Obama Regulatory Plan Answers Questions, Creates More

President Obama’ financial services regulatory reform plan, announced on June 17, is answering some questions and creating more.

Insurance trade groups with varying positions on insurance regulation and the National Association of Insurance Commissioners, have all found points they like in the plan, but also points of clarification that they were still awaiting.
The plan calls for the Federal Reserve in consultation with the U.S. Treasury Department and external experts to propose recommendations by Oct. 1, 2009. It is in response to the financial meltdown last September that helped drag down an already straggling economy.

The plan would:
• Recommend firms for identification as Tier 1 Financial Holding Companies (Tier 1 FHCs) that should be under consolidated supervision by the Federal Reserve ;
• Create a Financial Services Oversight Council, chaired by Treasury to fill regulatory gaps that would include heads of federal financial regulators;
• Create an Office of National Insurance;
• Create a Consumer Financial Protection Agency to focus on consumers in the credit, savings and payment market;
• Better regulate securitizations which the white paper says actually concentrates risk as well as money market mutual funds;
• Call on accounting bodies including the Securities and Exchange Commission and the Financial Accounting Standards Board and the International Accounting Standards Board to review accounting standards to provide forward-looking loan loss provision practices that include a broader range of available credit information;
• A review of fair value accounting rules; as well as many other points.


Among the points that are still open are is whether in the long term, insurance should be regulated by the states or the federal government. In the short term, the paper states that “functionally regulated and depository institution subsidiaries of a Tier 1 FHC [financial holding company—read too big to fail.] should continue to be supervised and regulated primarily by their functional or bank regulator, as the case may be.”

But it also states that “Increased national uniformity [can come] through either a federal charter or effective action by the states.” Other points that the Obama plan make is that “the current crisis did not stem from widespread problems in the insurance industry,” but it also notes that the current system of insurance regulation is “highly fragmented, inconsistent, and inefficient. While some steps have been taken to increase uniformity, they have been insufficient.”

During a press conference yesterday, NAIC CEO Terri Vaughan commended the “stability and strength” which the Obama plan could provide to the financial services industry and said that it was consistent with the “collaborative effort and information sharing” that state insurance commissioners want to see. Vaughan said that state regulators should be part of the council that is being proposed.

And she says that while it is a “fair statement” that works need to be done on uniformity, she says that work is under way as evidenced by 36 states participating in the Interstate Insurance Product Regulation Commission, a single point of filing for life insurance products.

She also notes that it is uncertain how broad the scope of the new Consumer Council would be and that it should not duplicate consumer protections that the state insurance system currently affords. Vaughan says that work on suitability of annuity products and the Unfair Trade Practices Act are needed and if the Council ultimately does encompass insurance regulation, it sets a floor that states could go beyond with current laws and regulations.

Consumer groups praised the plan for the federal Consumer Financial Protection Agency, noting that it would eliminate allowing financial institutions to “shop around” for the “weakest form of regulation.” The joint statement was made by groups including the Consumer Federation of America, U.S. PIRG, Public Citizen, Consumers Union, the National Consumer Law Center, the Center for Responsible Lending, Consumer Action and Consumer Action.

All the major trade groups also weighed in on the Obama plan. The following is a thumbnail:
--The American Insurance Association and the American Council of Life Insurers noted that the White Paper says that insurance is systemically important to the American people as well as being a global enterprise and the state regulatory system is inefficient. It also noted that the paper identifies a federal charter as an option and applauded the proposal to create an Office of National Insurance.
--The National Association of Mutual Insurance Companies said that the White Paper implicitly recognized that property-casualty companies had performed “exceptionally well throughout this crisis and do not pose a risk to the financial system.” NAMIC also noted that the ONI proposal paralleled a proposal for an Office of Insurance Information which NAMIC has endorsed. And, it said that the paper leaves open the possibility that an ONI could be undertaken through the current state-based regulatory system.
--The Property Casualty Insurers Association of America also said it is pleased that the paper acknowledged insurers did not cause the current crisis and agrees that a federal systemic risk overseer is needed and that the plan will not create a duplicative layer of federal regulation for well capitalized property-casualty insurers.