As we previously reported here, President Obama has proposed a broad overhaul of the federal financial regulatory system. The proposed reforms if adopted by Congress would have far-reaching impacts upon the U.S. financial system, including new regulation of hedge funds, over-the-counter derivatives, rating agencies and securitizations and enhanced regulation of banks, investment banks and bank holding companies. Insurance and reinsurance companies and their parent companies that previously were not subject to federal regulation would, under the new regulatory structure, for the first time be subject to federal oversight.
A new body, the Financial Services Oversight Council, composed of the Secretary of the Treasury, Chairmen of the Federal Reserve Board, FDIC, SEC and the Commodity Futures Trading Commission, and the Directors of the new National Bank Supervisor, the new Consumer Financial Protection Agency described below, and the Federal Housing Finance Authority, would coordinate financial services regulation and oversight. Notably, since the proposal does not establish any separate federal insurance regulator, no representative to the Council would have a specific insurance or reinsurance regulatory portfolio.
In addition to bank holding companies, the Federal Reserve Board would be given authority over all financial services firms that could pose a threat to financial stability if they fail (“Tier 1 FHCs”). Thus, an insurance holding company, whose size, leverage and interconnectedness is deemed sufficient to create such a threat, would find its activities, capital and leverage subject to federal regulation, while its insurance subsidiaries remain subject to state regulation. The reform proposals do not specifically recommend establishment of federally chartered insurers.
In addition, the Federal Reserve Board would be given authority to require periodic reporting from all U.S. financial services firms above a certain size to enable it to identify firms that may be Tier 1 FHCs. Accordingly, many insurance and reinsurance holding companies could expect to have federal reporting obligations, even if they were not classified as Tier 1 FHCs.
A new Office of National Insurance within the Treasury Department would be established to gather information, coordinate policy and negotiate international agreements. However, this Office would not appear to have any regulatory authority over the insurance industry.As reported previously here, Frank Nutter, President of the RAA, suggested in testimony before the United States Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises that regulation of the impact of insurers and reinsurers on systemic risk should be accompanied by authorization of federally chartered reinsurers and/or insurers.
A new Consumer Financial Protection Agency would be created to establish standards and disclosures in connection with the sale of consumer financial services products. While the proposed reforms do not reference insurance products as included within this new Agency’s authority, elsewhere in the proposals insurance companies are clearly considered to be financial services firms.
The full impact of the reform proposals on the insurance and reinsurance industry will likely become clearer in coming months as Congress takes up the President’s overhaul recommendations.