A New Regulatory Regime? New Yorks Proposal to Merge its Insurance and Banking Departments and Consumer Protection Board into a Single Agency
By Mark Peters and Mohana Terry, Edwards Angell Palmer & Dodge LLP
On February 1, 2011, New York Governor Andrew Cuomo unveiled a proposed 2011-2012 executive budget (the “Executive Budget”). As part of the Executive Budget, the Governor submitted a bill (the “Bill”) merging the Insurance and Banking Departments and the Consumer Protection Board into a single state agency, to be known as the Department of Financial Regulation (the “DFR”). To accomplish this, the Bill adds a new chapter 18-A to the New York statutes, entitled the Financial Regulation and Protection Law (the “FRPL”), and also makes revisions to the existing insurance and banking laws. The Bill aims to create a unified regulatory and consumer protection regime, and is designed to ensure more comprehensive oversight of financial products, services and transactions. The Bill could be voted on as early as this month. It may be of particular interest to insurance companies, and insurance producers, for a number of reasons, including that it proposes to:
1. expand the scope of financial regulation to include a broad range of financial products, services and transactions that may have been previously unregulated;
2. create a new office of the superintendent of the DFR (the “DFR Superintendent”) to assume responsibilities of the existing insurance and banking superintendents, as well expanded responsibilities under the FRPL;
3. grant the DFR Superintendent expansive investigatory and enforcement powers;
4. grant the DFR Superintendent broad discretion to levy assessments against insurance companies, that may potentially be used to cover the costs of non-insurance related operating expenses of the DFR; and
5. enact a new Financial Frauds Protection Act requiring the DFR Superintendent to create a Financial Frauds and Consumer Protection Unit to assume the responsibilities of the insurance frauds bureau and the criminal investigations bureau that are currently administered by the Insurance and Banking Departments, respectively, along with the consumer financial protection activities of the Consumer Protection Board.
This article describes key aspects of the Bill that may be of interest to insurance companies and insurance producers.
1. Expanded Financial Regulation The FRPL merges financial regulation and investor protection, including enforcement of the existing insurance law, under the DFR. It grants the DFR expansive authority to regulate financial products, services and transactions, which are broadly defined as:
a. any product or service offered or provided by any person regulated or required to be regulated by the DFR Superintendent pursuant to the FRPL, the banking law, the insurance law or other laws, or otherwise subject to the investigatory or enforcement authority of the DFR Superintendent under such laws;
b. any investment, credit, debt, lien, deposit, derivative, money management device; and
c. any contract involving any of the foregoing.
Bill, Part A, Section 1, Article I,
Section 104(a)(4). For purposes of the FRPL, a “regulated person” is “any person operating under a license, registration, certificate or authorization, or authorized, accredited, chartered or incorporated or possessing other similar status under the insurance law or the banking law.” Bill, Part A, Section 1, Article I, Section 104(a)(6). These definitions are sufficiently expansive to capture products, services and transactions that previously were not regulated by the Insurance and Banking Departments individually. Supporters of the proposal believe that the single regulator approach may be beneficial as the DFR will have a holistic view of any given product, service or transaction, as well as the financial condition of a holding company system comprised of companies offering such products, services or transactions. Others have expressed concern that the expanded regulatory scope may slow down regulation and enforcement, at least initially, as the DFR’s employees will need time to become familiar with areas in which they previously had little or no experience, e.g., employees of the current Banking Department may be unfamiliar with insurance law issues and considerations. The DFR will need to ensure that it has sufficient resources to handle matters that come within its purview, including matters relating to the new financial fraud investigatory, as more thoroughly discussed below.
2. Establishment of the DFR Superintendent The Bill creates a new office of the DFR Superintendent, who will assume the responsibilities of the existing insurance and banking superintendents, as well as new and heightened oversight responsibilities with respect to financial products, services and transactions. Bill, Part A, Section 1, Article II, Section 201(a). The Bill authorizes the DFR Superintendent to take actions necessary to:
a. foster the growth of New York’s financial industry through regulation and supervision;
b. ensure sound and prudent conduct of financial product and service providers;
c. ensure that providers fulfill their obligations;
d. protect users of financial products and services from financially impaired or insolvent providers;
e. foster honesty, transparency, fair business practices and public responsibility;
f. eliminate financial; and
g. educate and protect users of financial products and services and ensure that users are provided with timely and understandable information to make responsible decisions about financial products and services.
Bill, Part A, Section 1, Article II, Section 201(b).
These responsibilities encompass matters currently handled by the Insurance Department, Banking Department, and Consumer Protection Board individually. The DFR Superintendent may establish bureaus within the DFR to facilitate its operations and duties. The current bureau heads in the Insurance Department will continue to serve at the pleasure of the DFR Superintendent upon enactment of the Bill. Bill, Part A, Section 1, Article II, Section 205.
3. Enforcement Powers of the DFR Superintendent
The DFR Superintendent will retain the enforcement powers afforded to the insurance and banking superintendents under the existing insurance and banking laws. In addition, the Bill grants the DFR Superintendent expanded powers to investigate, research, study and analyze matters affecting the interests of consumers of financial products and services. Bill, Part A, Section 1, Article III, Section 301(a). In particular, the DFR Superintendent is expressly authorized to:
a. take actions as he or she deems necessary to educate and protect users of financial products and services;
b. handle consumer complaints, including, among other things, mediate such complaints with providers of financial products and services;
c. make recommendations to the governor with respect to issues affecting consumers of and investors in financial products and services;
d. establish a process for assisting victims of financial fraud;
e. cooperate and assist with enforcement responsibilities of the New York Attorney General’s Office;
f. initiate and encourage consumer financial education programs; and
g. cooperate with and assist local governments and non-profits to develop consumer protection measures.
Bill, Part A, Section 1, Article III, Section 301(b).
The DFR Superintendent has the authority to issue regulations. Bill, Part A, Section 1, Article III, Section 302. He or she may conduct hearings in connection with violations of the insurance and banking laws, and the FRPL, has subpoena powers with respect to such hearings, and may impose civil penalties or provide injunctive relief where appropriate. Bill, Part A, Section 1, Article III, Sections 305, 306 & 309. With respect to insurance companies and producers, these powers are largely the same as those currently provided under the insurance law. See N.Y. Ins. Law §§ 301 et. seq. In addition to the enforcement powers added under new chapter 18-A, the Bill revises the existing powers under the insurance law. These revisions include: a. an increase in the monetary penalty for willful violation of the insurance law and regulations from $500 to $10,000 for most violators, and from $500 to $2,500 for agents, brokers and bail bondsmen;
b. an amendment to Section 1504(b) of the insurance law to permit the DFR Superintendent to examine every holding company and every controlled person within a holding company system if he or she has reason to believe that such person’s operations may impact the operations, management or financial condition of any controlled insurer within the system, without regard to materiality of the effect;
c. authority to impose a monetary penalty up to $500 for each transaction on any person, firm, association, or corporation acting without a license (other than as provided in Section 2102(a)(2) which imposes an additional penalty on reinsurance intermediaries);
d. an amendment to the penalty imposed for acting on behalf or aiding an unlicensed or unauthorized insurer or health maintenance organization by prescribing a $500 per transaction fine; and
e. expansion of the definition of a “defined violation” to include doing an insurance business without a license, acting without a license, and acting for or aiding an unlicensed or unauthorized insurer or health maintenance organization.
Bill, Part A, Sections 55, 68 to 71.
4. Broad Authority to Levy Assessments on Insurance Companies The insurance superintendent is currently granted broad discretion to levy assessments on insurance companies to cover the operating costs of the Insurance Department. N.Y. Ins. Law § 332. The assessment is calculated in proportion to the gross direct premiums and other considerations, written or received by each insurer in New York. N.Y. Ins. Law §§ 332(a). The Bill would repeal the existing law, and grant the DFR Superintendent broader discretion in determining insurance company assessments. Bill, Part A, Section 15. It would allow the DFR Superintendent to calculate assessments in such proportions as he or she deems just and reasonable on entities regulated under the insurance law as well as the banking law, provided, however, that persons regulated under the insurance law will not be assessed for expenses that the DFR Superintendent deems solely to address persons regulated under the banking law, and vice versa. Bill, Part A, Section 1, Article II, Section 206(a). Despite this language specifying that insurance company assessments will not cover expenses solely relating to persons regulated under the banking law, there is still risk that such assessments will be siphoned off to cover expenses that are not primarily insurance related. For example, the funds may be used to defray expenses associated with persons partially regulated under the banking law, or to cover functions of the Consumer Protection Board. Note also that the DFR Superintendent may, upon notice, suspend the license, registration or certificate of authority granted to any person under the new chapter, the insurance and banking laws, for failure to pay the levied assessment. Bill, Part A, Section 1, Article II, Section 206(e).
5. Financial Frauds and Consumer Protection Unit The Bill recognizes that financial fraud can manifest itself in many forms and occur across industries. Currently, fraud impacting the insurance and banking industries are regulated separately – by the insurance frauds bureau and the criminal investigations bureau, respectively. The Bill would create a new Financial Frauds Protection Act (the “FFPA”), which calls for the consolidation of these bureaus, along with the consumer financial protection activities of the Consumer Protection Board into a new Financial Frauds and Consumer Protection Unit (the “FFCPU”). (Bill, Part A, Section 1, Article IV, Sections 401 to 403). The FFCPU will be authorized to investigate financial fraud.
Financial fraud is defined as “any fraud, intentional misrepresentation or deceptive act or practice involving a financial product or service or involving any person offering to provide or providing financial products or services” and expressly includes:
a. any fraudulent insurance act or fraudulent life settlement act;
b. deceptive act or practice or false advertising, fraud as that term is interpreted under the banking law;
c. activities that violate certain specified sections of the penal law, and the general business law (including provisions of the Martin Act), which govern certain fraud related offenses;
d. any criminal activity involving a financial product or service or involving any individual or other entity offering to provide or providing financial products or services; or e. any act or omission in violation of federal or state fair lending laws.
Bill, Part A, Section 1, Article I, Section 104(a)(3).
In instances where the FFCPU has reason to believe that a person or entity has engaged, or is engaging, in a financial fraud (as defined above), the DFR Superintendent would have broad authority to investigate such activities, and impose penalties. Bill, Part A, Section 1, Article IV, Section 404 & 408. Violators may be subject to civil or criminal liability under the FFPA, or the insurance, banking and penal laws. In addition, the DFR Superintendent is expressly authorized to collect restitution and damages on behalf of any person suffering economic harm arising from financial fraud and may levy a civil penalty of $5,000 for each violation. Bill, Part A, Section 1, Article IV, Section 408.
This Bill requires approval of both the State Assembly and Senate. We are continuing to monitor the proposal.
