January 9, 2009
Written by Attorneys: Sue Stead and Matthew Brasch
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
In a report that was released on January 8, 2009, the U.S. Government Accountability Office (GAO) recognized a need to significantly reform the U.S. financial regulatory system and briefly suggested that as part of that reform, Congress might consider creating an optional federal charter (OFC) for insurers. The report, entitled, "A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory Structure," is a synthesis of existing GAO work that also includes input from representatives of financial regulatory agencies, industry associations, including the National Association of Insurance Commissioners (NAIC) and the American Council for Life Insurers (ACLI), consumer advocacy organizations, and others.
The GAO report explains that the current U.S. financial regulatory system relies on a fragmented and complex arrangement of federal and state regulators put into place over the past 150 years, generally in response to crises or market developments. The existing system has multiple financial regulatory bodies, including five federal and multiple state agencies that oversee depository institutions; federal, state and private entities that oversee securities activities; federal and industry regulators that oversee futures trading; and state regulators that oversee insurance activities. As a result, the report suggests that the current regulatory system is unable to properly manage "systemic risk," or the risk across the entire financial system.
A key point in the report is that this complex regulatory system has not kept pace with the major developments that have occurred in financial markets and products in recent decades. Specifically, it cites four developments in financial markets and products: 1) the emergence of large, complex, globally active, interconnected financial conglomerates; 2) less-regulated entities have come to play increasingly critical roles in the financial system; 3) new and complex products that pose challenges to financial stability and investor and consumer understanding of risks; and 4) financial markets have become increasingly global in nature, and regulators have had to coordinate their efforts internationally. In light of these developments, the fragmented regulatory system that exists is not designed to adequately oversee the modern financial market and its corresponding systemic risk.
The report sets forth a framework of nine elements that Congress and others could use in reforming the U.S. financial regulatory system. One of the elements recommends that the new system should provide "efficient and effective" oversight of the financial system. In its discussion of this element, the GAO proposes that consolidation of oversight among fewer agencies should occur, and briefly suggests that "the establishment of a federal insurance charter and regulator could help alleviate some of these challenges." An OFC would allow insurers to choose to be regulated by the federal government, similar to the dual-chartering system for banking. The GAO acknowledges that it has not studied the issues of an OFC for insurers nor the creation of a federal insurance regulator and further suggests that this approach could have unintended consequences for state regulatory bodies and insurers alike.
The GAO concludes that Congress should utilize the recommended framework to create or evaluate any proposals to reform the financial regulatory system. The report provides many examples of areas within the U.S. financial system that require improvement, including a short discussion on the advantages and disadvantages of providing an OFC for insurance and creating a federal insurance regulatory entity. If Congress follows the recommendations for reform set forth in the report, the U.S. financial market should anticipate major changes to the existing regulatory climate.
