President Barack Obama on Wednesday signed a sweeping overhaul of the financial regulatory system. The “Dodd-Frank Wall Street Reform and Consumer Protection Act,” drafted in response to the recent financial crisis, makes significant changes to financial services regulation.
The 2,300-page bill gives regulators broad authority to rein in banks, limit risk-taking by financial firms and supervise previously unregulated trading. It also makes it easier to liquidate large, financially interconnected institutions, and it creates a new consumer protection bureau to guard against lending abuses.
While the majority of this legislation does not apply to insurance and leaves the day-to-day regulation of insurance at the state level, Title V, the insurance title of the bill, includes surplus lines and reinsurance reform and creates a Federal Insurance Office (FIO) which would serve as a non-regulatory insurance informational office at the federal level. The office would also play a role in representing U.S. interests with international insurance agreements.
The new law does modernize the state-based regulatory system with the inclusion of the “Nonadmitted and Reinsurance Reform Act (NRRA),” a provision strongly supported by the property/casualty insurance industry. This section will streamline the regulation of surplus lines by making the insured’s home state the sole regulator in surplus lines transactions. Those changes would speed up and ease access to the surplus lines markets by consumers, and reduce administrative compliance issues.
“Proper implementation of this bill will provide benefits to surplus lines brokers as they no longer will have to deal with confusing and contradictory tax payment laws,” said National Association of Professional Surplus Lines Offices’ President Marshall Kath. “Standardizing tax payments will also provide benefits to consumers and the industry by making the process more efficient.”
While insurance agents and brokers did not endorse the legislation, the Independent Insurance Agents & Brokers of America (Big “I”) says the , the final law does include several major victories for its members.
“The Big ‘I’ is pleased that the final financial services regulatory reform legislation leaves day-to-day regulation of the insurance market at the state level,” said Robert Rusbuldt, Big “I” president & CEO. “Property/casualty insurers were not to blame for the financial crisis and pose no systemic risk to the overall economy. While the current system no doubt needs more uniformity and modernization, state regulation of insurance has a proven track record of ensuring insurer solvency and consumer protection, and it’s encouraging that President Obama and Congress recognized the strength of the state regulatory system.”
The newly created Federal Insurance Office goes into effect immediately. The office is restricted primarily to monitoring the insurance industry and advising Congress and federal agencies on insurance issues. However, federal regulators will have vast discretion over how this oversight is executed.
“We are pleased that Congress ultimately limited the scope of the Federal Insurance Office and recognized that it should not be a duplicative federal insurance regulator,” said David A. Sampson, president and CEO of the Property Casualty Insurers Association of America (PCI), in a statement. “Congress included important provisions in the final bill that will reduce duplicative information gathering requests on insurers. The Federal Insurance Office will be required to seek data from state regulators first before imposing costly and burdensome data demands on insurance companies.”
The Dodd-Frank Act also includes important Federal Insurance Office provisions for appropriate due process to address questions over federal preemption, Sampson said.
As the federal government moves toward implementation of the bill, insurers say it will be important to continue reinforcing the distinctions between insurance and other financial services.
“The new law recognizes this in many important areas, including leaving insurance in the existing state-based resolution mechanism and continuing the state guaranty fund system,” said Leigh Ann Pusey, president and CEO of the American Insurance Association (AIA). “It will be important in the months ahead to work with Treasury and other federal regulators to ensure the implementing regulations and related rule-making are consistent with the legislative intent.”
The following is a brief look at the bill’s main provisions:
SWAPS PUSH-OUT: Wall Street firms that dominate the $615 trillion over-the-counter derivatives market will have to spin off dealing operations in some swaps, but can keep many swaps in-house, including derivatives to hedge their own risk.
Much of OTC derivatives trading will be redirected through more accountable channels such as exchanges and clearinghouses. Many OTC contracts end-users will be able to carry on as before.
VOLCKER RULE: A new rule will bar proprietary trading by banks for their own accounts unrelated to customers; limit the growth of the biggest banks; and curb banks’ involvement in private equity and hedge funds, except for small investments allowed by a loophole added to the rule late in debate.
Some big banks’ profits will be pinched by both the Volcker rule and the Lincoln swaps plan, with a few Wall Street giants potentially facing structural changes.
WALL ST ‘DEATH PANEL’: Aiming to prevent massive bailouts like AIG’s and disastrous bankruptcies like Lehman Brothers’, the bill creates a new government “orderly liquidation” process for financial firms on the verge of collapse.
Authorities will be able to seize and liquidate them, with costs covered by sales of assets and fees on other firms if needed.
CONSUMER WATCHDOG: Protection of financial consumers will be enhanced by increased government regulation.
The bill will set up a new bureau in the Federal Reserve to regulate mortgages and credit cards. The watchdog has sharp teeth, but won’t be able to bite car dealers, who won an exemption.
THE BIG PICTURE: A new council of federal regulators will try to monitor the entire financial forest, not just the trees. High-risk firms can be singled out for stricter policing.
BEHIND THE HEDGE: Private equity and hedge funds will have to register with regulators and open their books to scrutiny. Not so for venture capital funds, which are exempt.
INSURANCE COPS: The first federal monitor for state-policed insurers will be formed. It’s not federal regulation — yet.
BANK CUSHIONS: Banks will have to set aside more capital to ride out tough times, but will get several years to comply.
FED SCRUTINY: The Fed’s emergency lending during the crisis will be reviewed, but not its decisions on interest rates.
DEBIT CARDS: Fees charged on debit card transactions will be reduced — a victory for retailers over the banks.
Reuters contributed to this story.
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