N.Y.'s Lawsky Shares Lessons on 'Pushing the Envelope' of Bank Regulation

Payday lenders. Debt collectors. The digital currency Bitcoin. Those are a few of the latest targets of Benjamin Lawsky, head of New York's muscular Department of Financial Services and one of the country's busiest banking regulators.

Since becoming superintendent of the consolidated financial services watchdog two years ago, Lawsky has cut a profile as one of the most aggressive cops on the banking and financial services beat. He has fined foreign banks over allegations of money laundering and temporarily banned leading financial consultants from working in his state. Last week, Lawsky also warned the nation's biggest banks that he regards them as accessories to payday lenders' illegal activities.

This week, he blanketed technology companies with subpoenas seeking information about Bitcoin and other "virtual currencies" that operate outside the regulated banking system. Now, however, Lawsky says his plate is full.

"We're going to focus on the things we have going. I don't think you're going to see anything particularly new from us anytime soon," Lawsky, 43, said in an interview this week. "You'll see more in each of those areas, whether it's consulting, Bitcoin or payday lending. As a regulator you have to be careful not to get too overextended. I think we are now fully extended."

As headquarters for most of the financial industry, New York has always been a contender in bank regulation, but under Lawsky the state has pulled even with and in some cases passed by federal agencies. A year ago, he stole a march on the Treasury Department by fining British bank Standard Chartered $340 million over money-laundering violations. In June, he slapped Bank of Tokyo Mitsubishi UFJ with a $250 million penalty, overshadowing a much smaller federal one.

After attending Columbia Law School, Lawsky served as a counsel to New York Sen. Charles Schumer and then as a federal prosecutor in the Southern District of New York. He left to become a senior aide to Andrew Cuomo during his time as New York attorney general and then as the state's governor. It is Cuomo who appointed Lawsky to his current job.

Many regulators and state attorneys general are ratcheting up oversight of the financial industry as public anger over various practices smolders. In Washington, the young Consumer Financial Protection Bureau has garnered much of the attention for its crackdowns on everything from credit card products to mortgage servicing. However, Lawsky's friends and foes alike — and he's made plenty of both — credit him with leading many initiatives and in some cases shaming less aggressive regulators.

"He's setting the bar very high. And when he does something, it becomes hard for other regulators to ignore because then they look like they're being lax," says Alan Kaplinsky, head of the consumer financial services practice at law firm Ballard Spahr.

Lawsky freely admits that he wants to "push the envelope" of how the government views the financial services industry but disputes the notion that a second agenda involves setting an example that other regulators feel compelled to follow.

"It's not what drives us," he says. "We're a little smaller than the other regulators, a little more nimble, and we have this ability, because we're new, to really not be wedded to the way things have been done in the past, when we don't think that makes sense."

The lanky former basketball player likes to refer to himself as the referee in the hyper-competitive games played by financial companies.

"You want all the players on the court to play very hard and to play their best and to succeed. But at the same time you have rules, and you have lines on the court which aren't supposed to be crossed … and you have a couple referees around who will blow the whistle when they have to," he says.

Lawsky has been blowing that whistle loudly and frequently since May 2011, when Cuomo put him in charge of an agency combining the authority formerly split between separate state banking and insurance regulators. The department formally opened in October 2011. Since then, Lawsky has taken action involving Bitcoin, payday lending, debt collections, force-placed insurance, pension plans and money laundering.

His AML fines against Standard Chartered and Tokyo Mitsubishi UFJ ruffled feathers in Washington and London because they inserted a state regulator into matters traditionally handled at the national level. Specifically, Lawsky's actions were an incursion onto turf traditionally controlled by the Treasury Department's Office of Foreign Assets Control.

Lawsky stops short of offering regrets for upsetting the regulatory apple cart. Yet he also credits himself with being a quick learner and implies that Standard Chartered was a learning experience.

"Since Standard Chartered, you can't point to a single example of where we've jumped the gun so to speak or moved first, or moved ahead of, or moved without coordination in these anti-money-laundering cases," he says. "Whenever we can collaborate or cooperate, it's always better. We had tried to in that case as well, it just didn't work out." He adds that even in the Standard Chartered case, he had communicated with Treasury ahead of taking action.

"We have a good, cooperative relationship with DFS and are looking forward to continued collaboration on a range of issues of mutual concern," Treasury spokesman John Sullivan said via email.

Lawsky characterizes widespread reports of inter-regulatory tension as "hugely overblown." But in the same breath he argues that a little friction between state and federal officials might be a good thing, like the spark that keeps a longtime marriage alive.

"Sometimes a little tension between a couple can be a healthy thing in the long term. It enables you to work out your conflicts and figure out who's right, and be better going forward," he says.

Other regulators seem to prefer proactive communication to makeup cuddles. Comptroller of the Currency Thomas Curry, who is trying to overhaul an agency criticized for its weak regulation of banks in the runup to the financial crisis, in an email emphasized the importance of "working together cooperatively in all matters."

For his part Lawsky gushes with praise for CFPB Director Richard Cordray, again calling him "a bright shining light in the Obama administration." The two agencies have turned their focus at roughly the same time to debt collection and payday lending, and Lawsky acknowledges close coordination.

"Superintendent Lawsky and other state banking officials are key partners in our efforts to protect consumers and to carry out our supervision and enforcement responsibilities," CFPB spokeswoman Michelle Person said via email.

On the state level, Lawsky joins a long line of activists, mostly attorneys general, who have been at the forefront of policing banks. Now New York's Department of Financial Services is at or near the top of that list, according to Compass Point analyst Isaac Boltansky.

"It's an incredibly powerful position," he says. "Lawsky has positioned the DFS to be in essence the tip of the sword for new financial regulations."

He sees Lawsky's influence in the banking world as even greater than that of other prominent state officials, including California Attorney General Kamala Harris and New York Attorney General Eric Schneiderman, who many say has been marginalized by the Cuomo-Lawsky team. Lawsky calls his relationship with Schneiderman "very good" and conflict-free.

"I don't believe in duplicative regulation, so if the Attorney General's office or any other regulator is busy playing in left field on a particular issue, we will typically go play in right field, because there's a whole big field to play on," he says. Schneiderman's office has "an enforcement job, and there is an enforcement aspect to DFS, but it's not primarily what we do," he adds.

Schneiderman spokesman Matt Mittenthal said via email that the departments "have different roles but shared goals: protecting New Yorkers and ensuring that everyone plays by the same rules and gets a fair shake. Since its inception, and under the leadership of Commissioner Lawsky, DFS has made important contributions in these areas, and we are always eager to collaborate with the Department."

There is another, oft-made comparison hovering over Lawsky and Schneiderman: that with former attorney general Eliot Spitzer, who earned the moniker "Sheriff of Wall Street" by targeting financial services firms. As with Spitzer, Lawsky and Schneiderman are surrounded by speculation about whether they will use their current positions as springboards to seek higher political office.

"When Spitzer was Attorney General, he sought to create a position for himself as a parallel regulator to the SEC. What Ben Lawsky is doing at DFS is building a profile for himself as a parallel regulatory of financial institutions, to the federal agencies," Andrew L. Sandler, the chairman of law firm BuckleySandler, says.

Lawsky is adept at deflecting questions about the Spitzer analogy by insisting his focus is not on the former governor but on the current one, Andrew Cuomo, who is himself widely believed to be eyeing a 2016 presidential run.

"We don't really think about it," Lawsky says of the Spitzer comparison. "I don't spend a ton of time living up to a model other than the model that Andrew Cuomo set."