When federal regulators told Congress in April that they lacked basic plans for the oversight of consulting firms that advise big banks, one lawmaker had blunt advice: start adopting guidelines “this afternoon.”
With changes yet to materialize, the lawmaker, Senator Sherrod Brown, plans to ratchet up the pressure on Friday in a letter to the nation’s top banking regulators.
In the letter — a draft of which was reviewed by The New York Times — Mr. Brown will urge the Federal Reserve and the Office of the Comptroller of the Currency to keep a closer watch on the multibillion-dollar consulting industry, which has become something of a shadow regulatory force on Wall Street.
“Without written guidelines and transparent processes, it is impossible to ensure the integrity of a system that relies upon consultants paid by banks to report on their regulatory compliance,” Mr. Brown, an Ohio Democrat who is a senior member of the Senate Banking Committee, is expected to say in the letter. “This lax system undermines financial regulation at every level and puts our economy at risk.”
The pressure from Capitol Hill comes as fresh details emerge about one of the consulting industry’s most lucrative assignments. When several consulting firms were enlisted to pore over home foreclosures as part of a federal enforcement action, they collectively received about $2 billion for their work, even though the consultants reviewed only a fraction of the loans.
New documents suggest that the Promontory Financial Group, which examined loans for Wells Fargo, Bank of America and PNC, was the highest paid of the consultants. The firm, run by a former comptroller of the currency, Eugene Ludwig, received $927 million for reviewing more than 250,000 loan files, according to documents provided to the Senate Banking Committee and reviewed by The Times.
PricewaterhouseCoopers, which reviewed files for four banks, was paid about $425 million. Deloitte, which handled JPMorgan’s foreclosure review, was paid $465 million.
The substantial payments have raised questions about the independence of the consulting firms, which Mr. Brown said were paid and handpicked by the same banks they were expected to help change.
After reviewing an early version of the letter, a spokeswoman for the Fed said, “We have received the letter and plan to respond.” A spokesman for the comptroller’s office said it was “actively at work on a set of standards,” and would finish them “in the near future.”
Some federal authorities who spoke on the condition of anonymity said that they were quietly rethinking their reliance on consultants. They also said that they could punish banks that failed to improve and could tell a bank to replace any consulting firm that had erred.
Yet Mr. Brown is calling on federal regulators to take a more public stance.
His letter comes on the heels of an effort in New York State to rein in the consulting industry. Mr. Brown praised New York for introducing a new “common sense” code of conduct for consultants while also raising questions about why federal authorities had yet to adopt similar standards.
“I urge the O.C.C. and the Federal Reserve to act immediately to create a similar set of written standards for independent consultants,” Mr. Brown said in the draft of the letter.
As part of the overhaul in New York, the state’s top financial regulator took action against Deloitte on Tuesday, imposing a $10 million fine and a one-year ban. The accusations by the state regulator, Benjamin M. Lawsky, stemmed from Deloitte’s work for Standard Chartered, the British bank accused of illicitly transferring billions of dollars on behalf of Iran.
Under a 2004 agreement with state and federal regulators, Standard Chartered hired Deloitte to look for suspicious money transfers routed through its New York branches. But when Deloitte submitted a report to regulators, Mr. Lawsky said, it relented to pressure from the bank and watered down its recommendations for rooting out money laundering.
In a statement, Deloitte said that it had not been accused of intentionally aiding and abetting the bank.
“As a leading professional services firm, Deloitte has an important responsibility to continually elevate the standards that govern our work and that of our profession,” the statement said.
Federal authorities have yet to impose a similar crackdown. Grappling with scarce resources, they rely on consultants to help remedy flaws at big banks. More recently, however, they have indicated a willingness to rethink their ties with consultants.
“While the use of independent consultants can be an effective supervisory tool, there are certainly lessons to be learned from our experience, and we believe we can improve the process going forward,” Daniel P. Stipano, who supervises enforcement at the comptroller’s office, said in testimony at the hearing in April.
But when Mr. Brown asked whether the agency had adopted written standards for the consulting firms, Mr. Stipano conceded that the agency had not yet “put pen to paper.”Senator Criticizes Lack of Supervision for Banks' Consultants »