Wells Fargo Asset Cap Is Now One of the Costliest Bank Penalties

Starling Team

Wells Fargo has lost over $200 billion in market value since the Federal Reserve’s cap restriction took effect, missing out on roughly $4 billion in profits according to estimates from Bloomberg.

“The constraints of operating under the asset cap has limited our ability to offset lower rates with balance-sheet growth,” CEO Charlie Scharf told analysts last month. Net interest income fell 18% in the second quarter. “The damage might have been half that if the firm were able to expand its balance sheet,” CFO John Shrewsberry contended.

To see the cap lifted, the Mr. Scharf’s management team must present the Fed with an acceptable plan for achieving certain reforms in non-financial risk management. Once the regulator accepts that plan, a third-party review must then be completed before the Fed will remove the restriction.

The Fed had rejected the firm’s first plan, delivered almost two years ago, and Wells missed an April 2020 deadline for submitting an updated plan. Expectations are that the firm will submit its new plan some time next month. Industry executives now regard a cap on assets as the harshest weapon in the regulators’ arsenal.

They are watching closely — as are Wells investors, and Congress.

Unlike a punitive fine, representing a one-time hit to the bottom line, the cap on assets at Wells implies an indefinitely long drag on earnings. Mr. Scharf has had less than a year to get his arms around a large and complex organization. In a January earnings call — his first as CEO — Mr. Scharf indicated that his firm may take “much of this year” to review its businesses and budget. One must wonder whether he has had sufficient time to take steps to placate the Fed, where his predecessors failed.

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Culture Challenges at Australia’s AMP

Starling Team
A spate of misconduct challenges at Australian wealth management firm AMP has led to a focus on seemingly pervasive and persistent culture challenges.  

Billed as Australia’s “#MeToo moment,” events at AMP have led to the resignation of several senior leaders, to include the chief executive of subsidiary AMP Capital, Boe Pahari, who was a central figure in the scandal.  Putting corporate boards across the country on high alert, the scandal also led to the resignation of AMP board chair David Murray, with immediate effect.

The high-profile exits followed “feedback expressed by some major shareholders” about the serious complaints made and company’s handling of them, AMP said in a statement on Monday August 24th. Louise Davidson, of the powerful Australian Council of Superannuation Investors, who engaged directly with the AMP board on multiple occasions to express members’ concerns, agreed the company’s initial response to the scandal in standing by the promotion had been “inadequate”.

“The company must now get on with the job of rebuilding public confidence and, in particular, the trust of their staff,” Ms Davidson said. “Investors will be continuing to engage with AMP to understand how these decisions were made and how the company intends to strengthen company culture.”Current travails at AMP follow on a recent history of other conduct and culture related challenges that caused public uproar when they came to light in the course of the Hayne Royal Commission investigation into Misconduct in the Banking, Superannuation and Financial Services Industry.
 
Francesco De Ferrari, chief executive of AMP commented on where financial firms had often gone “fundamentally wrong” in the past. Throughout history, lower-ranked employees had known of issues and not raised them, which led to even bigger problems down the road. “Financial services is a conduct risk business. For me, having safety of escalation and trust in the processes is critical,” said De Ferrari.

Culture is now front and center in De Ferrari’s strategic planning.  And events at AMP demonstrate that boards cannot take their eye off culture and the conduct risk it may engender.  As Britian’s The Guardian newspaper argues, environmental, social and governance (ESG) issues are now regarded by shareholders as inextricably linked to a company’s value as an investment.

“The events that have unfolded at AMP over recent weeks prove company directors today need to be as worried about good corporate governance as delivering a strong bottom line.”

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Banks’ Next Big Target for Job Cuts: Compliance

Starling Team
HSBC, Credit Suisse Deutsche Bank, Nomura and Societe Generale are among other firms looking to cut compliance team headcount as part of broader restructuring plans.  Pressure to reset running costs across the banking sector leaves compliance teams — bloated by having been spared the axe in years past — especially vulnerable in an economy mired in recession.

The impact of Covid-19 and a potential ‘hard Brexit’ have significantly impacted UK-based banking operations.  Tom Boulderstone, head of legal and compliance at search firm Barclay Simpson, expects firms to cut their London-based compliance divisions by up to as much as 25% within “the next 12 to 24 months.”  

Such trends have helped fuel an explosion in more cost-efficient regulatory technology offerings.  (RegTech)  The Covid-crisis has prompted a “don’t let a good crisis pass you by” mentality amongst bank bosses, Boulderstone said, adding that investment in more efficient compliance tools will contribute to decreased compliance hiring.

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MAS Commits S$250 Million to Drive Innovation and Build Fintech Talent Pipeline

Stephen Scott

The Monetary Authority of Singapore (MAS) announced that it will commit S$250 million under the enhanced Financial Sector Technology and Innovation Scheme (FSTI 2.0) in the next 3 years. The goal is to accelerate technology and innovation-driven growth in the financial sector — and to create jobs in Singapore amidst booming interest in fintech and regtech.


Under the FSTI 2.0 Scheme, MAS will double the maximum funding quantum, from S$200,000 to S$400,000, under the Proof-of-Concept (POC) Grant. It will also increase the maximum funding support from 50% to 70% of qualifying project costs. This support will enable financial institutions and tech companies to undertake larger-scale POC projects to experiment and, upon successful trials, to further develop and deploy innovative solutions. 

MAS is also looking into strengthening the adoption of Artificial Intelligence (AI) within the financial industry. In this direction, it will raise the maximum funding quantum for all qualifying AI projects under the Artificial Intelligence and Data Analytics (AIDA) Grant from S$1 million to S$1.5 million. (An AIDA-Lite track, providing half the funding quantum of the AIDA track.)


MAS has long been a leading Asian proponent of fintech and regtech.  In recent months, the Hong Kong Monetary Authority (HKMA) has announced efforts to promote regtech adoption among the firms it oversees.  Tokyo has launched a scheme to draw fintech and regtech firms to that market.  And even Seoul appears keen to join the race to establish the Asian “home” for this promising tech ecosystem.

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EBA Launches Industry Survey on RegTech Adoption

Starling Team

The EBA (European Banking Authority) has launched a survey to collect views on RegTech solutions in the financial sector.

Specifically, input is sought in the following areas:

AML/CFT; business relationship monitoring; transaction monitoring
Creditworthiness assessment
Compliance with IT security and cybersecurity requirements and standards in payments
Supervisory reporting

The goal of the survey is to better understand the needs and emerging activities in these area by firms and pioneering RegTech entrepreneurs, and to raise awareness regarding RegTech within the European regulatory and supervisory community. The EBA is also looking to inform future policy discussions and identify the main barriers to RegTech adoption.

The EBA has prepared two questionnaires; one for financial institutions and another for ICT third party providers. “Feedback from financial institutions and ICT third party providers is essential to better understand the extent and the impact of the use of technology-enabled innovation (RegTech) for regulatory, compliance and reporting requirements by regulated institutions,” the EBA said.

The consultation is open for comment until 30 September 2020 and the EBA expects to report its findings in the first half of 2021.

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