November 13, 2013
The OCC's Consultants Guidance
Posted by David Zaring

Banking regulation is increasingly being done through private contractors - these days, the OCC will require a bank in trouble to hire a consultant, usually composed of former OCC employees, to set things straight, or expect a bank to come to it with that sort of proposal.  There are plenty of worries about conflicts of interest in this practice, while at the same time, bank consulting is a business really growing in value, making, for example, former OCC head Eugene Ludwig, who has founded the consultancy Promontory, dynastically wealthy.

Yesterday, the OCC issued guidance - not a rule, nothing binding, so no lawsuit over this is in the offing - to banks on how they should handle requests from the agency to hire consultants.  Here's a nice take on the context, from DealBook.  The document is short; and it doesn't really constrain the agency.  But it does suggest the values that the agency thinks is important when taking on a consultant.  

One is competence - that is, the competence of both the bank and the consultant.  From the guidance:

When determining whether to require an independent consultant, the OCC considers, among other factors,

  • the severity of the violations or issues, including the impact of the violations on consumers, the bank, or others.
  • the criticality of the function requiring remediation.
  • confidence in management’s ability to perform or ensure that the necessary actions are taken to identify violations and take corrective action in a timely manner.
  • the expertise, staffing, and resources of the bank to perform the necessary actions.
  • actions already taken by the bank to address the violations or issues.
  • services to be provided by an independent consultant (for example, a full look-back or a validation of the bank’s look-back).
  • alternatives to the engagement of an independent consultant.

Another is independence:

When evaluating the independence of a consultant, including whether an actual or potential conflict of interest exists, the bank’s assessments should address, and the OCC considers, among other things, the following factors:

  • Scope and volume of other contracts or services provided by the independent consultant to the bank. As part of its submission to the OCC, a bank should disclose all prior work performed by the consultant for the bank for at least the previous three years. This information allows the bank and the OCC to assess the nature of the contracts and whether the consultant has been involved in any work closely related to the engagement under consideration. The information also allows the bank and the OCC to assess whether the number of contracts or services the consultant has had or has with the bank may pose an inherent conflict of interest.
  • Specialized expertise of the consultant and availability of other consultants, i.e., whether the bank evaluated other consultants with the requisite expertise and independence.
  • Proposed mitigants to address any potential conflict or appearance of conflict. For example, when the proposed consultant already has a contractual relationship with the bank, a mitigant could include the creation or maintenance of effective barriers to the exchange of information by different teams of the proposed consultant with differing responsibilities to the bank. Any proposed mitigant must be well established and documented in the engagement contract as well as in ongoing documentation and practice.
  • Any financial relationship, including the amount of fees to be paid, or previously paid to the person or company as a percentage of total revenue of that person or company, and any other financial interest between the bank and the proposed consultant.
  • Any business or personal relationship of the consultant, or employees of the consultant, with a member of the board or executive officer of the bank.
  • Prior employment of consultant staff by the bank.
  • Other relevant facts and circumstances.

It isn't clear whether this marks the onset of new oversight of a new set of gatekeepers in financial regulation, or is meant to head off alterantive forms of regulation coming from elsewhere, notably the state of New York.  But it's an important development in compliance, I think.

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