Wells Fargo filed its latest quarterly report on Tuesday, and you may have seen news that new CEO Charlie Scharf wants to cut back spending on outside compliance consulting dramatically — spending that he described as “beyond anything I’ve ever seen.”
That spending, of course, stems from the seemingly endless number of compliance failures Wells Fargo has endured since 2016, when regulators first whacked the bank for its false accounts scandal.
As I read Scharf’s comments, I wondered: just how much has Wells Fargo been spending on outside compliance help, anyway? So I went to the data to find an answer.
You may want to sit down before reading further.
According to SEC filings, Wells Fargo has spent $11.8 billion on outside consulting services alone since the start of 2017. See Figure 1, below. The blue line represents quarter-to-quarter spending; the red line is the overall trend.
To be clear, not every dollar of that $11.8 billion was devoted to compliance consulting — but a large portion of the amount definitely was. The consulting firms getting the money include PwC, McKinsey, and Oliver Wyman, to name just a few.
And before you point to that downward trend line to say the situation is improving, rest assured that it is not. I also calculated spending on outside consultants as a percentage of Wells Fargo revenue, and mapped out the percentage change over time. See Figure 2, below.
What’s going on with that upward spike from the end of Q4 2019 through the first half of this year? Simple: revenue for Wells Fargo has shriveled like sautéed spinach within the last 12 months — from $21.08 billion one year ago to (holy crap) $8.27 billion last quarter. Even as spending on outside consultants has gone down from its 2017 highs, revenue has been falling even faster.
By last quarter, spending on outside consultants consumed 9.16 percent of revenue. No wonder Scharf is now flipping out.
An article in the Financial Times paints a fuller picture of the dismay at Wells Fargo. First, the costs alone are sky high. Second, so much spending on outside consultants has led to internal resentment among employees, who are staring at layoffs and budget cuts to keep Wells Fargo on firm operational footing.
Plus, the more you spend with outside consulting firms to build up your compliance program, the less experience internal employees will have running said program; and the less accountability and oversight there is for programs run via MBA consultant clones.
In an earnings call Scharf hosted after the quarterly report, he said he plans to unveil a cost-cutting plan soon that will whack $10 billion from the bank’s annual cost base. How much will the compliance consulting budget get squeezed? That’s too soon to say, but I suspect PwC, Oliver Wyman, McKinsey and the rest will not like the answer.
The Bigger Number Here
Even as we’re all agog at the $11.8 billion in spending on outside consultants, remember — that’s not even the full picture of Wells Fargo’s compliance costs.
First are the regulatory penalties Wells has paid along the way…
- $3 billion to the Justice Department and Securities & Exchange Commission earlier his year for the unauthorized accounting scandal
- $185 million to the Consumer Financial Protection Bureau in 2016 for the same misconduct
- $35 million to the SEC in February 2020 for other misconduct related to abusive sales practices
- $500 million to the Office of the Comptroller of the Currency in 2018
The list goes on from there, one fine after another. One watchdog group calculates that Wells Fargo has paid $8.98 billion in penalties since 2016, and $21.14 billion since 2000.
On top of all that are also the internal costs for Wells Fargo’s compliance recovery: new hires for a compliance function, man-hours pulled from other parts of the bank to focus on compliance needs, and so forth.
How much does all that total? Who knows. But when you add all the numbers up — the outside consultants, the internal costs, the regulatory fines, and whatever else — we can safely say that Wells Fargo has spent more than $20 billion on compliance-related costs since its woes came fully into the light four years ago.
Whatever the costs might be to have your board, CEO, and senior team devote more time and energy on getting a culture of compliance right the first time — it ain’t going to be that much. Not by a stagecoach mile.