Effective Oct. 3, 2011, the state of New York, home to many of the largest and most sophisticated financial services companies in the world, significantly changed its regulatory landscape by merging its primary financial services regulators, namely, the Insurance and Banking Departments, into a new, single agency, known as the Department of Financial Services (DFS). The DFS is the brainchild of Gov. Andrew Cuomo, and was created by the Financial Services Law (FSL) enacted earlier this year as part of his 2010-2011 New York state budget.
The merger and creation of the DFS mark the beginning of a new regulatory era in New York, and signify a move towards more unified and comprehensive oversight of financial services generally and both the insurance and banking industries in particular. The merger has dual origins, stemming both from government’s perceived frustration at the inability to regulate certain hybrid financial products and practices as well as Gov. Cuomo’s goal of government consolidation and efficiency. Both goals will affect the law’s implementation.
While the merger has widespread implications for the insurance and banking industries, as well as the financial services industry as a whole, this article focuses on key aspects of the FSL and DFS as they apply to the insurance industry in particular.
Goals, Scope, and Structure of the DFS
Pursuant to the FSL, the DFS not only succeeded to the powers and duties of the former Insurance and Banking Departments following the merger, but also assumed new and enhanced responsibilities with respect to these two industries, and the wider financial services industry in New York.
The FSL expressly charged the new DFS with attainment of certain goals and objectives. These include, but are not limited to, the following:
• encouraging growth of financial services institutions in New York, including both insurance and banking institutions;
• modernizing New York’s regulatory and consumer protection framework, in particular with an aim to ensure effective regulation of new financial products and services that become available on the market;
• enforcing the banking and insurance laws;
• ensuring the safety and soundness of the financial services industry;
• protecting the public interest, including educating and protecting consumers of banking, insurance, and financial services products; and
• promoting fraud reduction and elimination.1
In addition to establishing specific goals, the FSL grants the DFS expanded authority, beyond that previously held by either the Insurance or Banking Departments individually, to regulate a broader range of financial products and services, which are defined by the FSL to include any financial product or service provided by any person regulated or required to be regulated under the banking or insurance law, or any financial product or service offered to consumers. This is an expansive definition, extending the regulatory purview of the new regulator.
There are, however, certain products and services that are excluded from the DFS’ jurisdiction, in particular, products or services (1) under the exclusive jurisdiction of a federal agency; (2) regulated for the purpose of consumer or investor protection by another state agency, department or public authority; (3) where rules or regulations promulgated by the DFS would be preempted by federal law;2 and (4) when offered by a provider of consumer goods or services.3 Furthermore, the FSL expressly allows the DFS to choose not to regulate certain products in its discretion.4
It is interesting to note that the original version of the FSL included a wider definition of “financial product or service.” The original definition proposed to cover products and services regulated under the insurance and banking law, as well as any other law, and included contracts involving the types of products or services otherwise specified in the definition. The adopted definition was ultimately narrowed. Nevertheless, it still affords the DFS expanded authority, particularly when read in connection with the provisions granting the DRS authority to investigate certain types of fraud and misconduct as more thoroughly described below.
The DFS is divided into five main divisions to help accomplish the goals articulated above, especially in light of the expanded scope of authority over financial products and services. These divisions are Insurance, Banking, Financial Frauds and Consumer Protection, Real Estate Finance, and Capital Markets.5 Each division is responsible for regulating a specific segment or aspect of the financial services industry, and aims to provide comprehensive regulation of increasingly more complex financial products and services with a view to ensuring that the events of recent years leading to the financial crisis do not reoccur.
Operation of the DFS and each of its divisions will be funded through assessments on regulated companies (i.e., insurance companies and banks). With respect to insurance companies, the existing assessment provision grants the insurance superintendent broad discretion to levy assessments on insurance companies to cover the operating costs of the insurance department. The assessment is calculated in proportion to the gross direct premiums and other amounts, written or received by each insurance company in New York. The FSL repeals and replaces the assessment provision, effective April 1, 2012. The new assessment provision will continue to provide a pro rata assessment. Furthermore, the new assessment provisions will expressly limit assessments on insurance companies to only cover “operating expenses of the department solely attributable to regulating persons under the insurance law.”6 This limitation was enacted in response to industry concerns that assessments may be used to cover expenses that are not primarily insurance related.
The DFS Superintendent
Benjamin M. Lawsky, Governor Cuomo’s former chief of staff, took the helm of the DFS by assuming the role of its new superintendent, effective Oct. 3, 2011.7 Mr. Lawsky, in his role as the DFS superintendent, is responsible for overseeing each of the five divisions listed above. The FSL grants Mr. Lawsky broad rights, powers and duties in connection with achieving the goals and objectives of the FSL, as well as any other applicable law of the state of New York.8 Among other things, Mr. Lawsky is empowered to:
• investigate and prosecute insurance fraud (as more thoroughly described below);
• take consumer protection measures, including investigating and researching consumer matters, monitoring consumer complaints, receiving complaints, mediating such complaints or referring them to the appropriate agency, educating consumers about financial products and services, making recommendations to the governor with respect to issues affecting consumers of and investors in financial products and services, and assisting local governments and non-profits in developing consumer protection measures; and
• cooperate and assist with the enforcement responsibilities of the New York Attorney General’s Office.9
Furthermore, Mr. Lawsky is granted rulemaking and interpretative authority to effectuate any power afforded by the FSL, the insurance law, the banking law, or any other law to prescribe forms or make regulations, to interpret the FSL, the insurance law, the banking law, or any other applicable law, and to govern the DFS’ procedures.10
Authority to Regulate Fraud
Recognizing that fraud can transpire across industries, the FSL consolidated the insurance frauds and the criminal investigations bureaus, which investigated fraud in the insurance and banking industries separately, into a new, single bureau, known as the Financial Frauds and Consumer Protection Unit (FFCPU).11 Mr. Lawsky, in his role as the DFS superintendent, is responsible for overseeing the FFCPU, thereby ensuring that a single set of eyes is watching over any potential fraud in the financial services industry as a whole.
The FFCPU is authorized to investigate and prosecute fraud involving financial products and services. Fraud, as it applies to financial products and services, is not defined in the FSL. This was a conscious decision by lawmakers, and effectively gives the DFS superintendent and FFCPU general authority to investigate fraud across the insurance and banking industries. Prior versions of the legislation proposed to expressly define “financial fraud” as a new offense. The original version of the legislation defined it broadly to cover “any fraud, intentional misrepresentation or deceptive act or practice involving a financial product or service or involving any person offering to provide or providing financial products or services” and included, among other things, any violation of the Martin Act.
This inclusion was significant as Martin Act powers would mean that the FFCPU and DFS superintendent would not need to show that the violator had an intent to defraud. The second draft of the legislation included a narrower definition of “financial fraud.” It removed the references to the Martin Act, and “deceptive acts or practices” from the definition of “financial fraud,” thereby making it more difficult to prove a violation. The FSL, as adopted, has removed the defined offense of “financial fraud” completely, and, gave the FFCPU and the DFS superintendent general authority to investigate violations of the insurance and banking laws, as well and violations of new law created by the FSL.12
If the FFCPU has reason to believe that a person or entity has engaged in prohibited conduct, the DFS superintendent will have authority to investigate such conduct:
If the financial frauds and consumer protection unit has a reasonable suspicion that a person or entity has engaged, or is engaging, in fraud or misconduct with respect to the banking law, the insurance law, the provisions of this chapter or other laws pursuant to which the superintendent has investigatory or enforcement powers, then the superintendent, in the enforcement of relevant statutes and regulations, may undertake an investigation thereon, provided, however, that the scope of authority set forth in this section shall not be deemed to otherwise limit or impair the ability of the superintendent to assist any other entity in an investigation involving a violation of law, and provided further that the responsibility and power to investigate any specific frauds or misconduct enumerated in this chapter, the banking law, the insurance law and other laws pursuant to which the superintendent has investigatory or enforcement powers shall be included under the jurisdiction of the financial frauds and consumer protection unit.13
The DFS superintendent will also have the authority to impose penalties for violations.14 For example, the DFS superintendent may levy a civil penalty of up to $5,000 for each intentional fraud or misrepresentation, or up to $1,000 for each violation of the FSL and applicable regulations. However, it is important to note that the FSL expressly provides that these penalties will not apply to persons regulated under the insurance law; such persons will be subject to penalties set forth under the insurance law.15
The merger of New York’s Insurance and Banking Departments into the DFS marks the beginning of a new financial regulatory regime in the state. A unified system is not a new concept. Other states have adopted similar regimes. However, as New York is home to many of the largest and most sophisticated financial services companies in the world, changes in its regulatory environment are significant to both domestic and international companies conducting business in New York. The benefits of a single regulator with a full, complete view of the financial services industry could, if used wisely and prudently, be significant and will lead to significant changes in how practices evolve.
Mark Peters, the former head of the New York Liquidation Bureau, is a partner, and Mohana Terry an associate, at Edwards Wildman Palmer in New York.
1. FSL, Part A, §1, Art. 1, §102.
2. Id. at §104(a)(2)(B).
3. Id. at §104(a)(2-a).
4. Id. at Art. 3, §302(b).
5. DFS Press Release, “Superintendent Lawsky Announces Launch of New Department of Financial Services,” Oct. 3, 2011, available at http://www.dfs.ny.gov/about/press/pr1110031.htm.
6. FSL, Part A, §1, Art. 2, §206(a).
7. See Governor’s Press Office, “Governor Cuomo Announces Unanimous Senate Confirmation of Benjamin Lawsky as Superintendent of The Department of Financial Services,” May 24, 2011, available at http://www.governor.ny.gov/press/GovernorCuomoAnnouncesUnanimousSenateConfirmation.
8. FSL, Part A, §1, Art. 2, §202(a).
9. Id. at Art. 3, §301(c).
10. Id. at §302.
11. Prior versions of the FSL proposed merging the consumer financial protection activities of the Consumer Protection Board into the FFCPU as well. This was not included in the adopted version. Rather, the Consumer Protection Board has been replaced by a new Consumer Protection Division in the New York Department of State. Id. at Art. 4, §401 et seq.
12. Id. at §404.
13. Id. at §404(b).
14. Id. at §§404, 408.
15. Id. at §408.