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Republican Lawmakers Criticize Regulatory Plan for Insurers

Seven Republican lawmakers criticized the process the Financial Stability Oversight Council (FSOC) uses to designate financial companies for stronger regulatory supervision. The lawmakers fear that the supervisory process will unnecessarily restrict insurance companies, and they asked regulators to study the issue in more detail before subjecting insurers to tougher oversight.

Rep. Scott Garrett, a Republican from New Jersey who chairs the House Financial Services Subcommittee on Capital Markets, and six other Republicans told Treasury Secretary Jacob Lew that they were concerned about “the disparate treatment” of insurers compared to other nonbank companies that may be subject to tougher regulatory supervision.

“We are concerned that the [Financial Stability Oversight Council] has devoted far less effort to empirical analysis, stakeholder outreach, and transparency in its consideration of insurance companies for designation than it has for asset management firms,” the lawmakers wrote to Lew on September 2, 2014. Lew chairs the council set up by the Dodd-Frank Act to monitor the financial system. FSOC’s members include the heads of the federal financial and banking regulatory agencies, and the SEC is represented on the panel by Chair Mary Jo White. “This disparate treatment has led to uncertainty in the insurance industry and raised concerns that the council’s approach to insurance company designations is to ‘designate first, ask questions later.'”

If a financial firm is designated as a systemically important financial institution (SIFI), it’s subjected to stricter regulation than its industry peers. The term is generally considered to be reserved for financial companies that the markets perceive as being too big to fail. Prior to Dodd-Frank’s enactment, the too-big-to-fail designation meant a bank, broker, or insurer would most likely be bailed out by the Federal Reserve or Treasury Department to avoid sparking a widespread panic throughout the markets.

“Given the unknown competitive impact and potential distortions that SIFI designations will create for specific companies and markets, it is incumbent on the Council to conduct a thorough public examination,” the lawmakers wrote. The letter was signed by Garrett, and Reps. Spencer Bachus of Alabama, Ed Royce from California, Steve Stivers of Ohio, Sean Duffy from Wisconsin, Mick Mulvaney from South Carolina, and Dennis Ross of Florida.

Garrett wrote that while there were problems with the council’s treatment of asset management firms, the Treasury Department ‘s Office of Financial Research still attempted to do a thoughtful analysis of the investment industry before designating specific firms as systemically important. However, he said the council hasn’t published a comparable analysis of insurance companies.

“We received the letter and plan to respond in due course,” a Treasury spokesperson said.

During a congressional hearing in June, Lew said that before the council was set up, no single authority was responsible for monitoring overall risks with each regulator focused on the institutions they regulate, allowing certain risks to “fall through the cracks of the regulatory system.”

“Today, there are even some who challenge the notion that the council should ask questions about whether certain activities or companies might pose risks to the stability of the U.S. financial system. But asking questions does not equal regulatory action,” Lew said. “If we avoid or are discouraged from asking questions all together, our financial system will be more exposed to unseen risks, potentially leading to large scale problems.”

Lew challenged assertions that the council’s processes are opaque and its outcomes predetermined.

The “council has voluntarily adopted a robust transparency policy and put in place a comprehensive, deliberative approach to its evaluation of risks, and it solicits public input and carefully considers all points of view,” Lew said.