Understanding financial reform's impact on PR

By Scott Tangney

The Wall Street and Consumer Protection Act just signed into law contains a sweeping set of rules and standards of unprecedented scope since the Great Depression. Yet the law does more than attempt to protect the economy from systemic risk. It will confront all business — not just financial institutions — with a set of communications challenges unparalleled since Sarbanes-Oxley.

The 2,319-page financial reform act is complex and still unfocused: regulators now will face the task of  translating broad mandates into specific rules. One clear premise, however, permeates the law: that increased government-mandated transparency and public disclosure regarding the financial sector is essential to prevent future abuses. In short, the law saddles management with multiple new communications responsibilities and fresh sources of reputation damage.

To help prepare for this new era, we have briefly outlined key provisions with the greatest PR impact, and then reviewed what communications executives might consider doing now to respond.

Key PR provisions

Bureau of Consumer Financial Protection. This new agency is a centerpiece of the reform act, giving the federal government broad power to write and enforce new rules pertaining to both banks and non-banks. Especially targeted will be "unfair" or "abusive" practices, terms that the American Bankers Association says are "far from clear." The bureau will also step up enforcement against discriminatory lending practice and establish a single national toll-free consumer complaint hotline.

Executive Compensation. Shareholders will have the right to a so-called "Say on Pay" vote as part of the proxy statement — the ability to publicly register disapproval (non-binding on management) regarding executive compensation. Part  of newly required public company disclosure is a requirement that companies provide data comparing their executive compensation with stock performance over the past five years.

Financial Stability Oversight Council. The new agency will include sophisticated economists, lawyers and others charged with identifying the next big problem in the financial  system. The council will have powers to collect and analyze data and responsibility to communicate its findings in periodic public reports as well as in annual testimony to Congress.

Mortgage Reform. The law establishes stiff penalties for lenders that fail to meet the rather vague standard that "institutions insure that borrowers can repay the loans they are sold."

Federal Insurance Office. The insurance industry will be regulated for the first time by a separate federal agency charged with ensuring access to "affordable" insurance products among low- and moderate-income persons. This body will also monitor the industry for systemic risk, similar to the oversight council.

Hedge Fund Regulation. Hedge funds and private equity advisors will be subject to  much stricter regulatory and disclosure requirements.  For the first time, they will be required to register with the SEC and to disclose information about their trades and portfolios. The law will also subject more advisors to state — as opposed to federal — supervision.
 

PR implications and response

Given these and other new realities, where should public relations executives focus their energies in the near term? Here is a short list to consider.

PR Planning for Litigation. Nearly all observers agree that the reform act — particularly the creation of the consumer protection bureau — will significantly increase exposure to litigation.

Banks and others should be engaging in pre-emptive planning now so that its first response to any litigation is not the damaging, deer-in-the-head-lights "no comment." Litigation is always a form of crisis. Has the company prepared clear and succinct public messages about its lending practices? Does it have public spokespersons trained to deliver and defend those messages? Does it understand new media and how to manage its impact? Are internal legal and PR teams prepared to collaborate rather than feud? Does the firm have trusted litigation public relations specialists at its call?

It is important to remember that any lawsuit engages a company simultaneously in the court of law and public opinion. And, as British Petroleum reminds us, public opinion can "convict" a company long before the facts of the case are presented in a formal court of inquiry.

Engaging with Local Communities. Retail banks and insurers will soon find new regulatory agencies closely scrutinizing their sales practices for evidence of discrimination, redlining and other inequities. Not only do companies need to carefully monitor compliance here, but they will be advised to build greater trust within the low- and moderate-income communities they serve. Citigroup, tarnished during the economic crisis, is a good model on this front. The bank has championed neighborhood revitalization, local sponsorship, employee volunteerism, microfinance lending, college scholarships, financial education and a recommitment to mortgage refinancing.

Justifying Fair Executive Compensation. The new law obliges all public companies to take the offensive on this issue. First, we encourage boards to explore provisions in the law that invite compensation committees to engage independent consultants regarding slurry and bonus plans.  If pursued, this decision and the subsequent recommendations should be aggressively promoted with investors and the media.

Second, public relations and investor relations staff will have new responsibilities to interpret mandated disclosures like the compensation v. stock price data cited earlier. Finally, PR executives must recognize that investors armed with "Say on Pay" powers will serve increasingly as de facto evaluation committees for top executives, and that the structure of compensation plans will need to be explained and justified long before proxy time.

Educating Employees. During the shakedown period ahead, when a lack of precedent increases the risk of inadvertent non-compliance, education for agents, advisors, reps and other salespeople is especially crucial. Public relations must play a central role here, working with internal compliance and legal departments to communicate and especially reinforce new operating procedures in persuasive, non-technical language.

Committing to Media Relationships. The data collection and disclosure activities required by the law represent a treasure trove for financial journalists, bloggers and others. As such, it represents a fresh source of potentially damaging news. It will be increasingly important for management to cultivate open and trusting lines of communication with new and traditional media covering their industries.

Crisis Preparedness. The newly created federal oversight council will have an essentially confrontational relationship with financial firm management, given that its primary role is to identify companies or activities within those companies that pose systemic risk to the economy. It has the power, in theory, to force banks to divest practices. In short, this agency by itself poses a new financial firms; crisis preparedness should move forward accordingly.

It is undeniable that financial institutions, and in some cases all public companies, face a new regulatory regime that demands increased transparency, increased disclosure and increased attention to compliance. Each of these issues places public relations professionals front and center as the organizational develops new policies and cultural attributes to respond.

Scott Tangney is Executive Vice President of Financial and Professional Services at Makovsky + Company in New York.