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Press Release

For Immediate Release: June 24, 2013

Press Contact: Matt Anderson, 212-709-1690

 

EXCERPTS FROM SUPERINTENDENT LAWSKY’S REMARKS ON CONSULTING REFORM AT AMERICAN BAR ASSOCIATION FINANCIAL SERVICES REGULATORY FORUM

Benjamin M. Lawsky, Superintendent of Financial Services for the State of New York, delivered a speech at a Financial Services Regulatory Forum hosted by the American Bar Association in New York City.

The following are excerpts from Superintendent Lawsky's remarks as prepared for delivery on reforming the consulting industry.

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Excerpts from Superintendent Lawsky’s Remarks at American Bar Association Financial Services Regulatory Forum

As Prepared for Delivery

"The independence and integrity of monitors and independent consultants is another area of vital concern to DFS.

"These consultants are installed at banks and other companies — usually after an institution has committed serious regulatory violations or broken the law.  The intent is that monitors assist companies in improving controls and ensuring that violations do not reoccur.

"All too often, however, the outcome of a monitorship is disappointing, as we recently saw in the context of the national mortgage reviews. This could be blamed on a number of factors, but it is worth considering that certain structural issues can significantly undermine the independence of the monitors — the monitors are hired by the banks, they’re embedded physically at the banks, they are paid by the banks, and they depend on the banks for future business.

"If the monitors or consultants are not independent of the big banks that pay their fees then their work-product can hardly be deemed reliable.

"Despite these often disappointing results, there has been little done to reform this broken system. Or to hold consultants accountable when they’ve engaged in misconduct.

"At DFS, we’re working to change that.

"Last week, we reached an agreement with Deloitte Financial Advisory Services regarding the company’s misconduct, violations of law, and lack of autonomy during its consulting work at Standard Chartered on anti-money laundering issues.

"Under the agreement, Deloitte agreed to a one-year, voluntary suspension from consulting work at financial institutions regulated by DFS, will make a $10 million payment to the State of New York (which included the disgorgement of the fees they were paid from their work at Standard Chartered), and will implement a set of reforms designed to help address conflicts of interest in the consulting industry.

"Among other provisions, those reforms include increased disclosures of past work at financial institutions that could compromise a consulting firm’s independence, as well as other measures designed to prevent banks from tampering with the independent findings of a consultant.

"DFS will use the reforms Deloitte has agreed to as a model that will govern all independent consulting firms that seek to be retained or approved by DFS.

"The agreement with Deloitte received a fair amount of attention. In part, because it was the first of its kind. To our knowledge, there hasn’t been a similar successful effort to impose significant consequences or reforms on a consultant that engaged in misconduct.

"Additionally, the agreement employed what we believe is an innovative legal strategy.

"We stated that if Deloitte breaches this agreement, DFS could issue an order pursuant to New York Banking Law § 36.10 barring regulated financial institutions from sharing confidential supervisory information with Deloitte.
"Under New York Banking Law § 36.10, — a statute that dates back to 1892 — DFS can revoke a consultant's access to confidential supervisory information if continued access to that information would not serve 'the ends of justice and the public advantage.'

"Other state and federal regulators have similar authorities when it comes to governing access to confidential supervisory information. And virtually all consulting and monitoring work at regulated financial institutions requires access to confidential supervisory information.

"Regulators basically hold the keys to the kingdom for consultants in the form of access to confidential supervisory information. We have the power to shut off the spigot. Using that authority could be a way to impose accountability in an area that’s seen precious little of it.

"For example, regulators could condition access to confidential supervisory information on consultants adhering to reforms meant to root out conflicts of interest, as we have done.

"Additionally, regulators could use their control over access to this information as a lever to disgorge fees paid to consultants that performed poorly or engaged in misconduct. Indeed, there has been significant outrage over the approximately $2 billion in fees paid to consultants during the independent foreclosure for results that were — at best —disappointing. We as regulators can review the work of consultants and — if warranted — seek to secure a voluntary disgorgement of fees from those that failed in their duties.

"It's important to remember that a good monitor can truly improve a troubled company when there is a problem. But an ineffective monitor can make the situation much worse by creating a false sense of security in the regulator and the public.

"We hope that our efforts in this area will help root out the ‘I’ll scratch your back if you scratch mine’ culture that has — at times — infected certain corners of the consulting industry. Our aggressive work in this area is far from over and will continue in the days, weeks, and months ahead."

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