Banking and Finance Law Daily Wrap Up, ENFORCEMENT ACTIONS—Chopra speaks at Pennsylvania law school about repeat offenders in the financial sector, (Mar 29, 2022)

By Steven D. Cole, J.D.

The speech centered on the need for regulators to use more than just fines in order to deter the recidivist problem among large institutions.

Consumer Financial Protection Bureau Director Rohit Chopra delivered the 2022 Distinguished Lecture on Regulation at the University of Pennsylvania Law School on March 28, 2022. His speech, titled “Reining in Repeat Offenders,” highlighted the problem of corporate recidivism and discussed some of the non-monetary, structural remedies that regulatory agencies might seek in an effort to deter such behavior. The event was hosted by the Penn Program on Regulation and co-sponsored by The Regulatory Review.

Recidivism in the financial sector. “I want to address a vexing problem facing regulators across sectors of the economy,” remarked Chopra. “How do we stop large dominant firms from violating the law over and over again with seeming impunity? Corporate recidivism has become normalized and calculated as the cost of doing business; the result is a rinse-repeat cycle that dilutes legal standards and undermines the promise of the financial sector and the entire market system.” Chopra stated that while financial penalties can threaten the viability of small firms, many large institutions are not deterred by such measures, having determined that threats of enforcement either do not often materialize or their punitive effects pale in comparison to the financial gains that result from continuing to break the law.

Examples. Chopra cited a few examples of large firms in the financial sector that have repeatedly broken the law but faced few meaningful consequences. He noted that the CFPB has taken action against Citigroup (five times), JPMorgan Chase (four times), Wells Fargo (four times), American Express (three times), and Discover (three times). “Repeat offenses—whether it’s for the exact same offense or more malfeasance in different business lines—is par for the course for many dominant firms,” he commented. Even though the CFPB has required large corporate recidivists to provide more than $3 billion in consumer redress, recidivism in the financial sector remains an ongoing problem.

Facebook. Chopra then transitioned into a more detailed synopsis of the FTC’s enforcement action against Facebook for the tech giant’s deceptive conduct regarding the privacy of its consumers’ personal information, focusing on Facebook’s flagrant and routine violations of the terms of the government’s orders against it. “In the case of Facebook, though the company was already subject to an FTC order, and violations of an order were subject to significant consequences under existing law,” Chopra explained, “for many observers, the FTC simply seemed to be watching from the sidelines as its orders were being openly flouted.” Eventually, Facebook entered into a settlement in which it paid a $5 billion fine. Chopra noted that he voted against the settlement since it imposed no meaningful changes to the company’s structure or financial incentives, which had led to the violations. “It was clear to many that the company paid off the FTC to minimize scrutiny of its top executives’ role in the order violations,” Chopra stated.

Suggestions for financial regulators. Citing the Facebook case and others, Chopra stressed the need to learn from these lessons and to “think about not only how to halt recidivism, but also how to treat small and big firms equally when it comes to enforcement actions.”

To this end, he provided five specific suggestions for financial regulatory enforcement reforms—limitations which many government regulators have sought to impose upon small businesses, but for which regulators have shown less willingness to implement with larger and more powerful firms. He suggested: (1) imposing caps on size or growth so as to curb incentives to break the law and boost incentives for compliance; (2) banning certain types of business practices to stop both the immediate harm and future violations; (3) divesting companies of certain product lines so that they can operate legally; (4) placing limitations on leverage or requirements to raise equity capital in order to mitigate the chances of a company becoming over-leveraged; and (5) revoking certain government-granted privileges when misconducts occur.

Chopra also emphasized the need for individual liability. Operators of small firms legitimately fear imprisonment, but officers in large institutions have rarely seen jail time for their part in recurring unlawful behavior. Paying closer attention to executive compensation incentives is also needed, noted Chopra, suggesting that clawbacks, forfeitures, and other changes to executive compensation can serve as important remedies for restoring law and order.

Closing remarks. “We must forcefully address repeat lawbreakers to alter company behavior and ensure companies realize it is cheaper, and better for their bottom line, to obey the law than to break it,” stressed Chopra. “In the end, large dominant firms should be subject to the same consequences of enforcement actions as small firms. We need to end double-standard enforcement that exists. We need to move away from just monetary penalties and consider an arsenal of options that really work to stop repeat offenses.”

RegulatoryActivity: CFPB CrimesOffenses EnforcementActions FinancialStability OversightInvestigations