NY's Proposed New Department of Financial Regulation

In the Executive Budget released today by Governor Cuomo, we get a look at the vision for the new Department of Financial Regulation. In the Agency Presentations release, (see pages 131-134) the mission of the new agency is described, in part, as follows: “The new Department of Financial Regulation (DFR) harnesses the regulatory powers and expertise of the Banking and Insurance Departments, as well as the Consumer Protection Board, to make the State’s oversight of financial services responsive to the 21st century needs of the industry and its consumers….Consolidation of these agencies and activities within a single agency platform will afford the State the ability to unify the State’s regulation of financial services and to more rapidly and adroitly respond to changing market practices and consumer preferences, thereby ensuring the industry’s continued integrity while shielding consumers from abuses.”

As I copied this passage from the budget book, I stumbled on the words “industry” and “industry’s” instead of “industries.” It appears that the regulatory consolidation is re-defining banking and insurance as a single industry.

After deciding to advocate consolidation of these two agencies, the governor could have taken the approach that while these industries are different and unique, there are enough similarities that regulatory economy can be achieved by combining agencies and personnel. But it seems he may be going much further.

At least in this preliminary view, it appears the regulatory framework being proposed in this budget is that there is a single industry; financial services. This document suggests that the governor views banking and insurance as more similar than different - they can not only be regulated by a single entity, they can be viewed as a single industry. If accurate, that is a huge shift in perspective and it could have very significant implications for how insurance is regulated in NY.

Another major initiative seems to be in the examinations the DFR will conduct. In the Program Highlights section of the discussion, under “Regulation” it states: “To ensure the safety and soundness of all regulated entities, the Department will monitor banks, insurance companies and other financial institutions to identify problems and will work with management to promptly solve them. The Department will carry out this responsibility through annual on-site examinations, regular review of institutional financial reports, and periodic site visits.”

Annual on-site examinations?

Under Budget Highlights, the document states that the proposed 1.1% increase in budget over the combined banking and insurance budgets in part “provides additional resources that will allow the Department to perform more on-site examinations of insurance companies. Increasing on-site examinations will result in savings to the insurance industry by reducing costly direct-pay examinations for which insurers contract with outside vendors to fulfill regulatory requirements.”

While there is no question that the third party vendors are expensive, it seems counter intuitive that doing more on-site examinations in this age of technology is more efficient and cost-effective. In addition, there are going to have to be very significant changes to the examination process if they are going to be annual. It could easily result in what are essentially perpetual examinations.

Finally, in the Consumer Protection section, there is another possible indication of changes to come. “The Department will strive for the fair treatment of insurance policyholders, claimants and the public through the regulation of company claim payments and sales practices, responses to consumer complaints, and the timely review of insurance company denials of coverage. The Department will promote high standards of industry conduct and competence through testing, oversight, and pre-licensing and enforcing educational standards of licensees.” No mention of approval of policy forms here. Instead, this states that “The Department will proactively educate consumers regarding unscrupulous financial industry practices and products and will advocate on behalf of consumers who have been defrauded or harmed by such abuses.”

Obviously much can, and probably will, change before the new agency gets finalized. And some of the proposals here would require other changes to law. However, one thing seems certain; there are many more changes coming to the regulation of insurance in NY than a change in the name of the executive agency.