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Third Treasury Report Calls on HUD to Reconsider Application of Disparate Impact Rule to the Insurance Industry
On October 26, the U.S. Treasury Department published a report outlining a number of recommendations for ways to manage systemic risk primarily within the asset management and insurance industry. A section of the report, however, also discusses HUD’s potential application of the disparate impact rule to the insurance industry—specifically related to homeowner’s insurance. The report, “A Financial System That Creates Economic Opportunities—Asset Management and Insurance,” is the third in a series of four the Treasury plans to issue in response to President Trump’s Executive Order 13772 (EO), which mandated a review of financial regulations for inconsistencies with promoted “Core Principles.” (See Buckley Sandler Special Alert on the EO here and InfoBytes coverage on the first two reports here.)
HUD is authorized to adjudicate housing discrimination claims and issue rules relating to the Fair Housing Act. According to the report, Treasury recommends that HUD reconsider the use of the disparate impact theory to the insurance industry. The report notes a number of problems and challenges that would arise from applying disparate impact to the insurance industry. In particular, the report identifies potential challenges because (i) “state insurance regulations ordinarily prohibit the consideration of protected characteristics in the evaluation and pooling of risk” and at least one state expressly prohibits the collection of this data; (ii) the rule could impose unnecessary burdens on insurers and lead to actions that are not actuarially sound in an effort to avoid underwriting practices that may result in disparate outcomes; and (iii) it may be inconsistent with the McCarran-Ferguson Act and other existing state laws.
The report also recommends, among other things, that Congress clarify the “business of insurance” exception that generally excludes these services from the CFPB’s jurisdiction. The report recommends clarification to this exception to eliminate uncertainty about the CFPB’s jurisdiction and the potential overlap between the Bureau and state insurance regulators. A fact sheet accompanying the report further highlights Treasury’s recommendations to evaluate systemic risk, streamline regulations, rationalize international engagement, and promote economic growth.
Senate Banking Committee Seeks Perspectives of Midsized, Regional, and Large Institutions, Regulators on Economic Growth
On June 15, the Senate Committee on Banking, Housing, and Urban Affairs (Committee) held a hearing entitled, “Fostering Economic Growth: Midsized, Regional and Large Institution Perspective”. This is the third in a series of hearings to address economic growth. Frequent topics of discussion in the hearing included stress testing and capital planning—specifically the Federal Reserve’s Comprehensive Capital Analysis and Review stress test. Also discussed was the Systemically Important Financial Institution designation and costs incurred as a result, as well as the Volcker Rule.
Sen. Mike Crapo (R-Idaho), Chairman of the Committee, remarked in his opening statement that the current regulatory framework is “insufficiently tailored for many of the firms subject to it.”
Sen. Sherrod Brown (D-Ohio) – ranking member of the Committee—released an opening statement in which he stated “Let me be clear: proposals to weaken oversight of the biggest banks have no place in this committee’s process. . . Having said that, I am optimistic that there is room for agreement on a modified regime for overseeing regional banks.”
The June 15 hearing—a video of which can be accessed here—included testimony from the following witnesses:
- Mr. Harris Simmons, Chief Executive Officer and Chairman of Zions Bancorporation, on behalf of the Regional Bank Coalition (prepared statement)
- Mr. Greg Baer, President of The Clearing House Association (prepared statement)
- Mr. Robert Hill, Chief Executive Officer of South State Corporation, on behalf of the Midsize Bank Coalition of America (prepared statement)
- Ms. Saule Omarova, Professor of Law at Cornell University Law School (prepared statement)
On June 22, the Senate Banking Committee held another hearing entitled “Fostering Economic Growth: Regulator Perspective, the fourth in its series of hearings focusing on economic growth. The hearing is available via webcast here.
FSOC Rescinds Nonbank Financial Company's "Too-Big-to-Fail" Designation
On June 29, the Financial Stability Oversight Counsel (FSOC) announced that it rescinded its July 2013 “systemically important” designation of a Connecticut-based financial company. FSOC’s July 2013 designation subjected the company to supervision by the Federal Reserve and enhanced prudential standards. According to FSOC, the company posed a threat to U.S. financial stability due to its standing as one of the largest – ranked by assets – financial services companies in the U.S. At the time of its designation, the company also acted as a significant source of credit to the U.S. economy by providing financing to more than 243,000 commercial customers, 201,000 small businesses through retail programs, and 57 million consumers in the U.S. On June 28, FSOC unanimously voted to rescind its designation, stating that the company had “fundamentally changed its business” by, among other things: (i) decreasing its total assets by more than 50 percent; (ii) moving away from short-term funding; (iii) reducing connections with large financial institutions; (iv) no longer owning any U.S. depository institutions; and (v) no longer providing financing to U.S. consumers or small businesses in the U.S. FSOC also noted that, “[t]hrough a series of divestitures, a transformation of its funding model, and a corporate reorganization, the company has become a much less significant participant in financial markets and the economy.” Treasury Secretary Lew commented that the FSOC’s decision demonstrates a two-way designation process: “The Council follows the facts: When it identifies a company that could threaten financial stability, it acts; when those risks change, the Council also acts.”
GAO Report Examines Effectiveness of the Financial Regulatory System
Recently, the Government Accountability Office (GAO) released a report on the effectiveness of the U.S. financial system’s existing regulatory structure. In examining the financial regulatory system, the GAO conducted a performance audit from April 2014 to February 2016, dividing the regulatory system into the following sectors based on the various agencies’ missions: (i) safety and soundness oversight of depository institutions; (ii) consumer protection oversight; (iii) securities and derivatives markets oversight; (iv) insurance oversight; and (v) systemic risk oversight. The GAO found that “[f]ragmentation and overlap have created inefficiencies in regulatory processes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protection afforded to consumers.” Based on its audit, the GAO concluded that the regulatory structure as it stands does not always guarantee (i) efficient and effective oversight; (ii) consistent financial oversight; and (iii) consistent consumer protections. The report further identified problems with the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR), which are regulatory groups created out of the Dodd-Frank Act to address gaps in systemic risk oversight. Specific problems highlighted in the GAO’s findings include: (i) potential missed opportunities and duplicative analyses as a result of the Federal Reserve’s and the OFR’s similar systemic risk monitoring goals but lack of key collaboration; (ii) a lack of reliance by FSOC on the Federal Reserve’s and the OFR’s systemic risk monitoring efforts; and (iii) limitations on FSOC’s authority to address broader systemic risks that are not specific to a particular entity. The GAO emphasized that, “[w]ithout congressional action it is unlikely that remaining fragmentation and overlap in the U.S. financial regulatory system can be reduced or that more effective and efficient oversight of financial institutions can be achieved.”
Financial Stability Board Issues Proposed TLAC Rule For Global Systemically Important Banks
On November 10, the Financial Stability Board issued policy proposals in response to G20 Leaders’ request at the 2013 St. Petersburg Summit to develop proposals by the end of 2014. The proposals consist of “a set of principles and a detailed term sheet on the adequacy of loss-absorbing and recapitalization capacity of global systemically important banks (G-SIBs).” The proposals will establish a new minimum standard for total loss-absorbing capacity (TLAC). The new TLAC standard should (i) ensure home and host authorities that G-SIBs have adequate capacity to absorb losses; (ii) allow resolution authorities “to implement a resolution strategy that minimi[zes] any impact on financial stability and ensures the continuity of critical economic functions;” and (iii) help achieve an equal playing field internationally. Comments and responses to the proposals are due by February 2, 2015.
Financial Stability Board Updates List of Global Systemically Important Banks
On November 6, the Financial Stability Board published its annual update of global systemically important banks (G-SIBs). Included in its annual update is the addition of one international bank bringing the total number of institutions on the list to 30. Eight U.S. G-SIBs remain on the list. Coinciding with the updated list, the Basel Committee on Banking Supervision also published updated information regarding denominators and capital thresholds used to calculate bank scores and allocate capital requirements of G-SIBs.
Major Banks To Sign ISDA Resolution Stay Protocol
On October 11, the International Swaps and Derivatives Association, Inc. (ISDA) announced that 18 major global banks (G-18) agreed to sign the Resolution Stay Protocol, which was designed to support cross-border resolution and reduce systematic risk and is a significant step for banks that are considered “too-big-to-fail.” Effective January 2015, the Protocol will allow participating counterparties to “opt into certain overseas resolution regimes via a change to their derivatives contracts.” The Protocol will be applicable to new and existing trades and will likely extend to firms beyond G-18 banks in 2015.
Banking Regulators Issue Additional Resolution Plan Guidance
On April 15, the Federal Reserve Board and the FDIC issued additional guidance for the first group of institutions required to submit resolution plans pursuant to the Dodd-Frank Act. That group includes 11 institutions that submitted initial resolution plans last year. Based on their review of those initial plans, the regulators offer additional instruction as to what information should be included in the 2013 submissions, including more detailed information about certain potential obstacles to resolvability under the Bankruptcy Code. Given the additional request, the regulators also extended the due date for the plans from July 1, 2013 to October 1, 2013.
Federal Reserve Board Approves Final Rule Related to Systemically Important Financial Institutions
On April 3, the Federal Reserve Board approved a final rule that establishes the requirements for determining when a company is “predominantly engaged in financial activities.” The requirements will be used by the Financial Stability Oversight Council when considering whether to designate a nonbank financial company as systemically important and subject to supervision by the Federal Reserve Board. Pursuant to the rule, a company is considered to be predominantly engaged in financial activities if 85 percent or more of the company's consolidated revenues or assets are derived from or related to activities that are defined as financial in nature under the Bank Holding Company Act. In addition, the FSOC may issue recommendations for primary financial regulatory agencies to apply new or heightened standards to a financial activity or practice conducted by companies that are predominantly engaged in financial activities. The final rule largely mirrors the rule as proposed, but includes some changes. For example, final rule states that engaging in physically settled derivatives transactions generally will not be considered a financial activity. The final rule also defines the terms "significant nonbank financial company" and "significant bank holding company." The rule will become effective on May 6, 2013.
European Bank Resolution Proposal Released
On June 6, the European Commission released a proposal to establish common rules for EU member country banking regulators to follow when faced with failing banks. The rules are meant to provide a more standard regulatory structure and approach to help reduce the impact of bank failures, improve market stability, and limit taxpayer risk. To achieve these goals, the Commissions proposal would allow banks that do not pose a systemic risk to fail. Further, the proposal would shift the burden of restructuring costs for a systemically important troubled bank to its shareholders, creditors, and any employees responsible for mismanagement. Public authorities would be given new powers to (i) intervene earlier, (ii) establish in advance bank resolution plans, (iii) assume control of a failing bank if early intervention fails, and (iv) better coordinate cross-border issues raised by a failing bank. Banks, for their part, would be required to put in to place recovery plans and take certain actions if capital reserves fall below a set level, among other things. The proposals must first be considered and approved by the European Parliament and Council, and would take effect in 2018.