Insurers May Face New Consumer-Focused Regulations

Insurance Networking News, November 21, 2008

Minneapolis – Under a new presidential administration, successful financial services and insurance organizations will be those that are not only able to adjust to a changing regulatory landscape, but ones that can also demonstrate they are embracing the letter and the spirit of the law. So say experts at Wolters Kluwer Financial Services, a provider of compliance and operational risk management solutions to financial organizations.

 

“The country’s financial and economic crisis is really prompting everyone to look at our current regulatory system and ask, ‘What can we do better?’” said David Thetford, securities compliance principal analyst at Wolters Kluwer Financial Services. “The regulatory structure needs to be reviewed from the ground up. We need to identify the goals we are trying to achieve through regulation and what regulatory structure is best to achieve those goals.”

 

Thetford noted that this could encourage and promote a lean toward principles-based regulation, a model that has already received a lot of attention from the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

 

Kathy Donovan, manager of Government Relations for Wolters Kluwer Financial Services’ Insurance Compliance Solutions group, agrees the basic premise of principles-based regulation—doing right by the customer—will likely be paramount in the financial services industry as we enter 2009.

 

“There continues to be a growing interest in protecting consumers—particularly the senior population,” said Donovan. “Within the insurance industry, we’ve seen many recent examples, including the National Association of Insurance Commissioners’ (NAIC) new model law to prohibit the use of certain senior-specific designations for insurance agents and many state initiatives to place restrictions on Stranger Originated Life Insurance (STOLI).”

 

Donovan expects that as the 2009 legislative sessions begin in multiple states, insurers will see variations of the NAIC model law and STOLI restrictions, as well as other consumer-focused regulations, introduced.

 

The issue of state regulation versus federal regulation, and the potential for discrepancies between the two, will also be in focus in the banking industry in coming months.

 

“I don’t think we’ll see a lot of new regulations right away at the federal level, but I do think we will continue to see substantial change at the state level, given the recent subprime issues,” said Amy Downey, senior compliance consultant at Wolters Kluwer Financial Services. “State banking regulators haven’t traditionally waited for the federal banking regulators to take the initiative in protecting their citizens.”

 

Downey says many of the emerging regulations at the state level are fair and anti-predatory lending requirements. And while designed to protect the consumer, these regulations can also sometimes unintentionally inhibit lenders. The requirements can be so onerous that the secondary market will not purchase loans that cannot comply with them.

 

States may be eager to impose new regulations, but that is not always the solution, according to Edward Kramer, executive vice president for regulatory programs at Wolters Kluwer Financial Services.

 

“Everyone’s instinct when something goes wrong in the financial services industry is to come up with a new regulation,” said Kramer. “But oftentimes, it really is a matter of fixing what you already have.”

 

Kramer added that mortgage lending has always been based on the ‘three Cs’—credit, collateral and capacity to pay.

 

“We lost sight of these basic elements,” said Kramer. “And as a result, many regulators are considering more aggressive postures when it comes to monitoring and enforcement practices.”

 

Such heightened oversight will also apply to new requirements, such as the Fair and Accurate Credit Transactions Act’s Red Flag Rules, that took effect on Nov. 1, said Kevin Byrne, senior compliance consultant for Wolters Kluwer Financial Services.

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