Promontory/NYDFS – Can consulting firms ever be truly independent
17 Sep 2015

Earlier this month, the FT’s Lex column discussed the New York Department of Financial Services’ findings that Promontory Financial, like PwC and Deloitte before it, had agreed to the request of a bank to tone down some of the conclusions of an investigation it had conducted into the bank.

The Promontory saga is the natural conclusion of a system by which banks which are to be investigated are allowed to choose the consultants which will conduct the investigation, and in which the investigating firm is likely to have one eye on the possibility of future audit, legal or consultancy work for the bank concerned. The conflicts of interest thereby created are immediately apparent.

Lex concluded there were two possible solutions: either to accept that consultants are paid by their clients and treat their investigatory work with scepticism accordingly, or to eliminate consultants by paying regulators to conduct investigations themselves. Neither of these proposals are satisfactory.

To suggest that the world should simply accept that reports by supposedly independent consultants are likely to be partial or self-censoring is an affront to the rule of law – in what other walk of life does an accused enjoy the luxury of selecting their inquisitor and then leaning on him to tone down his conclusions?

Meanwhile, regulators the world over would like to do more investigatory work in house but frequently lack the funding, expertise, and scalability called for by investigations which may arise suddenly, consume vast resources, and last for a number of years.

The solution to this conundrum is in two parts. First, it requires a new type of consultancy firm: one which is dedicated to the conduct of regulatory investigations but which does not seek to provide other services to those firms which it investigates and which is willing on accepting an investigatory mandate to sign a non-solicitation agreement to demonstrate its bona fides.

Second, regulators must change the current practice by which firms to be investigated are allowed to choose the consultants who will perform that investigation.  Instead, regulators should either instruct the investigating consultants directly (as agents of the regulator itself) or compel the bank which is to be investigated to appoint independent consultants chosen by the regulator.

If these steps are followed, regulators can relax and allow the independent consultants to carry out their work free from concern about whether next year’s audit contract will be jeopardised by an inconvenient truth in this year’s investigation report.

By Tom Devlin

Tom is a Partner at regulatory investigations specialists Stephen Platt & Associates LLP

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