U.S. regulator knocks its own handling of Wells Fargo sales scandal

By Patrick Rucker and Pete Schroeder

WASHINGTON (Reuters) - Wells Fargo & Co and its U.S. bank regulator discussed complaints of high-pressure sales tactics as early as 2010 but officials took no action for years, according to the regulator's review of the scandal.

Bank examiners "failed to follow-up on significant complaint management and sales practices issues," according to an internal review from the Office of the Comptroller of the Currency which oversees many national banks.

The report released on Wednesday ended a seven-month evaluation of how the OCC failed to halt a scandal in which thousands of Wells Fargo employees created as many as 2 million customer accounts without their consent.

The Wells Fargo board of directors was alerted in 2005 that bank tellers were being fired because they created phantom accounts, according to the report.

Five years later, Wells Fargo and bank examiners met to discuss what was motivating bank tellers to continue to create accounts without customer authorization.

There were 700 cases of whistleblower complaints from Wells Fargo employees at that time, the report said.

In that January 2010 meeting, Carrie Tolstedt, the former head of community banking, credited Wells Fargo's internal controls for catching the fraud.

"The primary reason for the high number of complaints is that the culture encourages valid complaints which are then investigated and appropriately addressed," the report said of Tolstedt's explanation.

Wells Fargo has laid much blame for the scandal at Tolstedt's feet.

A company-sponsored report released early this month said Tolstedt stood by while abusive sales practices multiplied.

A lawyer for Tolstedt has said the former executive was being used as a scapegoat for broader problems at the bank. The lawyer, Enu Mainigi of Williams & Connelly LLP, did not immediately respond to a request for comment on Wednesday.

The OCC review recommended nine changes to internal processes to better detect and address such scandals. Whistleblowers will have a more direct line to senior officials under one change, the document said.

Earlier this year, the OCC fired its most senior Wells Fargo examiner.

U.S. state insurance regulators on Wednesday pointed to the Wells Fargo scandal to bolster their view that the U.S. government should not take on a broader role in overseeing the insurance industry.

"States know best what is happening within our own unique borders," said Maria Vullo, superintendent of the New York State Department of Financial Services, at an event in Washington.

(Reporting By Patrick Rucker and Pete Schroeder in Washington; Editing by Lauren Tara LaCapra, Editing by Meredith Mazzilli and Andrew Hay)