Filed Under:Markets, E&S/Specialty

Obama Plan Outlines Regulatory Scheme For Large Insurers

NU Online News Service, June 9, 4:14 p.m. EDT

WASHINGTON--The Obama administration will propose putting large insurance companies under the control of a federal systemic risk regulator for the financial services system, and probably a U.S. insurance regulator as well, according to a draft document obtained by National Underwriter.

The plan, due for release next week, has been circulating on Capitol Hill today, several sources said.

However, a Treasury Department spokesman, when asked about the draft, said he would look into it but he was "very skeptical" it was accurate.

On another front, sources said, House Republicans could unveil their own regulatory reform proposal this Thursday.

According to the administration draft, large insurers likely will be pre-empted from state laws, but will not be "deregulated" and it may not be optional. Also, those designated as "national insurers" will likely be subject to new financial product safety commission regulations.

The administration is expected to unveil its principles for financial services reform on June 17, and Treasury Secretary Timothy Geithner will explain the plan the next day in testimony before the House Financial Services Committee, according to insurance industry lobbyists.

Mr. Geithner confirmed the administration's plans in testimony on June 9 before the Subcommittee on Financial Services and General Government of the Senate Appropriations Committee.

"As we have made repairs to the financial system, we have understood that repair alone is not enough," Mr. Geithner testified. "We must also reform the system so that it is less prone to crises of the dimensions that we now face."

Specifically, he said that "in the next few weeks, we will outline a comprehensive plan of reform that will include systemic risk regulations to ensure that no large and interconnected firm or market can take on so much risk that its failure could destabilize the entire financial system."

He said the plan calls for bolstering consumer and investor protections, "and it will streamline our out-of-date regulatory structure so that our regulatory system matches the size, shape and speed of our modern financial system."

The administration proposal would give the systemic risk regulator the authority to set capital, liquidity and other safety and soundness requirements. It will propose that this authority be granted to the Federal Reserve.

But the proposal is likely to state that the administration "would be open to a strong council as long as the chair would have sufficient authority to be effective."

The authority to resolve systemically risky financial services firms would be given to the Federal Deposit Insurance Corp., but the draft does not specifically say that insurers would be subject to this authority.

Under the plan, hedge funds would be regulated via mandatory registration and additional disclosure of positions, while large hedge funds would be subject to the authority of the new systemic risk regulator.

The administration plan will call for the Securities and Exchange Commission to gain power, but the Commodity Futures Trading Commission will remain independent, according to the document.

It also states that creation of a Consumer Product Safety Commission is "under serious consideration," and would focus on consumer finance issues, but due to resistance from the SEC, it will leave investor protections to the SEC and CFTC.

The draft said that a dual banking charter will be continued, but the systemic risk regulator "will take even more power away from the state regulators."

It also said that the Office of Thrift Supervision is likely to be merged with the Office of the Comptroller of the Currency, and that OCC will also be given a more prominent role in examinations, and may take over many of the Federal Reserve and FDIC examination roles, and will gather most of the data going forward.

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