Change... it’s overdue. The head of the NYDFS, Linda Lacewell, believes there is a transformative energy in the air and it must not be wasted. She speaks to Sarfraz Thind
“The arc of the moral universe is long, but it bends toward justice,” says Linda Lacewell, reciting the quote made famous by Martin Luther King and which President Barack Obama stitched into the White House carpet. “But we must bend it ourselves,” she adds.
Lacewell is referencing the protests against racism that have been happening in the US and around the world – but equally talking about the need for greater social and economic equality that has been highlighted by this year of the pandemic. She says there is now an energy out there demanding change, and it must be used.
“That energy cannot be in vain, it has to be harnessed. It is up to companies, governors and industries who have to capitalise on this energy to generate change.”
Energy is key with Lacewell. An engaging interviewee, the head of the New York State Department of Financial Services (NYDFS), in charge of regulating probably the most important finance centre in the world, is brimful of that classic New York brio that makes things happen.
Earlier in her career, she prosecuted members of the Mafia and took on Enron. While the finance industry may not be quite as bad, it has its own levels of deviancy.
“On one level, rooting out wrongdoers and wrongdoing is the same across the board,” Lacewell says.
Hard work pays off
Lacewell worked a hard route to get where she is. She started off as federal prosecutor for the Eastern district of New York where she roiled and harried Mafiosi, including members of the infamous Gambino family, and sat on the Enron taskforce investigating the biggest fraud in US corporate history at the time.
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That work got her a fair share of news mentions and led to her being appointed as a state prosecutor in Andrew Cuomo’s office when the latter was New York attorney general in 2007. Here, she carried out industry-wide investigations to root out public corruption.
It has been a close relationship between the two. When Cuomo became governor he appointed Lacewell the first state-wide risk officer for New York state, then chief-of-staff and his counsellor and finally, last year, to the position of NYDFS superintendent.
The purview of the DFS is incredibly broad: 1,500 banking institutions with some $2.6trn in assets and more than 1,400 insurance companies with assets of more than $4.7trn. The DFS’s size and complexity would make it equivalent to most national regulators.
So how to deal with this almost incomprehensibly large behemoth? First, take no crap.
“I was once asked why I hired so many former federal prosecutors into DFS,” she says. “Well, they are not going to be intimidated, they will do work without fear or favour. That’s what you want from your regulators: strong and engaged people who will just do the work as work, irrespective of the individual or industry.”
Coming into last year, Lacewell says there were three main challenges she faced: cyber; climate; and protecting consumers, including communities of colour, which have been excluded from the system.
Emphasising a message she delivered at the National Association of Insurance Commissioners’ (NAIC) National Meeting in New York last year, Lacewell says the first of these - cyber - is “the biggest risk to industry or government anywhere”.
And the regulator has been busy in tackling the issue, encouraging better cyber practices to protect both industry and the consumer. The DFS’s 2017 regulation on cybersecurity came into full effect in March last year and was followed by the creation of the cyber security division in May, which is headed by Justin Herring, another former prosecutor from the US Attorney’s office.
"The pace of change of innovation is dramatic"
The aim is to ensure the state’s financial institutions get their cyber risk management practices in order. And the DFS has already been chasing down wrongdoers.
In July, it filed charges against First American Title Insurance Company for exposing hundreds of millions of documents containing sensitive personal information including bank account numbers, mortgage and tax records.
This kind of vigilance will have to continue as technology changes and the financial services industry evolves.
“The pace of change of innovation is dramatic, it is revolutionising our industries,” says Lacewell. “We need to make sure we make it a priority and engage with innovators and entrepreneurs.”
A more important issue for the long-term is climate change. Prior to Lacewell’s arrival the DFS had not been overly quick in tackling climate, but she is trying to redress the balance.
The DFS joined the Sustainable Insurance Forum (a network of insurance supervisors) and the Network for Greening the Financial System, the international coalition of bank supervisors dedicated to addressing climate change during last year’s Climate Week in September. It further hired Nina Chen as its first-ever sustainability and climate initiatives director in May.
And this year’s Climate Week promises to hold some announcements too, with the DFS due to reveal two new initiatives.
"The US is behind on climate change initiatives"
Introducing climate regulation in the US has not been helped by the federal government’s obstinacy over the issue.
“We have an administration in the White House that denies global warming and tore up the Paris global accord as one of its first acts in office,” says Lacewell. “The US is behind on climate change initiatives.”
Lacewell has, instead, taken her cues from European regulators. She went on a trip to Europe last year, speaking to banking and insurance rulemakers to find out how they are doing things.
“They walked us through it, especially the Bank of England, [talking about] how they had approached climate change and how they’d engaged industry and the steps taken. It reinforced to me as regulator that it was possible to engage on this issue.”
Reaching out across the Atlantic is a show of global co-operation that signals intent by the DFS.
In turn, Europe might be looking at the US for its response to another of the most important issues of the year, and indeed that which has become the signal movement of our times.
Since the death of George Floyd, the cry for racial equality has grown louder and bolder. The financial sector has a responsibility to pull its weight here.
“If people of colour had been more included in the first place, we would be a stronger system,” says Lacewell. “But they start from a position of financial weakness because they have been trodden down instead of helped, so they don’t have the resilience. We need to be resilient from the first to the last, to be a stronger system.”
Lacewell points to the example of life insurance and how it can reinforce disparities. Middle class families take for granted they have life insurance that will be handed down to their children as a means of generational wealth transfer.
"If people of colour had been more included in the first place, we would be a stronger system"
This does not happen for black or Hispanic families, which may not be able to afford life insurance, or have it included in their job perks, which in turn is driving further generations of impoverishment.
“How do you further life insurance for families of colour that allows them to have transfer of wealth generationally?” she asks.
Pre-pandemic, Lacewell says she didn’t see enough being done on the issue by industry, with some exceptions. But the pandemic and the crises including the protests since George Floyd's death seem to have motivated people.
She has held conversations with captains of industry and says they are "extremely focused”. The drive to action is being helped by regulators at the NAIC, whom she praises for moving on the issue.
“North, south, west, Midwest, commissioners are all speaking out and saying we need to do something in this space. This is really put a tremendous spotlight on the plight of those who are both excluded from opportunities in the financial system and are barraged with the worst kind of garbage financial products and services that are predatory and drive them further into debt.”
It needs to be a sustained effort, however. To that end the DFS is building a state-wide office of financial inclusion, “as a service to the entire state.”
The federal clash
Lacewell’s drive towards social equality and justice has not always been aided by the federal government. Indeed, the DFS has been involved in some heated tussles with federal agencies in recent times.
Earlier this month, it opposed the Office of the Comptroller of the Currency’s proposed "true lender" rule which would enable predatory lenders to make loans with triple-digit interest rates, well beyond those normally permitted by New York law.
"I hope I will continue to improve lives of people"
Last year, Lacewell created the Consumer Protection and Financial Enforcement Division, to fill the void in consumer protection that opened when the federal government took a hatchet to the Consumer Financial Protection Bureau.
Given the election in November, one wonders if things may change with a political shift next year.
Being “a fully neutral agency”, Lacewell says she cannot comment on the elections. But, irrespective of the outcome, she says she hopes to be serving the public and bending that arc towards justice for a while to come.
“I hope I will continue to improve lives of people,” she says. “I understand the imperative to meet earnings targets and generate profits, [but] I don’t believe everything is about shareholders. If this pandemic doesn’t show us how connected we all are, then I don’t know what [will].”
It is a lofty philosophy, and one hopes someday it will be realised.