GAO Report Concedes Congress Should Consider Pros & Cons Of OFC

ACLI has been a strong advocate for optional federal charter legislation.

State regulators and industry groups opposed to federal chartering were quick to point out that the OFC element amounted to a mere mention in a much more broadly targeted GAO report, and was certainly no endorsement of the concept. Still, critics of OFC spoke out strongly against the idea.

"We caution Congress against efforts by some in the industry to use the current financial turmoil as a pretext for proposing changes to the existing state [insurance] regulatory structure that would essentially result in deregulation," said Roger Sevigny, president of the National Association of Insurance Commissioners, in a statement titled: "NAIC Response Cautions Against Unjustified Changes."

Mr. Sevigny, who is New Hampshire's insurance commissioner, warned that adding an OFC to the regulatory mix "would only increase the complexity of the current U.S. financial regulatory structure and not address the gaps in regulation or inadequate coordination and communication between functional regulators."

In defending the current, state-based system, Mr. Sevigny said that "state insurance regulators are continuing efforts to make adjustments, as needed, in the ever-changing insurance marketplace."

He said the NAIC was "pleased to point out" that GAO's study acknowledges state regulators are positioned to "move more quickly and more flexibly to respond to activities causing harm to consumers."

"We have all witnessed how lax federal regulation and oversight has contributed to the current financial crisis, and warn against any plan to create a regulatory authority that is solely federally based," he said.

At the same time, he commended the overall GAO report, and said NAIC "looks forward" to working with the new Congress and Obama administration to "strengthen and improve our state-federal regulatory system with meaningful reforms."

The National Association of Mutual Insurance Companies also pointed out that insurance is practically a footnote in the GAO report, which "makes no such [OFC] recommendation and acknowledges that the authors did not study proposals for an OFC."

NAMIC said the report states that establishment of a federal insurance charter could "have unintended consequences for state regulatory bodies and for insurance firms as well."

Jimi Grande, NAMIC's vice president for federal and political affairs, said the GAO report was evidence the state system worked well, and that "stringent state financial and accounting insurance standards ensured that even as the nation's non-insurance segments experience economic disruptions, the property-casualty insurance sector remains solvent and able to meet claims obligations."

Charles Symington, senior vice president of government affairs at the Independent Insurance Agents and Brokers of America, said that "despite some assertions to the contrary, the GAO does not formally recommend that an optional federal charter be debated. The study only mentions OFC in passing, and that an OFC regime could be considered by Congress."

"Once OFC is studied fully through the prism of the recent financial services market turmoil, it will be clear that it would only promote a race to the bottom and result in haphazard deregulation to the detriment of consumers," Mr. Symington argued in a statement.

"We believe that the GAO's comment that there could be 'unintended consequences for state regulatory bodies and for insurance firms as well' from such a system is fair warning that an OFC would create many more problems than it would allegedly solve," he added.

In recommending a new system to provide "consistent consumer and investor protection," GAO noted that interconnected financial conglomerates crossing financial sectors of banking, securities and insurance have "increased significantly in recent years."

The GAO called for regulations that are comprehensive and cohesive, covering all activities that pose risk–noting that some activities may require less regulation than others. Needed, the agency said, is a system that allows regulators to adapt to market innovations and changes in a timely manner.

GAO urged the elimination of overlapping federal regulatory missions without sacrificing effective oversight.

The agency said lawmakers, in making revisions, should look for opportunities to consolidate rival agencies and streamline consumer protection activity.

Regulators, GAO said, should have independence from inappropriate influence, as well as prominence and authority to carry out their mission. Similar institutions, products, risks and services, GAO said, should be subject to consistent regulation.

A new system, the agency recommended, should foster financial markets that are resilient enough to absorb failures, and thus limit the need for federal intervention as well as taxpayers' exposure to financial risk.

The GAO report said one issue that should be considered is the appropriate role "of the states in a financial regulatory system and how federal and state roles can be better harmonized." It suggests that one way of dealing with it is to "consider the potential benefits that might result in some cases from having multiple regulators overseeing an institution."

Specifically, the report said, "Some types of concurrent jurisdiction, such as enforcement authority, may be less burdensome to institutions than others, such as ongoing supervision and examination."

The report noted that consumer groups argue "states may move more quickly and more flexibly to respond to activities causing harm to consumers."

The focus of the GAO report was covered in comments made to CNBC by President-elect Barack Obama.

He said that by April 1–working with congressional officials, led by the Senate Banking Committee chair, Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass., chair of the House Financial Services Committee–the incoming administration will present a proposal for "substantial overhaul" of the current regulatory system.

The effort, he said, will involve international coordination. "We're going to have better enforcement, better oversight, better disclosure, increased transparency."

He added that "we're going to have to look at this alphabet soup of agencies and figure out how do we get them to work together more effectively."

The GAO report echoed that theme.

"Responsibilities for overseeing the financial services industry are shared among almost a dozen federal banking, securities, futures and other regulatory agencies, numerous self-regulatory organizations, and hundreds of state financial regulatory agencies," GAO noted.

"The portion of firms operating as conglomerates that cross financial sectors of banking, securities and insurance increased significantly in recent years, but none of the regulators is tasked with assessing the risks posed across the entire financial system," GAO added.

President-elect Obama's comments in his interview were consistent with the GAO report. "We've got to stop splintering functions in such a way that capital in one form is treated one way and capital in another form is treated another way, because these days in global financial markets, they're all fungible," he said.

"And there are systemic risks that are possible, whether it's in the form of derivatives or insurance or traditional bank deposits," he added. "So we've got to update the whole system to meet the needs of the 21st century."

In its report, the GAO said that a new regulatory system must be "flexible and forward-looking" while allowing regulators to adapt to market innovations and changes.