Fargo needs to prove to Fed examiners that the bank has fixed its oversight and risk management.

Once that’s done, a third-party like a consultant or law firm needs to confirm that Wells Fargo has fixed its issues. After that, the Fed’s Board of Governors has to vote to lift the cap.

Former Wells Fargo CEO Tim Sloan once optimistically expected the asset cap to be lifted by the first part of 2019. The asset cap remains; Sloan left the company in the first part of 2019.

Scharf appears to have learned from Sloan, who was widely criticized for an overconfident mien in trying to move the bank past the scandal. When probed by Wall Street analysts on his first earnings call, Scharf declined to put time-frames on addressing regulators’ concerns.

“It’s really hard to say” how long it’s going to take to resolve the outstanding regulatory orders Wells Fargo has, Powell said.

Powell has ample experience dealing with regulators. Before joining Wells Fargo, he ran the U.S. wing of the Spanish bank Santander. When he started there in 2015, regulators were pushing the bank to improve its internal controls, much like they are asking of Wells Fargo today.

“We closed a number of those things out while I was at Santander,” Powell said.

Regulators have told Wells Fargo what it needs to do, and it’s the bank’s responsibility to get it done. “We’ve got to be very transparent with our regulators, which we are. We’ve got to provide regular updates to them. It’s not a complicated process,” Powell said.

Until the Fed lifts the growth cap, the bank will likely continue to give up ground to its unencumbered competitors. But there’s little incentive for the Fed to be proactive in unshackling Wells Fargo, according to Isaac Boltansky, director of policy research for Compass Point Research & Trading, a Washington, D.C.-based policy research firm.

“In my time of covering this, I don’t know if the Federal Reserve has been more politically vulnerable than it is right now,” Boltansky said in an interview. “There’s just no upside for the Federal Reserve to stick its neck out for Wells Fargo when Wells Fargo still needs to make material changes to its operations.

“I can’t tell you when it will be all clear,” he said, “but I think it’s going to have to be all clear and then some because of the Fed’s politically precarious position.”

The Fed is not the only regulator Wells Fargo will need to satisfy.

The bank has 12 outstanding public enforcement actions against it from a range of regulators, including five alone from the OCC.

Waiting on the Feds

For years, Justice Department lawyers have also been probing the bank, led by federal prosecutors in Los Angeles and Charlotte.

That investigation has hung over the bank, with little public indication from either side of how painful its resolution could be.

Los Angeles was an epicenter of the sham sales practices, and the Los Angeles Times was the first to document the company’s past sales culture. The San Francisco-based bank has 27,000 employees in the Charlotte area, its biggest presence in any city, a legacy of its 2008 acquisition of Wachovia.

The government’s position is a challenging one. Standards for getting convictions in criminal cases are higher than those in civil cases. And Wells Fargo has the money to buy top legal counsel to fight any potential charges.

“They’re not going to bring charges unless they’re confident they’re going to win the case,” said Lee Reiners, executive director of the Global Financial Markets Center at Duke University’s law school.

“Executives, who the government’s case likely focuses on, didn’t directly create the fake accounts, meaning the government would have to prove something more complex. The people who most clearly broke the law were the branch employees, the lowest rung on the totem pole,” he said.

A report in The American Banker said criminal indictments could come for former Wells Fargo executives in the coming months. A spokeswoman for Charlotte’s federal prosecutor said they are actively investigating Wells Fargo’s past sales practices, but declined to elaborate.

Fixing the culture

Once the legal and regulatory issues are dealt with, Scharf also will be judged on whether he can change the bank’s culture, a tall order when you employ as many people as live in Buffalo, N.Y.

Under his predecessors, regulators said, the bank fostered a sales culture that used pressure, hazing and intimidation to get results from its workers. In 2013, an unnamed employee wrote to management that “I had less stress in the 1991 Gulf War than working for Wells Fargo.” The complaint was cited in the OCC’s charges against former executives.

The bank initially defended the culture that led to the mass misconduct, but Scharf and some of his predecessors have admitted that it needed improvement. The sales goals that regulators said were unreasonable were lifted in 2016.

Powell, the COO, created a new position to oversee sales practices and filled it with a former Santander colleague, Michael Cleary.

At a company event in Charlotte’s Knight Theater last Wednesday, glimpses of a more open culture started to appear.

Employees were allowed to give speeches that would be broadcast to coworkers across the globe on the bank’s internal broadcast service. Talks focused on the immigrant experience, veteran suicide and, in one, mental health and stress.

“There’s a massive disconnect in how we approach stress and well-being in the workplace,” Rob Cooke, a relationship manager for Wells Fargo’s wealthy clients, said in his talk. While he was speaking generally about corporate America, the subtext was clear.

“I’m afraid that we’ve created a culture where personal care and overall well being are given the backseat,” he added, citing new technology, social pressure and a “laser focus” on shareholder returns. Cooke advocated for leaders to show how they care for their mental health.

But culture changes slowly. Some employees are still nervous to report issues to the company’s ethics line, gun-shy from the pressure-cooker habits of past management, according to Alex Ross, a Wells Fargo bankruptcy specialist who is seeking to unionize the company with the Committee for Better Banks.

“Wells Fargo has zero tolerance for acts of retaliation,” company spokesman Peter Gilchrist said in an emailed statement. “Employees are encouraged to report concerns which will be promptly and thoroughly investigated.”

But given the company’s recent history, Ross said, “everyone is really skeptical.”

Observer reporter Michael Gordon contributed to this report.

This story was originally published February 20, 2020 at 11:45 AM.