Wells Fargo's unprecedented move to strip Chief Executive John Stumpf of $US41 million ($53 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.
The scandal at Wells Fargo, where some of its employees opened as many as two million bank 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 outrage over 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."
US 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 finalised 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 Federal Reserve chair Janet Yellen, who told 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 requirements.
Yellen also told the committee that the Fed was reviewing whether the largest US 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 US Senate last week that the behaviour at Wells Fargo highlighted the need to complete the compensation rule.
Clawing back pay
Clawback provisions were put in place or strengthened at all the top US 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 that would be 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.
UK lender Standard Chartered 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 Wall Street 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 $US185 million fine did not force it to make a material restatement of its results.
The rules vary from bank to bank, but they generally allow the banks to take back share awards or pay for misconduct, taking improper risks or poor performance. Executives can also be penalised 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 per cent since the financial crisis.
Lobbying setback
"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 Johnson Associates.
He said the Wells Fargo scandal will have blunted industry efforts to soften the blow from 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 $US40 million, it makes you more cautious," he said.
Reuters
