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The Importance of Independent Consultants

Posted by Bobbe Sigler on Thu, May 08, 2014

Running your bank, you are thinking things are clipping along fairly well, maybe there are a few problems, but hey, who didn’t have problems during the “Great Recession”? Now your recovery is progressing nicely and you get an order or some other requirement to fulfill concerning some of the endless new regulations that are comingconsulting images out of Washington, D.C., Who is going to help you solve this problem? And help you get and stay compliant? The regulators have a few thoughts on using consultants we believe will help you…

An independent consultant can play a valuable role in assisting a bank’s management and board of directors in correcting significant violations of law, fraud, or harm to consumers. It is the policy of bank regulators to carefully consider whether to require an independent consultant in these cases and to evaluate the consultant’s independence, capacity, resources, and expertise and to monitor the consultant’s performance. This is a critical area when a national bank, federal savings bank, or federal savings association is instructed to employ independent consultants as part of an enforcement action to address significant violations of law, fraud, or harm to consumers.

The bank regulators evaluate the bank’s assessment of the independence of the consultant to establish that the consultant can perform its work with a high level of objectivity such that the results of the engagement are free of any potential bias and that the work is based on the consultant’s own independent and expert judgment. Any direct conflicts or facts that call into question the independent consultant’s integrity will cause the disqualification of the consultant. Examples of such direct conflicts include the use of a consultant that has previously reviewed the transactions that are to be evaluated in the current review or that has previously assessed the specific policies and procedures related to the violations or practices at issue. In addition to a direct conflict of interest, a bank should consider whether there is the potential for an appearance of a conflict of interest such that the consultant’s objectivity could be unduly influenced indirectly.

In particular, the Comptroller of the Currency (“OCC”) has used its enforcement authority to require banks to retain independent consultants in a significant number of cases and for a variety of purposes. For example, as part of enforcement actions, the OCC has required banks to retain independent consultants to assess the banks’ compliance with legal requirements in cases involving material violations of law. The OCC also has required the use of independent consultants when banks are obligated to provide restitution for violations of consumer protection statutes. The OCC has ordered banks of all sizes to retain independent consultants to

  • Address significant deficiencies with banks’ programs related to compliance with Bank Secrecy Act and anti-money laundering laws and regulations (BSA), including reviews of banks’ BSA staffing, risk assessment, and internal controls. The OCC has also ordered reviews by independent consultants of the adequacy of actions already taken by banks to address deficiencies in the BSA programs.
  • Review transaction activity to determine whether banks must file suspicious activity reports (SAR), whether SARs filed by banks need to be corrected or amended to meet regulatory requirements, or whether additional SARs should be filed to reflect continuing suspicious activity. The OCC has ordered similar reviews by independent consultants of banks’ currency transaction reporting.
  • Address significant consumer law violations, including violations of section 5 of the Federal Trade Commission Act regarding unfair or deceptive practices. Banks have also been required to hire independent consultants to identify affected consumers, monitor payments to such consumers, and provide written reports evaluating compliance with remedial provisions in enforcement actions.
  • Perform forensic audits in cases where the OCC has concerns about widespread fraud or systemic irregularities in banks’ books and records.

In addition, banking regulators have required banks to retain independent consultants to provide expertise needed to correct operational and management deficiencies rather than to address significant violations of law, fraud, or harm to consumers. By retaining consultants to perform these “functional” engagements, banks gain the additional knowledge, experience, and resources required to address deficiencies identified through the supervisory process. These engagements have been particularly valuable for community banks that may lack the necessary expertise and resources to correct the problems on their own.

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

  • Scope and volume of other contracts or services provided by the independent consultant to the bank. Specialized expertise of the consultant and availability of other consultants,
  • Proposed mitigating factors to address any potential conflict or appearance of conflict.
  • 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.
It is important to remember that no single factor determines the outcome of the regulatory acceptance of a bank’s selection of consultant. It is all the factors collectively that are evaluated with the goal of ensuring that the services performed by the consultant, including its findings and recommendations, are expert and free of bias.

Topics: Great Recession, Bank Regulators, Independent Consultants

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BankNotes© is published by De Novo Strategy as a service to clients and other friends. The information contained in this publication should not be construed as legal, accounting, or investment advice. Should further analysis or explanation of the subject matter be required, please contact De Novo Strategy at