Should Investors Be Concerned About Wells Fargo's Latest Regulatory Headache?


Wells Fargo (NYSE:WFC) cruised through much of the first eight months of 2021. The bank showed progress on regulatory issues related to its phony-accounts scandal, and it also put a solid plan in place to improve profitability. A good set of results in the second quarter sent the stock up to $51 per share in August, a nearly 70% gain this year.

Recently, however, Bloomberg reported that regulators are weighing further action in regard to matters associated with the phony-accounts scandal. The news caught the market off guard, sending Wells Fargo’s stock down more than 10% in a two-day period, which is a big move for a large bank. Should investors be concerned about the recent report? Let’s investigate.

What happened

The Bloomberg report is the latest in what has now been a years-long headache for Wells Fargo. In 2016, it came to light that employees at the bank had opened millions of depository and credit card accounts without customers’ authorization, in addition to charging customers for other products without their consent. What followed were numerous consent orders from regulators, billions of dollars in fines, and an order from the Federal Reserve that prevented Wells Fargo from growing its balance sheet until it improved its regulatory infrastructure.

Progress was slow, but in 2019 Wells Fargo hired Wall Street veteran Charlie Scharf as CEO. He seemed to move quickly despite having to deal with the coronavirus pandemic. On the regulatory front, Scharf more or less cleaned house, instituting a new management team and replacing many top leaders at the bank. Roughly half of the bank’s top 150 leaders are new to their roles from the start of 2020, including more than 40 who are brand new to the organization. Additionally, Scharf has created new regulatory infrastructure at the bank and hired new compliance chiefs for each of its divisions.

The bank saw some real victories. In January, it announced that the Office of the Comptroller of the Currency (OCC) had ended a 2015 consent order related to anti-money-laundering issues at the bank. Then in February, Bloomberg reported that the Federal Reserve had approved the bank’s proposal for overhauling its risk-management and governance structure. The approval was seen as a key step toward getting the asset cap limiting the bank’s growth removed, which is considered the main roadblock inhibiting the stock.

But the latest Bloomberg report clearly disturbed investors. It said the OCC and Consumer Financial Protection Bureau (CFPB) may bring further regulatory action against the bank because the agencies are not happy with Wells Fargo’s progress on compensating victims of the phony-accounts scandal, or efforts to enhance its regulatory infrastructure.

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