New York Governor Andrew Cuomo released a bill on February 1, as part of his 2011- 2012 budget, proposing to merge the State’s Insurance and Banking Departments. On March 31, 2011, the Governor signed the budget into law, including the final version of the merger legislation, entitled the Financial Services Law (the FSL), which, effective October 2011, will consolidate the Insurance and Banking Departments into a new, single agency to be known as the Department of Financial Services (the DFS). This article describes some of the provisions of the adopted legislation most likely to affect individual entities or the industry as a whole.

Establishment of the DFS and the DFS Superintendent

Effective October 2011, the FSL will consolidate the existing Insurance and Banking Departments, as well as the enforcement powers provided under existing insurance, banking and financial services law, into and under the DFS.1 It will create a new office of the Superintendent of the DFS (the DFS Superintendent) to assume the responsibilities of the existing insurance and banking superintendents, as well as new and heightened oversight responsibilities with respect to financial products and services. For example, the DFS Superintendent will have the authority to issue regulations and guidance with respect to a variety of financial products and services.2 The FSL contemplates that the DFS will consist of two divisions, the insurance and banking divisions, each of which will be overseen by a deputy for insurance and a deputy for banking, respectively, as selected by the DFS Superintendent.3 Prior versions of the legislation also contemplated merging the Consumer Protection Board into the new agency. This was removed from the final adopted legislation. Instead, the Consumer Protection Board will be replaced by a new Consumer Protection Division in the New York Department of State.

Expanded Authority to Regulate Financial Products and Services

The FSL grants the DFS and the DFS Superintendent authority to regulate financial products and services, which are defined to include any financial product or service provided by any person regulated or required to be regulated under the banking or insurance law, or any financial product or service offered to consumers. This last point expands the new agency’s scope beyond that of either of the two original agencies. However, the following financial products and services are expressly carved out of this definition:

  • products or services regulated under the exclusive jurisdiction of a federal agency or authority,  
  • products or services regulated for the purpose of consumer or investor protection by any other state agency, department or public authority, and
  • products or services where rules or regulations promulgated by the Superintendent on such products or services would be preempted by federal law.4  

The definition also expressly excludes certain products and services when offered by a provider of consumer goods or services.5

The original version of the legislation defined “financial product or service” more broadly to cover also products and services regulated under any other law. Furthermore, it included in the definition any contract involving the types of products or services otherwise specified in the definition. Despite the narrower definition of “financial product or service” in the adopted FSL, the definition still affords the DFS expanded authority, particularly when read in connection with the provisions granting the DRS Superintendent the authority to investigate certain types of fraud and misconduct.

Financial Frauds and Consumer Protection Unit

The FSL recognizes that fraud can occur across industries, and is detrimental to the social and economic wellbeing of New York’s citizens. As such, it calls for the consolidation of the insurance frauds bureau and the criminal investigations bureau, which currently investigate fraud in the insurance and banking industries, respectively, into a new bureau, to be known as the Financial Frauds and Consumer Protection Unit (“FFCPU”), under the supervision of the DFS Superintendent. Prior versions of the legislation also contemplated merging the consumer financial protection activities of the Consumer Protection Board into the FFCPU, but this was not included in the final, adopted version.6

Once formed, the FFCPU will be charged with investigating and prosecuting fraud involving financial products and services as defined above. Prior versions of the legislation expressly created a new, defined offense of “financial fraud.” The original version defined “financial fraud” expansively to cover “any fraud, intentional misrepresentation or deceptive act or practice involving a financial product or service or involving any person offering to provide or providing financial products or services” and included certain specified conduct, including any violation of the Martin Act, which does not require proof of a violator’s intent to defraud. The second draft of the legislation narrowed the definition of “financial fraud” significantly by removing the references to the Martin Act, and “deceptive acts or practices” from activities that constitute financial fraud, thereby raising the standard for proving a violation. The adopted FSL has removed the defined offense of “financial fraud” altogether, and, instead, gives the FFCPU and the DFS Superintendent general authority to investigate violations of the insurance and banking laws, as well and violations of new law created by the FSL.7 In instances where the FFCPU has reason to believe that a person or entity has engaged, or is engaging, in prohibited conduct, the DFS Superintendent will have authority to investigate such activities and impose penalties.8 The DFS Superintendent will be authorized to levy a civil penalty of up to $5,000 for each intentional fraud or misrepresentation, or up to $1,000 for each violation of the FSL and applicable regulations issued under it. However, unlike previous versions of the legislation, the adopted FSL makes it clear that these penalties will not apply to persons regulated under the Insurance Law; such persons will be subject to penalties provided under the Insurance Law.9

Authority to Levy Assessments on Insurance Companies

Another area of interest to insurance companies is the new assessment provision included in the FSL. Currently, the Superintendent of Insurance is granted broad discretion to levy assessments on insurance companies to cover the operating costs of the Insurance Department.10 The assessment is calculated in proportion to the gross direct premiums and other considerations, written or received by each insurer in New York.11 Under the adopted FSL, effective April 1, 2012, the existing assessment law will be repealed and replaced with a provision which generally continues to provide a pro rata assessment. However, in response to industry concerns that insurance company assessments will be siphoned off to cover expenses that are not primarily insurance-related, the adopted FSL expressly limits assessments on insurance companies to cover only “operating expenses of the department solely attributable to regulating persons under the insurance law.”12 Prior versions of the legislation did not contain this limitation.

The merger contemplated by the FSL is scheduled to go into effect in October 2011. New York is not the first state to pursue a unified financial regulatory system. However, because New York is a global financial center, changes in its regulatory environment are significant to both domestic and international companies conducting business in New York. The full effect of the merger will become more apparent as the year progresses and the DFS becomes operational.