I’ve worked on compliance issues from all sides of the financial ecosystem. I’ve drafted laws in both houses of Congress. I’ve overseen the financial services industry as a federal financial regulator. I have managed legal/compliance operations for multiple start-ups. If anybody should have a nuanced, balanced perspective on compliance, it should be me.
Yet, I marvel at how easy it was to put blinders on and discount the perspective of industry when I was a regulator, and to discount the perspective of regulators when building a business. I call this tendency to embrace the views and culture of one’s current compliance role – compliance partisanship.
Maintaining a balanced perspective on compliance is really difficult. One has to fight the natural tendency to take sides and fight for “your team.” Have you ever played a pick-up sports game, switched sides, and suddenly started arguing with players who previously were your teammates?
Work environments tend to exacerbate our cognitive biases. Regulators go to the office every day with other regulators. Business compliance folks work side-by-side with business compliance colleagues. If you spend your day with people who share the same mission and organizational culture, it creates an echo chamber. Cass Sunstein, the famed administrative law scholar, published a marvelous book, Going to Extremes: How Like Minds Unite and Divide, which investigates how people with similar views tend to reinforce each others’ prejudices.
He notes that juries are systematically “more severe in their awards than the median juror.” Federal judicial appellate panels, which have three judges, tend to have more extreme liberal or conservative positions than expected when they contain all Democratic or all Republican judges. Investors who slightly favor real estate investments tend to increase their zeal for real estate after discussing the topic with like minded investors.
Here’s an illustrative personal story. When I first joined the Consumer Financial Protection Bureau (CFPB) in 2011, I was a program manager on the Markets team. Markets is a division unique to the CFPB. It houses industry experts who act as a bridge between industry and the Bureau. For Markets, I wrote a major paper on credit reporting (see Key Dimensions and Processes in the US Credit Reporting System).
Getting this report published caused a turf war with other parts of the CFPB, particularly with Supervision and Enforcement. They feared that the paper could muddy their efforts at industry oversight. At the time, I thought Supervision simply didn’t get the importance of shedding public light on a poorly understood industry.
Several years later, I joined the Supervision office to help build out the CFPB’s first nationwide program to supervise credit bureaus. I then saw the Markets office as an obstacle to critical work I was pursuing. As the old adage states, “where you stand depends on where you sit.”
So why should we push back against Compliance Partisanship. First, if you don’t try to appreciate and understand the perspective of your counterpart in the compliance ecosystem, valuable feedback is lost. Business gurus commonly stress the importance of listening to customers. Well, one can view the press releases, advisory opinions and rules of the CFPB and other financial regulators as aggregated versions of customer feedback.
I truly believe that businesses who carefully listen to the issues regulators advance build better, more successful products with happier customers. Government agencies are equally culpable. Regulators don’t do enough to understand the practical exigencies and economics of running businesses. The CFPB’s very mission includes a mandate to support “innovation,” so it should do a better job of understanding how innovation works.
Here’s my ask to business and regulatory compliance professionals. Be mindful of your compliance partisanship. And actually try to listen to the other side. You’ll be surprised at what you learn.
