Federal Financial Watchdog Aims to Expand Its Reach

What You Need to Know

FSOC started out designating several large life insurers as financial institutions in need of extra oversight.
Life insurers argued that the FSOC designation system was arbitrary and opaque.
In 2019, FSOC agreed to rules that reduced the odds that it would classify as an organization other than a bank as needing extra oversight.
Now, FSOC says it will make the designation process more clear but must have the ability to move quickly.

The Financial Stability Oversight Council — the federal agency in charge of keeping the U.S. financial system upright — wants to change a 2019 document that limits how it tries to keep problems at life insurers, money market funds, cryptocurrency firms and other nonbank financial companies from destroying the economy.

FSOC announced Friday that it’s proposing a new version of the document that would free it from the 2019 restrictions.

FSOC could skip doing cost-benefit analyses before designating a nonbank financial company as a company in need of extra regulation.

FSOC could also start by focusing on specific companies it considers potentially risky, instead of starting by looking at risky marketwide activities, and it could respond to problems at a nonbank company immediately, instead of giving the nonbank company’s state-level regulators time to see what they can do.

“Today’s proposals would make us better equipped to handle risks to the financial system, whether they come from activities or firms,” Treasury Secretary Janet Yellen, FSOC’s chairperson, said.

What It Means

One section of the new draft guidance does not mention the word “insurance,” and the other part mentions insurance only in a long list of types of asset classes, institutions and activities that FSOC might monitor.

If FSOC does use any new flexibility to designate life insurers as companies in need of extra attention, that could revive old fights over federal regulators’ authority to step in when they feel state regulators are failing to do enough to resolve companies’ problems.

For clients, new FSOC designation fights could mean that life insurers’ names and product lines could change quickly as insurers try to act on FSOC recommendations and back away from activities that look as if they could hurt the financial system.

If FSOC believes that providing investment guarantees poses a threat, finding new annuities or indexed universal life insurance policies with attractive investment guarantees from big insurers could become especially difficult.

FSOC Basics

Congress created FSOC in the Dodd-Frank Act of 2010 in an effort to keep the type of complicated, previously obscure kinds of threats that shook American International Group’s collateralized default swaps operation from causing financial crises in the future.

FSOC is supposed to monitor new, existing and emerging threats to the U.S. financial system. It can address threats at nonbanks, which normally fall outside the reach of federal banking regulators, by putting them under the oversight of the Federal Reserve board.

In addition to Yellen, the FSOC chairperson, the council also has nine other voting members and five nonvoting members.

Most of the voting members are the heads of federal financial services regulatory agencies, such as the U.S. Securities and Exchange Commission.

One is an “independent member with insurance expertise.” The director of the Treasury Department’s Federal Insurance Office and a state insurance commissioner designated by the state insurance commissioners also serve as nonvoting members.