Hot Topic: Setting Policy Through Enforcement and Guidance

By Adam Maarec

October 10, 2013

While financial institutions scramble to understand and comply with rapidly evolving state and federal consumer protection laws, regulations, and policies, take a moment to consider how some new policies are being implemented.

Earlier this year, the New York Department of Financial Services (NYDFS) sued the primary insurance companies underwriting force-placed insurance in New York and, in the resulting consent orders, significantly altered long-held compensation structures, including producer commissions and affiliate reinsurance arrangements. The regulator then obtained consent orders with the remaining insurers underwriting force-placed insurance in the state, who promised not to engage in the same practices. Now the NYDFS has proposed a regulation, and sought public comment, on the same practices that it has already prohibited through enforcement actions. Has the NYDFS’s maneuvering eliminated the benefits of a public notice and comment period? While the answer to this question is largely subjective, the NYDFS’ tactics are a legitimate source of skepticism. And without a clearly stated rationale for the state’s policy towards producer commissions, affiliate reinsurance arrangements, and other restrictions, industry is left to guess whether such prohibited arrangements could be troublesome in other contexts.

Other states are beginning to follow the NYDFS’ lead. This week, the Florida Office of Insurance Regulation (FLOIR) announced that it rejected an insurer’s force-placed insurance rate filing. The FLOIR entered a consent order requiring the force-placed insurer to use lower rates and abide by the same restrictions that New York imposed, including prohibitions on the payment of producer commissions and affiliate reinsurance arrangements. Without question, the FLOIR has the authority to regularly review rates and require that they be actuarially sound. However, the effort to prohibit producer compensation and affiliate insurance arrangements again established new policy in a rate filing without the benefit of consumer and industry input, and leaves the industry to guess whether the policy behind these actions might apply to them in other contexts.

The Consumer Financial Protection Bureau (CFPB) has followed a similar path. When the Bureau was formed in 2010, many skeptics feared that the Bureau would set policy by enforcement. Two years later, they have been proven right. With respect to add-on products, the CFPB has taken five enforcement actions and issued two bulletins, all of which contain significant policy statements and specific requirements that particular companies must comply with. But the CFPB has failed to put these specific policies out for public notice and comment, leaving the industry to speculate over what the CFPB wants, and fearing that the Bureau’s lack of thorough industry insight (which is typically obtained through comment letters) will hinder its judgment.

If the states are determined to reform the force-placed insurance industry, and the CFPB is determined to reform the add-on product industry, they should propose rules and subject them to meaningful public notice and comment periods. Obtaining consumers’ and industry’s perspective on new policy will, without doubt, enrich the regulators’ understanding of the industry being regulated, and result in fair, balance, and informed policy. Clear rules will also reduce the industry’s level of distrust for regulatory enforcement of subjective policy.

This article also appeared in the American Banker.

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