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July 21, 2009 |
Schiff Hardin Insurance Alert The Obama administration "New Foundation" for financial regulatory reform is taking shape in a manner that may have important implications for some elements of the insurance industry. This Insurance Alert focuses on the potential impact of the proposed Consumer Financial Protection Agency (CFPA) on segments of the insurance industry. The June white paper that presented the outlines of the administration's program for reform contained a proposal for creation of the federal Office of National Insurance (ONI) within the Department of the Treasury. It is not yet clear what powers the ONI would have, but in proposed legislation presented by the administration it has now become clear that the proposed CFPA could have considerable power over several aspects of the insurance business that have been largely, if not entirely, regulated by the states. The CFPA as envisioned by the administration would have sweeping federal authority over a wide range of consumer financial products. As defined in the legislation — the proposed Consumer Financial Protection Agency Act of 2009 (Act) — a "consumer financial product or service" is any financial product or service to be used by a consumer primarily for personal, family, or household purposes. (ý 1002(8)). The legislation enumerates fourteen such products or services. These include selling or servicing credit insurance or mortgage insurance (ý 1002(18)(B)(ii)) and providing title insurance (ý 1002(18)(F)). While the CFPA would be precluded from defining covered financial activity to encompass "engaging in the business of insurance" (ý 1002(18)(O)), the administration clearly intends to bring selling and servicing credit, mortgage and title insurance under the supervision of the CFPA. As explained by the Treasury when the legislation was released, the CFPA would be a consumer protection agency that would consolidate the enforcement and related rule-making powers under many pre-existing federal consumer protection laws and would extend similar powers to many additional financial products and services as enumerated in the Act or determined by the CFPA. The CFPA would be a single point of accountability for federal consumer protection, creating a "level playing field" across all institutions, so that regulation would be product- and service-based rather than depend on the nature of the entity selling the product or providing the service. The CFPA would have powers commonly associated with consumer protection agencies, though in many cases those powers would exceed those currently granted to federal agencies with respect to the covered products. It would have the power to examine covered persons (ý 1022(c)), i.e., any person who engages directly or indirectly in a financial activity; to issue rules governing any person subject to the law (ý 1022(d)); prescribe "unfair, deceptive, or abusive acts or practices" (ý 1031(b)); prescribe rules to ensure "appropriate and effective disclosure or communication to consumers of the costs, benefits, and risks associated with any consumer financial product or service" (ý 1032(a)); and prescribe rules "regarding the manner, settings, and circumstances for the provision of any consumer financial products or services to ensure that the risks, costs, and benefits of the products or services, both initially and over the term of the products or services, are fully and accurately represented to consumers" (ý 1033)). The CFPA would have the power to prescribe rules regarding compensation practices, though not to the extent of setting a limit on dollar compensation paid to anyone. (ý 1037(a)(3)) With the rulemaking powers would come enforcement powers, including seeking judicial legal and equitable relief, such as injunctions, restitution, damages and civil monetary penalties (ýý 1054-55). The CFPA itself could impose cease and desist relief. (ý 1053) The Act would not comprehensively pre-empt state regulation of products and services covered by the Act. The states would retain whatever rulemaking and enforcement powers they have, and standards set by the CFPA would be viewed as a floor, not a ceiling, for state regulation of the same products and services. The only exception is that if the CFPA's rules are inconsistent with a state statute or regulation, the state provision would be pre-empted but only to the extent of the inconsistency. (ýý 1041-42) The administration is taking a hands-off approach with respect to consumer life, auto and property and casualty insurance — except to the extent that the ONI, if created, would investigate those industries and develop proposals to strengthen capital standards and to impose meaningful and consistent consumer protection, with the possibility of a federal insurance charter. With respect to credit, mortgage and title insurance, however, the industry is immediately presented with a concrete proposal for substantially increased federal regulation by an agency that would regulate virtually all financial products and services and those who provide them, except to the extent that such regulation is already (or would be added by new enactments) delegated to the Securities and Exchange Commission and the Commodity Futures Trading Commission. The proposals summarized above confront important segments of the insurance industry and those who sell insurance products with the prospect of duplicative regulation, adding a federal layer to existing state regulation, and with dealing with an agency charged with regulating a wide array of disparate products and services that may overlap the covered insurance products only in limited respects. In light of the administration's apparent determination to move forward with all of the elements of the financial regulatory reform package, now is the time for interested parties to have their voices heard in Congress. The CFPA is a high profile proposal that may have wide appeal, so that if there is a priority for pressing some proposals more aggressively than others, this one may come near the top of the queue. For more information, please contact Marci A. Eisenstein or Allan Horwich.
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