Lawsky's Aggressive Stance Lives on at N.Y. Regulator

WASHINGTON — In the wake of Benjamin Lawsky's departure as head of the New York Department of Financial Services two months ago, there were some in the banking industry that predicted the agency might back away from being the outspoken, aggressive one it had become during his tenure.

But the past two weeks have dashed those hopes as the agency took significant actions that show it intends to carry on Lawsky's legacy. On Monday, it effectively banned Promontory Financial Group from doing business with banks chartered in New York, prompting the consultant firm to say it would soon file a lawsuit. That followed the agency's launch of a major probe two weeks ago into an instant messaging service jointly owned by several banks.

Both actions were reminiscent of Lawsky, who boosted the agency's profile dramatically, sometimes by moving unilaterally against firms without the support of other federal regulators. Some of that may be due to Lawsky's former chief of staff, Anthony Albanese, who is now his acting successor. But in an interview last week, Lawsky said he expects a similar view to prevail with whomever is chosen as the next superintendent.

"I would expect whoever gets appointed [as the next superintendent] to be committed to the same kind of success," Lawsky said in comments made before the Promontory action. "I think whoever is the next DFS superintendent will obviously have their own style, but at the end of the day it is the governor's DFS and I know the governor thought very highly of DFS and how it conducted itself."

Lawsky, who recently returned to the private sector, was seen as something of a renegade by federal regulators. In 2012, he led the state agency to take action against Standard Chartered for alleged violations in its anti-money laundering office. What set the action apart was that the agency acted on its own, privately infuriating federal government officials who were still negotiating with Standard Chartered. He did it again a year later by fining Bank of Tokyo Mitsubishi UFJ $250 million, eclipsing a far smaller settlement the bank had reached with federal officials.

"No regulator likes to be shown up by another regulator and certainly an aggressive state regulator," said Kevin Petrasic, a partner at White & Case.

Lawsky's maverick reputation is one reason New York banks and federal regulators are anxiously awaiting to see who is appointed as Lawsky's successor.

"That is the biggest question, who will replace him and how active will that individual be?" said Edward Mills, a financial policy analyst and managing director at FBR Capital Markets. "Is the Lawsky experience the new norm for banking or was it a one-off?"

But Mills suggested the next commissioner would be likely to follow Lawsky's lead.

"He showed any future DFS superintendent that if you want to, you can raise your profile both at the state and national level given the unique responsibilities of both banking and insurance regulations in the state of New York," Mills said.

To be sure, it isn't uncommon for tension to exist between state and federal regulators.

"In my experience, it is rare for a state regulator to coordinate effectively with a federal regulator," said H. David Kotz a managing director at Berkley Research Group and former Inspector General at the Securities and Exchange Commission. "There may even be turf battles such that the relationship can be in some ways adversarial, rather than collaborative."

But banks had been hoping for the New York regulator to shift away from the Lawsky era. They want better coordination between federal and state regulators because it would make reaching a resolution on enforcement matters faster and easier.

"If banks feel there is consistency between the regulators, it sets the expectation that issues can be settled more cleanly and that the banks can avoid the prospect of settling with one regulator and then have it potentially undone later by another regulator who may view the issue differently," said John Melican, a managing director at Exiger, a regulatory and financial crime, risk and compliance firm.

Carol R. Van Cleef, a partner at Manatt, Phelps & Phillips, added that "Greater coordination between agencies means it is going to be less costly because you are not going to have to respond to the same questions twice, maybe respond to a different set of questions," and that when negotiating "you are not necessarily negotiating with two separate agencies with two separate agendas."

But during an American Banker conference last week, Lawsky said sometimes regulators need to act on their own.

"It is always better to collaborate if you can, but there are limits to that and I don't think that regulators should go along if they think the path other regulators are going down is the wrong one just to go along," he said.

Matthew Anderson, a spokesperson for the New York Department of Financial Services, wrote in an email that "Our general preference is for coordinated enforcement actions — which represent the vast majority of our cases," but added that "our view has been that — where appropriate and warranted given the misconduct — we are willing to move forward as an individual agency."

"On enforcement actions, we'd expect to continue to follow a similar course as under Superintendent Lawsky," Anderson wrote.