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Regulators Must Stop Policymaking-by-Enforcement

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While financial institutions scramble to understand and comply with rapidly evolving state and federal consumer protection laws, regulations and policies, take a moment to consider how thesenew policies are being implemented.

Earlier this year, the New York Department of Financial Services sued the primary insurance companies underwriting force-placed insurance in New York and, in the resulting consent orders, significantly altered long-held compensation structures, including producer commissions and affiliate reinsurance arrangements. The regulator then obtained consent orders with the remaining insurers underwriting force-placed insurance in the state, who promised not to engage in the same practices.

Now the NYDFS has proposed rules to reform the industry, and sought public comment, on the same practices that it has already prohibited through enforcement actions. Has the NYDFS's maneuvering eliminated the benefits of a public notice and comment period? While the answer to this question is largely subjective, the NYDFS' tactics are a legitimate source of skepticism. And without a clearly stated rationale for the state's policy towards producer commissions, affiliate reinsurance arrangements and other restrictions, the industry is left to guess whether such prohibited arrangements could be troublesome in other contexts.

Other states are beginning to follow the NYDFS' lead. This month, the Florida Office of Insurance Regulation announced that it rejected an insurer's force-placed insurance rate filing. FLOIR entered a consent order requiring the force-placed insurer to use lower rates and abide by the same restrictions that New York imposed, including prohibitions on the payment of producer commissions and affiliate reinsurance arrangements. Without question, FLOIR has the authority to regularly review rates and require that they be actuarially sound. However, the effort to prohibit producer compensation and affiliate insurance arrangements again established new policy in a rate filing without the benefit of consumer and industry input, and leaves the industry to guess whether the policy behind these actions might apply to them in other contexts.

The Consumer Financial Protection Bureau has followed a similar path. When the CFPB was formed in 2010, many skeptics feared it would set policy by enforcement. Two years later, they have been proven right. With respect to add-on products, the CFPB has taken five enforcement actions and issued two bulletins, all of which contain significant policy statements, as well as specific requirements that particular companies must comply with. But the CFPB has failed to put these specific policies out for public notice and comment, leaving the industry to speculate over what it wants, and fearing that the CFPB's lack of thorough industry insight (which is typically obtained through comment letters) will hinder its judgment.

If the states are determined to reform the force-placed insurance industry, and the CFPB is determined to reform the add-on product industry, they should propose rules and subject them to meaningful public notice and comment periods. Obtaining consumers' and industry perspective on new policy will, without doubt, enrich the regulators' understanding of the industry being regulated, and result in fair, balance and informed policy. Clear rules will also reduce the industry's level of distrust for regulatory enforcement of subjective policy.

Adam D. Maarec is an associate with McIntyre & Lemon PLLC in Washington,where he specializes in legal compliance and government relations services for banks, insurance companies and their service providers.

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Comments (2)
What - you don't like regulation without representation?
Posted by Marc11 | Wednesday, October 16 2013 at 4:36PM ET
The owners and managers of banks are not in control. Congress and regualtors are now the managers having departed from the original concept of Auditing for safety and soundness. Regulators have become dictators of the banking industry with the results being very bad. The results are bad because they do not have enough knowledge or understanding about the variety of needs required to serve the numerous different communities in one state let alone all 50 states. The more regulations the greater the problems and costs for the banks in two ways. First, the staff and cost directly to the bank and second, the fees paid by the banks to cover the costs of the regulators. In my 61 years in commercial banking, the environment established by congress and regulators today is at best a mess. There was good reason to separate commercial banking, investment banking and commerce in 1933 because having one source do all three resulted in the failure of the financial system in 1929. The mega banks lobbied, pushed and paid their way to eliminate the fire wall and it only took a few years for the same failure that occured in 1929. Law makers and mega bankers do not seem to learn from past mistakes. The bible has a passage that speaks of the blind leading the blind resulting in disaster. Is this happening in with banking laws and regulators?
Posted by Alfred Kreps | Thursday, October 17 2013 at 2:55PM ET
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