U.S. Treasury Department Proposes Far Reaching Financial Services Regulatory Reform Plan
Issue: Regulatory Reform
Date: March 31, 2008
Action Taken: On March 31, Secretary of the Treasury Henry Paulson announced a financial services regulatory reform plan that, if enacted, would profoundly change the way the insurance, securities, and banking industries are regulated. The plan is extensive, complex, and will require Congress to enact implementing legislation. It is not possible to predict at this time whether or how long the Treasury Department’s report will take to work its way through the legislative process.
Relevance to NAIFA Members: The plan’s impact on NAIFA members is impossible to overstate, even if Congress modifies it or ultimately rejects it. Congressional interest in setting the ground rules for overall regulation of all financial industries –including insurance regulation-- has been simmering for years. The Treasury Deportment Report will certainly kick-start an intensive new round of scrutiny on the subject in Congress. Some very partisan Democrats praised the report as an approach that could be useful in preventing another financial services meltdown like the one taking place now in the mortgage and credit markets. All aspects of the NAIFA federation should pay close attention to this development for the foreseeable future.
The heart of the Treasury’s proposal calls for migrating from regulating each component of financial services by industry separately to regulation by objective. Instead of regulating banking, insurance, securities, and other industries under separate systems, all financial industries would come under the same regulatory system based on objectives such as market stability, “prudential financial” regulation (regulation of any product, business or practice that has a government guarantee connected to it) and business conduct regulation. That means, for example, that under the “optimal regulatory structure” that the Treasury is proposing, all sales practices—whether of insurance, securities, or banking products—would come under one regulatory body. Needless to say this is a sea change from the current regulatory system.
First Look at Proposed Regulation by Objective: Following below is a general outline of the Treasury plan taken from its Executive Summary. Keep in mind that it will take time to analyze all the relevant details fully. Plus, it is too early to know any but the most general reactions. How Congress and the collective financial services industry receive these proposals will significantly influence the extent to which it has legislative potential.
Optimal Regulatory Structure: The Treasury plan is motivated by a need to modernize financial services regulation in order to maintain the US’s leadership role in world capital markets. Treasury envisions a regulatory structure headed by the Federal Reserve Board (Fed). Under the Fed, and answerable to the Fed, would be three objectives-based regulatory agencies: market stability, prudential financial services, and business conduct. Each of these agencies would in turn have more specialized regulatory bodies under them. Insurance regulation involving products and carriers would begin in an agency called the Federal Insurance Institution (FII) within the Prudential Financial Regulation agency. Regulation of sales practices, marketing, licensing, continuing education, etc. would reside within the Business Conduct Agency. Business Conduct regulation would cover all sales situations including insurance, securities or banking.
Short and Intermediate-Term Recommendations: Prior to enactment of the optimal regulatory structure, there should be several short-term and intermediate-term changes made to the current regulatory structure, the Treasury Report envisions. The short-term recommendation involves expansion and continuation of the President’s Working Group(PWG) on Capital Markets.
The intermediate-term recommendations have significant direct impact on NAIFA members. They include:
- Optional Federal Charter for Insurance Companies: The Treasury report calls for giving insurance companies the option to be federally chartered and regulated (OFC). It specifies that no carrier should have an OFC for both life/health and property-casualty insurance business. Carriers would have to choose one or the other. It also would establish an Office of National Insurance (ONI) to deal with insurance issues. The report also recommends that pending enactment of legislation establishing an OFC and/or an ONI there should be established an agency within the Treasury Department called the Office of Insurance Oversight (ONI) to deal with international insurance issues, and to serve as an advisor on insurance issues to the Treasury Secretary.
- SEC: The report calls for merging the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC). It calls on the SEC to reform itself along the lines of the CFTC to facilitate the merger, moving from an after-the-fact enforcement regulatory focus to a principles-based regulatory focus. Treasury also called on the SEC to reform its Self-Regulatory Organizations (SROs) including FINRA. Further, the Treasury report recommended that regulation of broker-dealers and investment advisors should be rationalized and modernized so that both groups operate under essentially the same rules.
State Regulation of Insurance: The report lays out arguments for retaining state insurance guarantee funds, but also provides a framework for a federal insurance guarantee program, leaving up to Congressional policymakers the choice between the two. It also emphasizes that it is not suggesting elimination of state insurance regulation. For example, it acknowledges the states’ likely decisions to continue their premium tax regimes. But pending further, more detailed analysis of this very complex plan, it appears that state insurance regulation would be vastly diminished if the Treasury plan were to be enacted into law.
Next Steps: NAIFA will continue its close study of the Treasury proposal, and will keep members apprised of nuances and positions as they are identified and developed.
NAIFA Staff Contact: For additional information on this issue, please contact Jill Edwards, Director of Federal Relations.
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