The “worst economic downturn since the Great Depression” will produce the greatest change in financial oversight since then. While a number of studies must first be conducted before specific actions are taken by regulators, and the full impact of financial reform legislation may not be felt for some time since proposed legislation is subject to negotiations and compromise, it will be the most sweeping financial reform since the 1930s. Here are some of the major initiatives that may impact insurance-related operations.
Fiduciary Responsibility Rule: Higher Bar for Brokers
The legislation amends both the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 to allow the SEC to impose a common fiduciary standard to broker-dealers as investment advisors. This will permit broker-dealers to wear “two hats” when working with retail clients. While providing personalized investment advice about securities, broker/dealers would have to follow a fiduciary standard of conduct similar to investment advisors, though a return to the current suitability standard of conduct is allowed once the advice has been given. The sale of commissioned products and proprietary products would not, in and of itself, be considered a violation of the fiduciary standard.
This matter has been passed to the Securities and Exchange Commission (SEC) to conduct a study that will evaluate if there are any legal or regulatory gaps or overlaps and the impact of eliminating the broker-dealer exclusion from the definition of “investment advisor” in terms of potential benefits or harm to customers.
Use of Financial Designations: More Specific Terms
Based on the findings of a study by the he Comptroller General, sales professionals may need to change what they call themselves. Restrictions may be in the offing for those who wish to use “financial advisor” or “financial consultant” as titles. The study will analyze legal or regulatory gaps in the regulation of financial planners and other individuals who provide or offer to provide financial planning services to consumers. The study will weigh the role of financial planners in providing advice regarding the management of financial resources, including investment planning, income tax planning, education planning, retirement planning, estate planning, and risk management, and the use of the title “financial planner” and misleading designations in connection with the sale of financial products, including insurance and securities, as well as the potential risk to consumers by individuals who present themselves as financial planners through the use of misleading designations, including “financial advisor” and “financial consultant.”
Federal Insurance Office: Non Discrimination
The legislation will create a Federal Insurance Office (FIO) within the Treasury Department, which will gather information about the insurance industry and monitor the industry for systemic risk purposes. The FIO will monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable insurance products regarding all lines of insurance, except health insurance. Insurers will need to begin to look at the representation of their policyowners and review their underwriting standards.
The FIO may also preempt state insurance measures that result in less favorable treatment of a non-United States insurer. A federal insurance authority creates a single point of entry for foreign insurers and could open the U.S. market to global competition.
Optional Federal Charter: Federal Insurer Oversight
Tje FIO is also charged to study how to modernize and improve insurance regulation. The study will be based on systemic risk regulation, capital standards, gaps in state regulation of consumer protection, and uniformity of state regulation. It will examine the cost and benefits of potential federal regulation of insurance across all lines except health, and the ability of federal regulation to provide robust consumer protection, and will determine the potential consequences of subjecting insurance companies to federal authority. If enacted, federal regulation will provide a uniform set of regulations, which is not seen under the current system of regulation at the state level. In addition, it may lead to the adoption of an Optional Federal Charter, providing dual regulation (state and federal) for insurance companies.
Financial Stability Oversight Council
The legislation will establish a 15-member panel chaired by the Treasury Secretary. The Council will have the power to regulate nonbank financial companies (i.e., insurance companies) if it believes there would be negative effects to the financial system if the company failed or its activities would pose a risk to the financial stability of the United States. The Council will be able to approve Federal Reserve decisions to require large, complex companies to divest some of their holdings if the financial stability of the United States is believed to be threatened. A limited number of large financial services firms, including insurance companies, will need to carefully guide their operations to meet not only management expectations, but those of federal authorities.
CFPB: Consumer Protection and Regulatory Inquiries
The Consumer Financial Protection Bureau (CFPB) will be established in the Federal Reserve System, and led by an independent director appointed by the President and confirmed by the Senate to write rules for consumer protections governing all financial institutions that provide consumer financial services or products, including banks and non-banks.
The CFPB will research, analyze, and report on consumer understanding and use of disclosures and communications regarding financial products and services. The CFPB will also establish an Office of Financial Education to help improve the financial literacy of consumers. These actions should help individuals better understand the relevant risks associated with financial products and make more informed financial decisions.
The CFPB will create a consumer hotline to investigate and respond to consumer complaints regarding financial products or services. Complaints will be routed to appropriate federal or state agencies for follow-up. There could be increased disclosure regulations for insurance products in the future. Financial services firms will need to have the appropriate resources in place to cope with the potential for additional regulatory inquiries.
Senior Investor Protections: Increased Compliance
Insurers that offer products for the senior market, such as annuities, must be prepared for a more diligent state regulatory system.
The legislation will provide grants to states for enhanced protection of seniors from being misled by false designations. The grants will be used to hire staff to identify, investigate, and prosecute cases involving misleading or fraudulent marketing, fund technology, equipment, and training for regulators in order to identify salespersons and advisors who target seniors through the use of misleading designations, provide educational materials and training to regulators and seniors.
Equity-Indexed Annuities: To Be State Regulated
An amendment would classify Equity-Indexed Annuities (EIAs) as insurance products. As a result, EIAs will remain regulated at the state level, rather than by the SEC. FINRA rules still require broker/dealers to supervise EIAs as if they were securities, while the National Association of Insurance Commissioners (NAIC) model regulation will impose a suitability standard on EIA sales to the extent states adopt it.
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