All Banking Law, All in One Place. Bloomberg Law: Banking is the comprehensive research solution that powers your practice with access to integrated banking-related legal news, analysis,...
By Jeff Bater
Oct. 20 — A prominent Federal Reserve official is calling on banks to repeatedly assess how they compensate employees, and says new laws or rules might be needed to improve culture and avoid ethical troubles within the industry.
William Dudley, president of the New York Fed, spoke of pervasive evidence of “deep-seated cultural and ethical problems” in financial services during a speech Oct. 20 in New York. He said recent bad conduct in the banking and securities industries has eroded trustworthiness.
Dudley's remarks come as Wells Fargo deals with the fallout of a scandal involving the unauthorized opening of customer accounts by employees to meet sales goals. Wells Fargo said it fired 5,300 employees over the fake accounts, and the bank's then-CEO, John Stumpf, resigned earlier this month after taking responsibility for the misconduct
“Incentives drive behavior, and behavior establishes the social norms that drive culture,” Dudley said in prepared remarks for the New York Fed workshop examining culture and behavior in the financial services industry. “If the incentives are wrong and accountability is weak, we will get bad behavior and cultures.”
He said companies must continually assess their incentive regimes to ensure those are consistent with good conduct. “When they are not consistent, the incentives need to be changed,” Dudley said.
Supervisors of banks should also play a role, evaluating how compensation is determined and whether risk managers have the authority to challenge revenue producers and prevent activity that is questionable, Dudley said.
He also said new laws or regulations might help in changing culture. Dudley pointed to two ideas he supported in the past: a database of banker misconduct and an industrywide survey to assess culture.
The plan for a database of bankers was studied by the Bank of England but deemed to face too many legal obstacles. Another speaker at the conference, BOE Deputy Governor Minouche Shafik, said his institution explored the idea but couldn’t get enough lawyers to agree on implementing the idea (See related story in this issue).
Banks are under increased pressure from lawmakers to improve corporate governance after Wells Fargo agreed to pay regulators $185 million to resolve investigations into bogus accounts.
In a letter Oct. 20 to the bank's board of directors, Sens. Elizabeth Warren (D-Mass.) and Robert Menendez (D-N.J.) said Stumpf's exit was entirely appropriate, but not enough to assure proper accountability at Wells Fargo. The senators asked whether the board properly addressed whether Stumpf's replacement as CEO, Tim Sloan, knew about or played any role in the scandal as the company's president and chief operating officer.
Warren and Menendez, along with Sen. Jeff Merkley (D-Ore.), earlier asked the Securities and Exchange Commission to probe whether any whistle-blower protection laws were violated when the bank fired employees who tried to report misconduct internally. The request was part of a Sept. 29 letter to SEC Chair Mary Jo White from the three lawmakers on whether Wells Fargo's conduct in creating bogus customer accounts violated securities laws.
Dudley didn't name specific firms in his remarks for the conference. But he said banking industry supervisors evaluating incentive structures should ask how people who speak up to point out potential conduct issues are treated. “Are they held up as examples to emulate, or are they discouraged or even penalized?” Dudley asked.
Aside from Wells Fargo, Goldman Sachs was ordered by the Federal Reserve in August to pay $36.3 million over allegations that former employees obtained confidential documents from the regulator in a settlement that requires the bank to bolster its policies to prevent another lapse. The Fed is also pursuing a fine and a permanent banking ban against a former Goldman Sachs managing director, Joseph Jiampietro, over his unauthorized use and disclosure of Fed secrets, according to a statement Aug. 3 from the agency. The Fed said Goldman Sachs’ employees used confidential supervisory information in presentations to clients to try to solicit business.
The erosion of trustworthiness hamstrings the ability of the financial services industry to do its job, said Dudley, adding that fines for bad behavior drain resources and that time spent handling a legal crisis is time not spent on more productive pursuits.
“Moreover, I worry that, in the long term, an industry that develops a reputation for dubious ethics will not attract the best talent,” he said.
To contact the reporter on this story: Jeff Bater in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Mike Ferullo in Washington at email@example.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)