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New York-regulated banks won't be able to hire PwC for consulting work until 2016 under a penalty handed down by Benjamin Lawsky, the state's banking superintendent. The move could encourage some banks to turn to smaller auditors, who some experts say produce higher quality work and are less expensive.
August 19 -
Banks will have to scrutinize their relationships with consultants, brace for the possibility of a wave of regulation of consulting practices and have backup plans in case a key advisor ever receives a punishment like the one New York state dealt Deloitte.
June 19 -
Promontory's connections and expertise turned the consultant into a private sector regulatory proxy. But those same strengths put the firm in the crosshairs after its role in the failed foreclosure review process and controversial work for MF Global and Standard Chartered.
March 15 -
WASHINGTON — A Senate Banking subcommittee will examine the role of independent consultants in the financial services industry, including Promontory Financial Group, at a hearing next week.
April 4
Suing a regulator may be the only way for Promontory Financial Group to save its reputation for being able to work with regulators.
The company is so thickly staffed with former regulators that it is often called a "shadow regulator," and it is often hired by banks in regulatory or legal binds for its reputation as a skilled intermediary between banks and their supervisors.
That reputation took a serious hit on Monday when the New York State Department of Financial Services accused Promontory of bending to pressure from Standard Chartered to tone down reports on money laundering, in order to protect its relationship with its client. The allegations laid out are similar to ones the department, under former superintendent Benjamin Lawsky, used to extract fines and temporary suspensions from Deloitte and PriceWaterhouseCoopers.
But those consultancies also admitted to wrongdoing as part of their settlements. Promontory and the regulator were on their way to settling, too, but talks broke down when it refused to admit to doing anything wrong.
That refusal led the department to impose a punishment that's arguably worse than an admission of wrongdoing: a public report saying Promontory conspired to downplay mass-scale sanctions violations; and a ban, with no end in sight, on consulting with New York banks.
The ban would likely only affect a handful of new client engagements a year for Promontory, but they could be very large ones. The department supervises all state-chartered banks and foreign banks with headquarters in the state.
That's significant but won't be a killer for Promontory, which has offices worldwide. The reputational hit, though, may ultimately be worse than the financial damage.
"Consultants have as much credibility as the regulators give them," said Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy. "People hire these firms because they think the regulators trust them."
Promontory claims it is being unfairly maligned.
The New York regulator "willfully misconstrued our work based on a handful of emails taken out of context," the consulting firm said in a statement. It said it would ask the New York Supreme Court to block the regulator's action.
In response to Promontory's comment and the news that it would sue, Anthony Albanese, acting superintendent of the New York agency, said in a statement, "Our department remains committed to improving independence and integrity in the bank consulting industry."
Promontory's legal path forward appears rocky, lawyers say.
New York is taking aim at the company using a formerly obscure law that it a successfully used as leverage over Deloitte and PwC. The nineteenth-century law says that banks need to request a waiver from the state to share supervisory information with a consultant. The regulator has said it's no longer going to approve those waivers for Promontory.
Daniel Alter, the department's former general counsel, devised this strategy. Previously, most thought financial regulators had little leverage over consultants, which they don't formally oversee. Alter realized that threatening to deny waivers would cut off new business for the consultants, and he used the strategy to help launch the department's investigation into all three consultancies.
Now a law professor at New York University, Alter said he sees the department's move as reasonable and doubted that Promontory's suit will succeed.
"It is within the superintendent's discretion to protect the confidentially of the supervisory information," Alter said. "When the superintendent determines that any entity has abused the public trust by submitting false and misleading content, it's not in the public interest to give it access to confidential information."
The company's suit is based on a law that allows challenges to administrative decisions that are arrived at in an "arbitrary or capricious" way. Promontory said all the work it did for Standard Chartered was correct and honest.
"We stand behind the integrity of our professionals and the quality of our work, the accuracy of which the order does not dispute," the company's statement said.
The challenge is a bit surprising in that the New York regulator is just the type of legal foe that most companies do just about anything to avoid.
The department has been sued a handful of times before by companies that felt they'd been treated unfairly most recently by a group of Native American tribes over payday lending rules, who later dropped the suit. But nearly every company prefers to settle when caught in its crosshairs.
"It's enormously expensive to go to court and battle an entity like the DFS that has pretty deep pockets given its history of billions of dollars in fines collected over the years," said Ross Delston, an attorney and anti-money-laundering consultant. "They have a track record of bringing in lots of money for the state, and it's doubtful that the state would object to their going all-out to defend a case of this sort."
Cases like this also tend to shred a company's reputation, he said. News reports repeat the accusations for as long as the lawsuit lasts.
Promontory is no ordinary company, however. It is more dependent on its reputation among a relatively small swath of regulators and financial services executives than among the public at large. That may be one reason why the firm apparently would prefer the public-relations headache of a lawsuit to admitting that it had fallen down on the job.
Promontory's fear of admitting guilt parallels banks' long reluctance until recently to do so in settlements with regulators. Now that many banks have pled guilty, it's less of a taboo.
For Promontory, though, admitting guilt may not be as harmless as it is for a too-big-to-fail bank, Hurley said.
"In the scheme of things, Promontory is a small fish," he said. "I'm guessing the reason they're willing to fight it is that it threatens their whole business model, just like taking away a bank's charter would."
