Officials at the Financial Stability Oversight Council (FSOC) say they will communicate better, emphasize general financial safety advice, and think harder about cost-benefits ratios when they decide whether a life insurer or other nonbank company poses a serious threat to the U.S. financial system.
But FSOC officials will still have the authority to give an insurer’s state insurance regulators “nonbinding recommendations” about what do if it looks as if an insurer is diving head first into the shallow end of the pool, and to tell the public why it gave the state regulators those nonbinding recommendations, according to a new batch of FSOC “interpretive guidance,” or explanation of how FSOC interprets the rules for designating insurers and other nonbank companies as risky.
For big insurers that look safe to FSOC, the new rules could mean fewer regulatory headaches.
For insurance agents, the new rules could mean that, any time FSOC gives “nonbinding recommendations” about an insurance company to other regulators, that would be something to watch closely.
The FSOC Story
Congress created FSOC in 2010, in the Dodd-Frank Act, as financial services companies and regulators were still cleaning up from the aftermath of the devastating 2007-2009 Great Recession. Some life insurers had to get help from the federal government to deal with disruption in the financial markets.
Congress gave FSOC great flexibility in determining which entities and activities might bring on a Great Recession II, in part because many members of Congress felt that they, and federal financial regulators, had been surprised to learn, in 2007, that problems with financial instruments linked to mortgage-backed securities could shake the entire financial system.
In 2012, FSOC posted rules for designating life insurers, asset managers, and other “nonbank companies” as “systemically important financial institutions,” or SIFIs. FSOC let itself have broad discretion in applying and maintaining SIFI designations, in an effort to keep companies from trying to game the SIFI designation system.
The insurers that were designated as SIFIs reported that complying with SIFI oversight rules was difficult and expensive; that FSOC SIFI oversight duplicated what state insurance regulators had already been doing; and that they had trouble finding out why they had been designated as SIFIs, or finding out what they could do to escape from SIFI status.
Courts have freed the life insurance sector SIFIs from SIFI status, and the administration of President Donald Trump has made revamping the nonbank SIFI designation rules a priority.
The New Rules
FSOC officials say in the new SIFI designation rules, and in the introduction to the new rules, that they plan to start by focusing mainly on potentially risky activities, and talking about what all companies could do better, rather than on designating specific companies as SIFIs.
Some critics of the new FSOC guidance argued, while a draft released in the spring was under consideration, that an activities-based approach would reduce FSOC’s ability to respond to serious problems at specific companies.