President’s Financial Regulatory Overhaul Would Establish National Insurance Office Within U.S. Treasury

Today, June 17, 2009, President Barack Obama, flanked by members of Congress, regulators and various White House administration officials announced a proposed overhaul on United States government oversight of financial markets, including the insurance sector, that is considered to be the most comprehensive since the 1930s and the Great Depression. 

In a White Paper entitled “Financial Regulatory Reform: A New Foundation,” issued today by the U.S. Department of the Treasury, insurance-specific details of the overhaul included the recommendation to establish an Office of National Insurance within the U.S. Treasury that would coordinate policy in the insurance sector.  To view the White Paper, click here.

Further, it was indicated that the U.S. Treasury would support insurance regulation modernization proposals based on the following six principles:

1. Effective systemic risk regulation with respect to insurance. The steps proposed in this report, if enacted, will address systemic risks posed to the financial system by the insurance industry.  However, if additional insurance regulation would help to further reduce systemic risk or would increase integration into the new regulatory regime, we will consider those changes.

2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies. Although the current crisis did not stem from widespread problems in the insurance industry, the crisis did make clear the importance of adequate capital standards and a strong capital position for all financial firms. Any insurance regulatory regime should include strong capital standards and appropriate risk management, including the management of liquidity and duration risk.

3. Meaningful and consistent consumer protection for insurance products and practices. While many states have enacted strong consumer protections in the insurance marketplace, protections vary widely among states. Any new insurance regulatory regime should enhance consumer protections and address any gaps and problems that exist under the current system, including the regulation of producers of insurance. Further, any changes to the insurance regulatory system that would weaken or undermine important consumer protections are unacceptable.

4. Increased national uniformity through either a federal charter or effective action by the states. Our current insurance regulatory system is highly fragmented, inconsistent, and inefficient. While some steps have been taken to increase uniformity, they have been insufficient. As a result there remain tremendous differences in regulatory adequacy and consumer protection among the states.  Increased consistency in the regulatory treatment of insurance – including strong capital standards and consumer protections – should enhance financial stability, increase economic efficiency and result in real improvements for consumers.

5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business.  As we saw with respect to AIG, the problems of associated affiliates outside of a consolidated insurance company’s traditional insurance business can grow to threaten the solvency of the underlying insurance company and the economy.  Any new regulatory regime must address the current gaps in insurance holding company regulation.

6. International coordination. Improvements to our system of insurance regulation should satisfy existing international frameworks, enhance the international competitiveness of the American insurance industry, and expand opportunities for the insurance industry to export its services.

 

To view Fact Sheets related to the proposed regulatory reform, click on the following titles:

• Requiring Strong Supervision And Appropriate Regulation Of All Financial Firms
• Strengthening Regulation Of Core Markets And Market Infrastructure
• Strengthening Consumer Protection
• Providing The Government With Tools To Effectively Manage Failing Institutions
• Improving International Regulatory Standards And Cooperation

An Insurance Journal article on the proposed regulatory reform in printed below.

 

Should you have any questions or comments, please contact Colodny Fass.

 

Obama Unveils Plan for Financial Regulation Today

By Kevin Drawbaugh
June 17, 2009

President Barack Obama on Wednesday unveil edhis plans for reshaping U.S. financial regulation, with proposals to close one bank regulator and create new overseers for big-picture economic risk and consumer financial product safety.

In a package of reforms that takes on many tough jobs while avoiding at least one, the administration will call for tighter oversight aimed at preventing a repeat of the severe banking and capital markets crisis that has shaken economies around the world.

Months of debate in the U.S. Congress lie ahead. Committees of both the Senate and the House of Representatives have scheduled more than a dozen hearings on regulatory reform between now and mid-July. Conservative House Republicans have already offered their own rival plan.

Obama presented his proposals at 12:50 p.m.  on Wednesday. Treasury Secretary Timothy Geithner, members of Congress, regulators and representatives from the financial industry and consumer groups joined Obama at the event “to lay out a comprehensive regulatory reform plan to modernize and protect the integrity of our financial system,” the White House said.

A senior administration official said on Tuesday that the Obama plan will call for closing the Office of Thrift Supervision, a Treasury Department unit, and eliminating the federal charter under which savings and loans operate, with the objective of streamlining bank supervision.

In addition, the Federal Reserve would be assigned new duties to monitor risks that could threaten the entire financial system, working in conjunction with a council of other regulators to be chaired by Treasury.

The goal is to make sure a failure of one large company — like bailed-out mega-insurer American International Group, for instance — does not destabilize the broader economy.

The administration has been discussing for six months how best to tighten bank and market regulation in response to the crisis, with the European Union moving on a similar track, and more quickly than the United States in some areas.

As the Obama plan has evolved, the administration has backed away from some proposals as politically unachievable, such as a thorough structural revamp of financial oversight. No merger of the Securities and Exchange Commission and Commodity Futures Trading Commission will be proposed, for example.

Obama will call for establishment of an independent consumer financial products watchdog agency, and for requiring financial firms to hold more capital so they can better survive tough times.

More transparency and accountability would be mandated for exotic financial markets that in recent years expanded far beyond the government’s ability to keep track of them.

Under the plan, the government would be empowered to seize and unwind large, troubled companies that are not banks, modeling the process on the Federal Deposit Insurance Corp.’s existing power to unwind failing banks.

The administration will also urge reining in markets for securitized debt and over-the-counter derivatives, as well as more regulation of money market mutual funds, credit rating agencies and hedge funds.

It will push for changes in corporate governance that could give shareholders more power to restrain executive compensation.

“We are going to put forward a very strong set of regulatory measures … We expect that Congress will work swiftly to get these laws in place,” Obama said on Tuesday.

In remarks to reporters, he warned that enacting his plan will be a “heavy lift” politically with special interests already offering opposition.

The U.S. Chamber of Commerce, the nation’s largest business lobbying group, on Tuesday said it opposes key parts of the plan.

House Democratic leader Steny Hoyer said on Tuesday the House will deal with financial regulation reform in late July or soon after Congress’ August recess. The outlook in the Senate, which moves more slowly, was unclear.

 

To unsubscribe from this newsletter, please send an e-mail to ccochran@cftlaw.com