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Regulation and Compliance > State Regulation

Oh, waiter? Reality check, please

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There is an interesting article on Investment News this morning regarding how the insurance industry has largely dodged a regulatory  bullet in all of the financial services regulatory overhaul. Now, I say “interesting” kind of how most English folks will nod and politely say that whatever your hitting them with is “interesting” when what they really mean is that you don’t know what you’re talking about.

Point the first: the article repeatedly notes how insurers got out of stronger regulations despite the central role AIG played in the financial crisis. No duh. Anybody who knows anything about the crisis and AIG knows that their insurance operations had nothing to do with it. They have always been solid, even if linked to a larger parent done in by hundreds of billions of dollars in bad bets. Frankly, this point has been made so many times, I wonder why it’s coming up now. It does support my cynical theory that anybody not in the insurance business has not the faintest clue of how it really works, however. Oh, how I wish this could change.

Point the second:  A couple of different comments on the nature of the Federal Insurance Office, which as we all know has been relegated to a largely advisory role without any real teeth to it. Jane Cline, West  Virginia’s insurance commissioner and the current head of the NAIC gives a predictable quote about how great the state-based insurance regulatory system worked, especially in the financial crisis, and Joel Wood, senior VP of government affairs for the CIAB also notes that the FIO, in its current form, is a pretty good deal, all things considered. Maybe so. But I would feel a lot more comfortable with all of this if the NAIC had not lobbied so hard to kill the FIO. There are plenty of insurers for whom the NAIC model of regulation is overly burdensome, complicated and inefficient. Morever, a strong federal system doesn’t necessarily ensure that regulation would be done any better. It’s not like the Fed has a great track record with this stuff. But at the same time, the various state insurance regulators couldn’t come together and see that something was going seriously awry with AIG. Sure, AIG’s problems weren’t insurance-related, but state regulators had access to all the numbers they needed to see that AIG was headed into oblivion. That they could not coordinate in time to stop AIG from doing what it did reminds me of the failures of the FBI, NSA and CIA to stop 9/11. There, I said it.

But what puzzles me most about this article was a quote from NAIFA president Thomas Currey, who hailed an SEC decision to study the impact of the fiduciary standard it is trying to make law. The ficudiary standard is a big, big deal for anybody in the financial advisory business, especially broker-dealers, so I can appreciate any effort to hold back the SEC, especially given that agency’s expansionist agenda as of late. (151A, anyone?)

But with that in mind, Currey makes a curious statement about how a universal fiduciary standard would overburden the already over-regulated broker dealer, and would render broker-dealer services too expensive for the low- and middle-income market. Now middle-income market, I can see. But low-income market? Maybe I’m missing something, but the last time I checked, the very best investment advice anybody in the low-income market could receive is for them to pay down their consumer debt. I simply cannot believe there are a lot of folks scraping by out there who have a big investment plan in the works that won’t come together without the help of a broker-dealer. To say that these folks will get left behind by a fiduciary standard seems a little overblown, especially since the threat of a global double-dip recession has not yet been ruled out.

I can appreciate where NAIFA is coming from, I really can. And likewise, I can appreciate the various viewpoints of the other groups noted in this story. But there is just an air of hollowness to a lot of these comments that seem to contribute more light than heat to some very serious movements underway that could change the face of how we use financial services for many years to come. Now isn’t really the best time to be throwing out arguments that are, upon examination, a little wobbly.


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