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By Olivia Oran and Ross Kerber
NEW YORK, Sept 28 Wells Fargo & Co's
unprecedented move to strip Chief Executive John Stumpf of $41
million in stock awards has sent a chill through Wall Street
with bankers fearful that a hardening political climate against
corporate wrongdoing will encourage boards to be more aggressive
about making them forfeit pay.
A sales practices scandal at Wells Fargo, where some of its
employees opened as many as 2 million accounts without
customers' knowledge to hit sales targets, could not have come
at a worse time for the wider industry with politicians in
Washington reviewing new rules on bank executive remuneration.
Bankers fear not only that the new rules on pay will be
tightened as a result of the furor at Wells Fargo but also that
boards will go beyond them to avoid a political backlash.
"The Wells Fargo board made a mistake by not recouping some
of the CEO's pay until after the firestorm developed," said
Harvard Law School professor Jesse Fried. "Other boards will
learn from this mistake."
U.S. regulators are looking at requiring banks to defer
compensation for senior officials and to allow clawbacks for
misdeeds over the previous seven years. The law is meant to come
into effect in 2019 and regulators are trying to get it
finalized before a new president takes office in January.
But banks' legal advisers worry that the Wells Fargo scandal
will result in them putting stiffer, more concrete requirements
into their proposal, such as requiring banks to decide very
quickly - perhaps in as little as 30 days - on clawing back
compensation once misconduct has been discovered, according to
the general counsel of a large Wall Street bank, who spoke on
condition of anonymity.
Banks are increasingly in Washington's crosshairs with U.S.
Federal Reserve Chair Janet Yellen telling a congressional
committee on Wednesday that the central bank is considering
changes to its annual stress test of the sector that would
result in a significant increase in their overall capital
Yellen also told the committee that the Fed was reviewing
whether the largest U.S. lenders are complying with banking
rules in the wake of what happened at Wells Fargo.
The Comptroller of the Currency Thomas Curry said in his
testimony before the U.S. Senate last week that the behavior at
Wells Fargo highlights the need to complete the compensation
Clawback provisions were put in place or strengthened at all
the top U.S. banks after the financial crisis of 2008, primarily
to hold executives responsible for risk taking.
But the time period to claw back is often around three
years, less than half the current proposal of seven years, and
the proposed regulation would expand the pool of employees
subject to it.
Britain introduced laws last year that allow banks to seek
recovery of bonuses from bankers deemed to have acted
irresponsibly up to 10 years after they are paid out.
Standard Chartered Plc has said it will try to claw
back bonuses from up to 150 senior staff if they are found
culpable of breaching internal rules around risk-taking during
the tenure of former chief executive Peter Sands.
But clawing back money from people who have already left a
bank can be fraught with practical and legal difficulties.
Stumpf is the first CEO of a major U.S. bank to actually
have to give back significant pay or benefits as the result of a
scandal. Wells Fargo's rule is written broadly enough that
Stumpf was subject to a clawback even though the bank's $185
million fine did not force it to make a material restatement of
The rules vary from bank to bank, but they generally allow
the banks to take back stock awards or pay for misconduct,
taking improper risks or poor performance. Executives can also
be penalized if the bank has to significantly restate results.
Compensation consultants said that increased clawbacks could
make it more difficult for banks to recruit and keep top talent
with bonuses at investment and commercial banks down about 40
percent since the financial crisis.
"Compensation is going to be a much more political process
going forward. You're going to based not only on your merits but
what is politically attractive at the moment," said Alan
Johnson, managing director of compensation consulting firm
He said the Wells Fargo scandal will have blunted industry
efforts to soften the impending remuneration rules.
"Whatever progress had been made in lobbying some features
now has been set back to zero," he said. "Who is going to listen
to the banking industry now?"
Still, David Knutson, head of credit research in the
Americas for Schroder Investment Management, believes CEOs at
other banks will be more careful with their own businesses now
that they have seen what happened to Stumpf.
"When you see a colleague you've known for years all of a
sudden lose $40 million, it makes you more cautious," he said.
(Additional reporting by David Henry in New York and Lawrence
White and Kirstin Ridley in London; Writing by Michael Erman;
Editing by Carmel Crimmins and Bill Rigby)