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From Banking and Finance Law Daily, November 13, 2013

OCC describes how it decides when enforcement calls for an independent consultant

By Richard A. Roth, J.D.

The Office of the Comptroller of the Currency has published a bulletin providing detailed guidance on its use of independent consultants to resolve enforcement actions against the financial institutions it supervises. The guidance covers when a bank might be required to hire an independent consultant, how the OCC will oversee the selection of a consultant, and how the agency will review a consultant’s work. OCC 2013-33 also makes clear that the use of an independent consultant is not a substitute for the bank’s responsibility to take corrective action required by the OCC or the OCC’s authority to supervise that action.

The bulletin says that independent consultants generally are required for one of two functions: to assess a bank’s compliance with legal requirements when there has been a significant violation of the law, fraud, or harm to consumers; or, to oversee restitution for the violation of consumer protection laws. Consultants also may be required to help banks correct operational or management deficiencies, the OCC notes, but these engagements are governed by the recently issued OCC 2013-29, Third-Party Relationships: Risk Management Guidance (see Banking and Finance Law Daily, Oct. 31, 2013).

Assessing need for consultant. The OCC’s main concern in requiring a bank to use an independent consultant is the need for independent judgment and expertise. The bulletin notes seven specific factors the agency will consider, including the severity of the violations and the resulting harm, the ability of the bank staff and management to correct the violations without assistance, corrective actions that already have been taken, and the importance of the bank function where corrective action or remediation is needed.

In the past, these considerations have led the OCC to require banks to use independent consultants to address Bank Secrecy Act compliance failures, correct failures to file Suspicious Activity Reports or Currency Transaction Reports, rectify violations of consumer protection laws, or perform audits of bank books and records. The regulatory agencies required the use of independent consultants to oversee financial institution compliance with the Independent Foreclosure Review process that was intended to implement the settlement with mortgage foreclosures, and that effort has come in for substantial criticism.

Agency review of proposed consultant. If a bank is ordered to hire an independent consultant, that consultant will be subject to OCC approval, in the form of a “determination of supervisory no objection,” the bulletin says. The bank will be required to gather significant information about the consultant it proposes to hire and to submit that information to the OCC for review. This review will consider a number of factors, but those relating to the consultant’s independence are given the most attention by the bulletin.

A consultant’s work must be performed with “a high level of objectivity” and free from “any potential bias,” the bulletin says. The OCC makes clear a particular concern over conflicts of interest. A direct conflict, such as the consultant’s prior review of the transactions, policies, or procedures that are the subject of the enforcement action, will result in the disapproval of the bank’s selection.

Other factors that could reflect on whether an actual or potential conflict of interest poses a problem include:

  • the scope and value of other contracts the consultant has with the bank;

  • special expertise of the consultant compared to the abilities of other available consultants;

  • how potential or apparent conflicts of interest would be mitigated;

  • existing financial, business, or personal relationships between the bank, the consultant, and any individuals associated with either of them; and

  • the prior employment by the bank of current employees of the consultant.

Scope of consultant’s task. The OCC not only will review the hiring of a consultant, it will review and approve the proposed contract and work plan to ensure that the issues in the enforcement action will be addressed, the bulletin says. This contract must provide that the OCC will have access to all of the consultant’s work and that the OCC will resolve any disputes between the bank and the consultant.

Oversight of work. The agency’s authority to supervise the bank and the bank’s compliance with the enforcement order gives it the authority to oversee the consultant’s work as well, the bulletin asserts. Depending on a number of relevant factors, this could extend to frequent monitoring of the work by the agency, periodic reports, and significant interactions between the agency, the consultant, and the bank’s staff.

Overseeing the consultant’s work includes examining all of the consultant’s documentation and also the final report, the bulletin says. If the OCC is not satisfied with the consultant’s work, it can direct the bank to take appropriate steps, which can include modifying the agreement or ending the engagement.

Senator Brown’s comments. Earlier this year, Sen. Sherrod Brown (D-Ohio), who is Chairman of the Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection, asked the Federal Reserve Board and OCC to establish standards for the use of independent consultants (see Banking and Finance Law Daily, June 24, 2013). Responding to testimony at an April subcommittee hearing at which witnesses from the two regulators said no formal standards existed, Brown asserted that without written standards it was “impossible to assure the integrity of a system that relies upon consultants paid by banks to report on their regulatory compliance.”

In response to the OCC’s announced standards, Brown said that vigorous enforcement still would be necessary to ensure that consultants serve the public, not the banks that hire them.

MainStory: TopStory EnforcementActions

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