The issue of accountability is a core tenet of the public’s view of fairness. Holding the right people accountable for their actions is a foundational objective of our justice system, and not achieving that objective can have serious consequences. Perceptions of accountability can be a key driver in elections. Perceptions of fairness, or lack thereof, can lead to significant social movements and changes in national, and in some cases, global policy.

Banking regulators are often thrust into the forefront of decisions regarding accountability, ferreting out the root cause of problems and the individuals responsible, and determining if a problem is idiosyncratic to one institution or systemic to the entire industry.

The Trump administration is currently endeavoring to review regulation to ensure that fairness, costs and benefits are all properly aligned. It is worthwhile for that review to include issues around accountability — how regulators identify the persons or institutions responsible for problems and how parties deemed responsible are penalized. Policymakers have made significant progress in the assigning of regulatory accountability, but more work is necessary.

Over the past six years, there were two significant changes in financial industry accountability for breaches of law or regulation. The first is the level of fines and penalties levied against institutions increased dramatically during that time frame, frequently exceeding $1 billion for a single infraction for the largest banks. For the mortgage foreclosure problems that arose out of the financial crisis, the 19 largest banks incurred fines and penalties that exceeded $150 billion, in excess of 10% of their cumulative capital. This is in addition to tens of billions in losses incurred on defaulted mortgages and additional billions spent to fix operational problems and comply with new regulations.

But regulators soon recognized that fines, penalties and litigation costs were becoming a significant drain on financial institutions’ financial results, even hampering an institution’s safety and soundness. Restitution to aggrieved customers was viewed as both critical and sacrosanct. However, there was a longstanding concern related to fines and penalties: Were regulators simply punishing innocent shareholders and employees, many of whom had already suffered investment or job losses, or both, as a direct result of malfeasance by certain individuals or small groups of individuals?

Should we not be holding truly culpable individuals more accountable versus hyperinflated punishment for institutions?

Thus, the second significant change in accountability was holding individuals responsible for gross negligence or individual malfeasance. As a result of changes in proposed compensation rules under the Dodd-Frank Act, banks were required to implement deferred compensation and make it subject to clawback in the event of the later discovery of bad behavior beyond normal errors or mistakes in judgment. Individuals could now be held more accountable for severe negligence or unlawful or unethical behavior. The industry responded fairly swiftly, with boards taking actions well ahead of those proposed rules being finalized at the very end of 2016.

JPMorgan Chase reported that slightly over $100 million of compensation was revoked by its board of directors following an internal investigation into the London Whale investment scandal in 2012. Dismissals, financial clawbacks and regulator-imposed bans on individual traders working in the industry resulted from banks being accused of collusion in foreign exchange markets. Similar consequences were felt by those who allegedly colluded in manipulating benchmark Libor rates. Wells Fargo, while criticized for delays in action, has reported clawbacks cumulatively greater than $180 million related to executives involved in the bank’s recent sales practices scandal. In all cases, senior executives or responsible individuals were not only dismissed, but also suffered material financial harm. In some cases, their ability to be re-employed in the industry was also terminated.

These advancements in holding responsible individuals accountable should be viewed positively, not only as a more just assignment of past blame, but as a real and more significant deterrent against future bad behavior. This trend should relieve the need to assess overly inflated fines and penalties against institutions. This would seem to be a win-win for accountability.

But more steps are needed to ensure that punishments meet the crime and accountability is assigned correctly. It is not clear that an optimal solution will be achieved without further changes in regulatory practices.

The same factors that drove the hyperinflated fines and penalties against institutions in recent history remain in place. The U.S. still has the most fragmented and overlapping financial regulatory structure of any developed country in the world. That structure results in institutions often facing double, triple and even quadruple jeopardy from multiple agencies for a single infraction. Independent agencies assess penalties using internal “scoring models” as if they were the sole arbiter of justice. With three, four and sometimes five agencies taking action for a single offense, fines and penalties can quickly become hyperinflated. Institutions as well as individuals should be held to account for bad behavior, but principles of fairness dictate that actions should be reasonable and proportional.

I am doubtful that there is sufficient political will to achieve any meaningful reorganization or consolidation of overlapping agency jurisdictions to address the root cause. But perhaps regulators — coordinating through the Treasury Department or the Financial Stability Oversight Council — that are targeting the same institution’s practices can come to an interagency agreement either to assess one global penalty agreed by all affected agencies or to defer to a single lead agency to determine the appropriate penalty for each infraction, with other agencies’ penalties subsumed by the lead. The former is more difficult to operationalize while the latter will incur the agencies’ pushback against any infringement of their independent status. However, agencies should be strongly encouraged to agree to a more balanced approach, particularly given advancements in individual accountability. “Independence” should not be an excuse for unfair or unbalanced acts by regulators against innocent bystanders.

There has been considerable progress made in recent years to hold responsible individuals accountable for bad behavior. In their zeal to rebalance regulation, Congress and the current administration should not materially alter deferred-compensation and clawback provisions. Those provisions can ensure a more equitable distribution of accountability and serve as a meaningful deterrent. But with those provisions in place, it is time to go even further and strike an even better balance with regard to the cumulative actions of regulators against institutions, their shareholders and their innocent employees.

Martin Pfinsgraff

Martin Pfinsgraff

Martin Pfinsgraff is former senior deputy comptroller for large-bank supervision at the Office of the Comptroller of the Currency. He is the founder and executive director of MP Alpha Advisory.

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