Wall Street's Accountability Gap

There is still an accountability gap on Wall Street.

It has been more than seven years since the 2008 financial crash. Yet, in the wake of the worst financial crisis since the Great Depression, we are still dealing with the same type of reckless and often illegal conduct that triggered a massive economic meltdown.

We have continued to see a parade of wrongdoing—from foreclosure fraud to foreign exchange manipulation to tax evasion to money laundering. Unfortunately, the list goes on. 

That raises a vital question: Why are some employees on Wall Street so prone to wrongdoing—especially after misconduct in the financial markets contributed to pushing the economy off the cliff? What exactly are we doing wrong as regulators and prosecutors?

Some evidence may be found in a recent report released last month entitled “The Street, the Bull and the Crisis.” The report’s authors surveyed more than 1,200 financial services professionals in the United States and United Kingdom.

The report’s findings are alarming. Despite the fines, regulatory reforms and legislative actions that followed the 2008 collapse, the report says “a culture of integrity has failed to take hold” in financial services. Nearly a quarter of those surveyed “believe it is likely that fellow employees have engaged in illegal or unethical activity in order to gain an edge.” Nearly 1 in 5 people questioned said they believe professionals must sometimes act illegally or unethically to be successful. More than a quarter disputed the notion that the client’s interests come first.

In other words, there is a far too prevalent view that people on Wall Street need to cheat to get ahead.

What’s worse, if bankers look at a number of the recent financial settlements with big financial institutions, they are likely to believe that even if they get caught cheating they will face little to no personal consequences.

Indeed, we almost always see bank settlements where a corporation writes a big check to the government without any individual Wall Street executives held to account.

Real deterrence of future wrongdoing has to mean more than just “corporate” accountability.

It is a little odd when we say that “a corporation has broken the law” or “a corporation engaged in misconduct.” A corporation is a legal fiction. Corporations are made up of people and when there is wrongdoing at an organization, that wrongdoing is caused by people.

Penalties imposed at the corporate level are an important and necessary tool in a regulator’s enforcement tool belt, especially as it relates to organizationwide failures of oversight or compliance.

But we need to go further.

Regulators—and society as a whole—must insist on individual accountability, not just corporate accountability. We need to find and penalize the individuals within an organization who are responsible for purposefully skirting rules and breaking laws. 

Greater individual accountability means that culpable individuals should face real consequences. That may mean suspensions, firings, bonus clawbacks and other types of sanctions. In the most serious cases, bankers should also face the possibility of criminal prosecution and prison.

While DFS does not have authority to bring criminal prosecutions, it has taken a number of actions to expose and penalize misconduct by individual senior executives—including all the way up to the C-suite, when appropriate. For example, DFS required the chief operating officer of France’s largest bank, BNP Paribas, and the chairman of one of the United States’ largest mortgage companies, Ocwen Financial, to step down as part of enforcement actions brought against those companies.

Ultimately, we believe that a greater focus on individual accountability is actually goodfor Wall Street over the long term.

Despite that seemingly dark picture of corporate social responsibility on Wall Street, it is unfair to paint with an overly broad brush. Big financial settlements grab dramatic headlines, but most corporations play by the rules, and most of the people in the financial markets are ethical professionals who work hard to serve their customers.

The question we need to address is how to protect consumers, investors and honest organizations by weeding out bad actors and incentivizing more ethical behavior throughout the world of financial services.

It is important to remember that “Wall Street”—besides being a physical address in lower Manhattan—is a group of thousands and thousands of individual people going about their everyday lives and trying to support their families. And the work they do is vital to New York’s economy.

When you focus more on deterring individuals, we stop sending the message to the world that an entire bank is bad or that the entire financial industry is bad. When bad things happen at banks, it is because some person or persons decided that it was worth it for them to commit a bad act.

Of course, when you are talking about an employee’s reputation, career or even personal liberty, we have to have a very high degree of confidence that we have our facts right, and the action we are taking is just and fair.

But we believe the only serious way to expose—and hopefully deter—bad conduct is for regulators, prosecutors, market actors and our society to insist on a culture where individuals are held accountable.

Benjamin Lawsky is New York State's superintendent of financial services.