Building a regulator from scratch, an interview with Raj Date, former Deputy Director of the CFPB
This week in our Mindset series, we interviewed Raj Date who was the first-ever Deputy Director of the Consumer Financial Protection Bureau. We wanted to interview Raj because he has a unique perspective having started his career in consulting at McKinsey and on Wall Street, then moving into the regulatory side. He is now Managing Partner of Fenway Summer, an advisory and investment firm focused on financial services and fintech. He is also an advisor or director to leading companies in the space including Circle, Customers Bank, and Tilia.
In this interview we get Raj’s unique perspective on building crypto/emerging tech companies in a regulated environment and his thoughts on what should be the role of a regulator as well as what he is currently optimistic about. You can follow him on Twitter here: @rajdate.
The Interview
The Axial Studio
Can you start by telling us what you wanted to be when you were growing up? And how did you come to be a regulator?
Raj Date
Well, it never occurred to me that I wouldn't be a doctor. But I had a rebellious streak as I entered my teenage years and instead of going pre-med, I was such a rebel that I became an engineer. But even when I was in the engineering program at Cal, I was interested in the idea of the practice of law and how institutions work within a democracy and within the fabric of the legal system. That led me to go to law school and then I sort of bumbled into financial services. The foray into the regulatory role was more or less by accident. I left Wall Street in the beginning of 2009 — I had spent the crisis as the senior investment banker at Deutsche charged with large cap banks, and it was quite a time. When I left the Street, I started down a four-year random walk through public policy. I started a think tank - which was a ridiculous idea, but the timing could not have been better. The only things that I knew about were bank balance sheets, capital markets, consumer credit — and all that stuff happened to be relevant at the beginning of 2009. So it's through that think tank that I then got to know at the time the brand new Obama economic policy team and Elizabeth Warren - whose daughter had the office next to mine at McKinsey in Los Angeles like 15 years prior.
So all these oddly serendipitous things resulted in me coming down after Dodd-Frank was signed to help put together the CFPB and things snowballed from there. When Warren left to run for the Senate, I took her role as acting head of the CFPB and stayed on as the deputy director for about a year.
The Axial Studio
When you think about what you achieved during that tenure, is there a particular thing that you are most proud of?
Raj Date
For me, I grew up leading teams of five or ten people at McKinsey, Capital One and Wall Street. As a practical matter that kind of work gets done in small teams. When I got to the Treasury and the creation of the CFPB, the implementation team was probably 14 people and by the time I left there were 1,400. Leading an organization that size just requires different muscles and frankly ones that I did not even know that I had. I was proud of being able to help articulate a day zero strategy and a set of values for the agency that was about 2 things:
Delivering tangible value to American households
Building a great institution.
The Axial Studio
And you had the opportunity while creating an agency to think about regulation from first principles. In your view, what would you say is the fundamental purpose of regulation?
Raj Date
I think there's kind of sort of two sets of goals fundamentally:
One is to safeguard the system from catastrophic risk, that is rather idiosyncratic and for which there is no natural market participant who effectively has the incentives and wherewithal to be able to do so. For example, the entire notion of the prudential regulation of depository institutions is grounded in the fact that there actually is great benefit to the economy of the maturity transformation that is enabled by insured banks. And you can't really have an effective insurance scheme that doesn't rely on the sovereign. And so, the sovereign should try to make sure that banks aren't habitually suffering from runs and otherwise going out of business.
The second goal is the maintenance of a competitive marketplace in which needed services are built, provided, efficiently priced, and iterated on over time. When markets aren't effective it's typically because of one of a handful problems — whopping market asymmetry, principal agent problems, or conduct arbitrage — and it's really with respect to those problems that the CFPB was focused. How do you prevent bad actors with bad conduct from distorting a marketplace that otherwise in the main should be able to provide goods and services to customers that they are willing to pay for and derive value from?
The Axial Studio
What is the one thing you think people most misunderstand about regulation?
Raj Date
From the outside, it’s easy to miss that unless you’re careful about it and intentionally fight to combat it - there is a natural tendency for regulated entities to fall into a certain sort of sclerosis of decision-making that tends to create risk aversion.
And unless you're careful and intentional about it, regulatory institutions themselves will take on the cultural attributes of their regulated charges. That is to say, you end up with regulatory agencies themselves ending up sort of sclerotic in terms of their embracing of new things and thinking about things differently. That was one of the drivers for developing Project Catalyst — which really had the purpose of forcing the CFPB to take a certain amount of its bandwidth and focus on new actors and new business models.
Most new things fail. So if you only have a finite number of great people, do you want a bunch of them focused on some pie in the sky idea that might not ever amount to anything, or do you want them working on some current disaster in the actual industry? Of course the latter and not the former, but if you do that, you will absolutely be continually surprised by every new development in the market and you will never catch up. And it's not because people are dumb or lazy, that's the natural institutional inertia that is quite sensible from a resource allocation point of view, but really does lead you to some strategic cul-de-sacs.
The Axial Studio
People sometimes talk about regulation not keeping up with the pace of innovation. In your mind, is that a feature or a flaw? And how should regulators confront regulation today, particularly in the blockchain space?
Raj Date
There's a couple of things that are easy to get fooled by. For example, some in the crypto community complain incessantly about ambiguity in securities laws. And yes, in some cases there is ambiguity, but in lots of others it is not so much the case that there's ambiguity, so much as it's unambiguous and they unambiguously don't like the answer. Now obviously, there are better ways to go about how we think about regulating certain things like the stablecoin industry. I have a horse in this particular race, as I was an early investor in Circle and still remain on the board. But I think that's an example of where we can and should set out by legislation a more purpose-built framework.
Broadening out from just crypto applications, the main thing to be attentive to is to make sure that our regulatory approaches are neither encouraging, nor artificially preventing, new ideas to compete openly in the marketplace. For example, just copying and pasting constraints that apply to insured banks on the one hand, to institutions that do not have or are not required to be backed up by it, will have the effect of just creating a massive incumbency bias within the sector. Idon't know why a sensible person would want to do that. So being responsive and attentive to not artificially kind of creating impediments or artificially putting a thumb on the scales is something you have to do intentionally.
The Axial Studio
What advice do you have for innovators who are reading this who want to build companies in a compliant manner and are trying to navigate the regulatory landscape we have today?
Raj Date
A few pieces of advice. One is to think about a compliance program that iterates with the business. There are some cases where you absolutely positively need to have zero fault tolerances, but most areas are not like that. Getting out of the gate with something that is sufficiently robust to be able to meet your obligations and also sufficiently flexible so that you can up-tier its capabilities over time as the business grows is important to simultaneously meet regulatory obligations, but also make sure they don’t become an artificial decelerant to progress while you’re testing things in the marketplace.
A second observation is that the industry we live in has an unbelievably complicated architecture of rules. It is tempting to say “well that's so complex that I'm gonna hire somebody to worry about all of that stuff.” So they hire a head of compliance and it becomes that solely person's domain. This is a recipe for disaster because operating nimbly within a regulated environment means that those constraints have to be part of the worldview of the CEO and the people who run lines of businesses. It is not something that can be just sort of outsourced entirely to a horizontal function.
The Axial Studio
Final question, what are you most optimistic about right now?
Raj Date
It might not feel like it in this exact moment in the world of venture-backed companies, but we are going to get to a place where a lot of talent and energy is going to get unlocked from business models that just don't really work, but that fact has been disguised by a seemingly never-ending spigot of late-stage venture money. That spigot has not been altogether shut, but it has rather dramatically narrowed. That means it will be painful for a number of investors and founders over the next couple of years. But that also means that a bunch of creative energy is going to get unlocked. When that happens that's going to be a pretty interesting time.
 |
|