Will Regulators’ Public Shaming Blunt Innovation?

The respective online “walls of shame” that U.S. and U.K. regulators have proposed to erect — spotlighting companies under various investigations — may have a chilling effect on competition and innovation.

As has been reported in recent days, the Consumer Financial Protection Bureau (CFPB) issued a final rule to establish a registry of nonbank financial companies that have broken consumer laws and are subject to federal, state or local government or court orders.

The CFPB initially proposed the creation of the online registry at the end of 2022. And this week’s introduction of the registry is designed to help a broad swath of law enforcement agencies better understand fraudsters, and to assist investors, creditors, business partners and members of the public in conducting due diligence.

Under the final rule issued by the CFPB, covered nonbank companies must register with the CFPB when they have been caught violating consumer law and must provide an attestation from a senior executive that the company follows any relevant orders.

The Ripple Effects

The ripple effect that may blossom in the wake of the final rule may be gleaned by what’s happening in the U.K.

Earlier this year, the Financial Conduct Authority had said it planned to publicly name companies under investigation, which has now prompted widespread criticism, as detailed in the media, including a report by Reuters. The chief criticisms revolve around the fact that the announcement of the investigations would take place — with an explicit naming of the company being investigated — before evidence gathering is finalized. As some financial industry trade organizations have noted, 65% of investigations are ultimately closed with no actions recommended against the firms.

Cost-Benefit Considerations

At this writing, there have yet to be cost-benefit analyses offered up on the part of the regulators as to just how the expanded disclosures will impact and improve current procedures — and what the impact might be, ultimately, to firms and their end customers.

In a letter to the CFPB last year, the U.S. Chamber of Commerce stated that, with the proposed registry, “in publicizing information that is already public, the Proposed Rule would not help consumers. In contrast, the Proposed Rule would impose very real costs upon consumer financial services companies that are subject to its requirements, including by driving up compliance costs through an unlawful executive attestation requirement … specifically, the contemplated public disclosures will lack critical context, particularly when a final order does not disclose potential weaknesses in the agency’s case, the reasons the company chose to enter a settlement agreement and whether the company admitted fault.”

The registry might also, the letter argues, discourage settlements, due to “negative consequences” from those settlements, in turn prolonging litigation.

Prolonged litigation, of course, means that there’s less money to spend on innovation, we’d note, and the reputational damage that occurs during ongoing investigations may result in customer churn. The debate over naming and shaming will continue, both here and across the pond.