Why NYDFS is the Financial Regulator to Watch
Last summer, the New York Department of Financial Services (DFS) burst into the regulatory spotlight by wresting a historic $340 million money-laundering fine from Standard Chartered Bank. Now, nearly a year later, there are plenty of good reasons to pay plenty of attention to this zealous regulatoras Jones Day points out via Harvard Law Schools corporate governance blog.
Given DFSs aggressive posture, its willingness to examine new issues, and its desire to establish precedents for other regulators and prosecutors to follow, banks, insurers, and other financial institutionsboth in and outside New Yorkshould keep DFS and its activities in view, the law firm memo [PDF] says.
Formed in late 2011 by the merger of two existing state agencies, DFS is led by Superintendent Benjamin Lawsky, who gave a speech last month on the agencys priorities and guiding philosophy. Between Lawskys remarks and Jones Days analysis, here are three things to note as DFS hits its one-year milestone:
1. The agencys desire to foster healthy competition among regulators
With Standard Chartered, DFS certainly demonstrated it wasnt afraid to break away from the regulatory pack and pursue a case aggressively. At the time, unnamed government sources grumbled to the media about DFSs approach.
Lawsky doesnt apologize for thatand in fact thinks competition among regulators cuts down on complacency and institutional inertia, according to his speech.
A dose of healthy competition among regulators is helpful and necessary to safeguarding the stability of our nations financial system, he said. Not just todaybut for the long term.
2. How federal regulators are taking notice
This year DFS cracked down on the force-placed insurance industry, which involves policies taken out by a bank or lender and placed on a homeowners property. In reaching a $14 million settlement with the insurer Assurant in March, DFS charged that rates were too high and that there was too little competition in the market.
Then came a decision by the Federal Housing Finance Agency. Jones Day points out: Shortly after the settlement was announced, [FHFA], which oversees Fannie Mae and Freddie Mac, filed a notice prohibiting the payment of fees or commissions by insurers for force-placed insurance.
Lawsky hopes others states will follow suit, too. To spur further action, DFS also recently urged other state regulators to use our settlement with Assurant as a national model, he said.
3. New items on the agenda
So whats next? Lawsky said his office is focused on:
Corporate Monitors: Lawsky questioned the independence of monitors that are often installed at companies after wrongdoing of some sort has occurred, calling recent outcomes of corporate monitoring in the context of the national mortgage settlement disappointing.
This can be blamed on a number of factors, he said, but it is worth considering that our current system significantly undermines the independence of the monitorsthe monitors are hired by the banks, theyre embedded physically at the banks, they are paid by the banks, and they depend on the banks for future business.
Private equity investment in insurance companies: According to Lawsky, private equity firms ownership of insurers has shot up recently, to nearly 30 percent of the indexed annuity market (up from 7 percent a year ago) and 15 percent of the total fixed annuity market (up from 4 percent a year ago).
In turn, DFS is concerned, about these firms having a short-term outlook: That their focus is on maximizing their immediate financial returns, rather than ensuring that promised retirement benefits are there at the end of the day for policyholders, he said.
Captive insurance companies: Last July, DFS started an ongoing investigation into these companies, concerned about insurers creating subsidiariesand shifting claims to themin jurisdictions with looser reserve and oversight requirements, Lawsky said.
One of the problems with that, he added, is that there is a smaller reserve buffer available at the insurance company to ensure that the policyholders receive the benefits to which they are legally entitled.