WASHINGTON, D.C. –U.S. Sen. Sherrod Brown (D-OH), Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, chaired a hearing today entitled “Outsourcing Accountability? Examining the Role of Independent Consultants.” Today’s hearing explored the role of independent consultants in the financial services industry and how to ensure proper oversight when they are hired by federal regulators.
“A lack of transparency and disclosure threatens to continue the same risky practices and widespread errors that undermine the public’s confidence in the financial system,” Brown said. “That’s why it’s particularly alarming when regulators outsource oversight activities to independent consultants. We need more clarity in the way our public regulators utilize private consultants to better understand these arrangements and identify ways to counteract the potential risks of conflicts of interests and misaligned incentives.”
The hearing focused on the independence, oversight, and quality of services provided by private consultants, which are routinely hired by banks at the behest of regulators. A report released last week by the Government Accountability Office (GAO) revealed gaps in the quality of banking regulators’ oversight of work provided by independent consultants hired to oversee the Independent Foreclosure Review Process (IFR) established in the wake of widespread mortgage servicing errors.
Witnesses who gave testimony at today’s hearing included: Daniel P. Stipano, Deputy Chief Counsel, Office of the Comptroller of the Currency; Richard M. Ashton, Deputy General Counsel, Board of Governors of the Federal Reserve System; Konrad Alt, Managing Director, Promontory Financial Group, LLC; James F. Flanagan, Leader, U.S. Financial Services Practice, Pricewaterhouse Coopers LLP; and Owen Ryan, partner, Audit & Enterprise Risk Services, Deloitte & Touche LLP.
Full text of Brown’s opening statement, as prepared for delivery, is below.
In the financial crisis and its aftermath we have seen case after case of wrongdoing at financial institutions – from money laundering for terrorist groups to illegal foreclosures that devastated millions of families.
In hundreds of cases, banks have been ordered by regulators to hire private independent consultants to review their behavior. At the OCC alone, nearly one third of their legal actions since 2008 have required banks to hire an outside consultant to review their actions and propose solutions.
The top consultants are staffed by scores of former regulators and big bank employees that reportedly charge as much as $1,500 per hour to give banks their expertise. And because most consulting firms are private companies, there is little transparency – to the public or to Congress – and we can only speculate about the financial incentives and business relationships that consultants have.
Recently, we’ve heard about consultants hired at regulators’ request to find and fix illegal practices, but instead of holding the banks to the highest standards, the consultants have either missed serious problems, or they have given the banks a free pass. We can’t be sure which is the case.
For example, it has come to my attention that one of seven consulting firms participating in the Independent Foreclosure Review (IFR) was given formal written notice of an “opportunity to improve” their performance on more than one occasion.
According to staff reports, there were multiple discussions between the consultant’s staff, including senior leadership, and OCC regulators, yet the consultant in question had not cured its deficiencies at the time that the foreclosure review settlement was announced.
In a January 28, 2013, letter to me, Comptroller Curry recognized that “additional reporting will improve transparency and understanding of the IFR and [the IFR settlement] agreement.” But the identity of this consultant is still not available for members of Congress.
This raises serious concerns about the ability of this consultant – and others – to provide thorough work that demands accountability from the banks that are paying their bills.
There are several factors that continue to concern me. The first is the lack of transparency and disclosure throughout the entire engagement. Transparency is fundamental to ensure accountability particularly in a democratic government. With little information about the consultants and who they report to, it is impossible for Congress and the public to hold them accountable.
In the case of the mortgage review, the partnership between the public sector regulators and private consultants appears to have been poorly managed from the start. The apparent lack of uniform standards and clear procedures undermined any possibility of effective management of such a large and important endeavor.
Today we hope to clarify the foggy relationship between private consultants and public regulators – to better understand these arrangements and identify ways to counteract the potential risks of conflicts of interests and misaligned incentives. With such a potential for cognitive capture and the influence of the revolving door, bright line rules are essential.
I particularly appreciate Mr. Stipano’s suggestion for how Congress might strengthen the OCC’s authority to discipline rogue consultants. That is something that this Committee should consider.