NY state to boost financial oversight of new products

By Dan Wiessner

ALBANY, New York (Reuters) – The merger of New York state’s banking and insurance departments will not unify all financial regulatory powers under one powerful agency as first advertised, according to Governor Andrew Cuomo’s budget deal.

Some authority over consumer protection will become the responsibility of the Department of State, as that is where the existing State Consumer Protection Board will be placed.

But Cuomo’s new overseer, formed out of the banking and insurance departments, is not expected to be hobbled the way the existing regulators were as it should gain the ability to regulate new financial products that these industries devise.

This will strengthen the policing of banks and insurers by ensuring that their new creations, including over-the-counter products such as credit default swaps, do not fall outside the financial regulator’s purview, making it impossible for the state to investigate any wrongdoing by their inventors.

The failure to fold consumer protection into the new agency, to be called the Department of Financial Services, marks one of the few concessions by Cuomo, who reached a $132.5 billion budget agreement with legislators on Sunday,

Spokesmen for the Democratic governor could not comment on what new powers, if any, the consumer protection arm may gain under the Department of State. The existing Banking and Insurance Departments will keep their oversight of some consumer fraud; these units, which have a total staff of 80, will be folded, into the new agency.

The merger will also see penalties in fraud cases increase from a maximum of $2,500 per transaction to $5,000.


Wall Street will keep a close eye on the new agency since whatever form it takes will affect the fees financial companies pay to the state and the regulations they must follow. The new agency’s first proposed version had drawn extensive complaints about new fees from New York’s insurance companies.

Cuomo has some of his reputation riding on the new regulator. As attorney general, he made national headlines investigating banks and brokerages and pursuing consumer cases. They included overcharging by drug companies and a probe into whether insurers defrauded the heirs of deceased veterans.

Dwight Evans, the chief of staff for Senate Banks Committee Chair Joseph Griffo, an upstate Republican, said that lawmakers had decided to leave much of the work of consumer protection in cases of financial fraud to the attorney general’s office.

Evans also said that lawmakers were uncomfortable with a provision of Cuomo’s proposal that would have funded consumer protection probes through penalties levied on banks.

New York Bankers Association President Michael Smith in March testified at a Senate hearing that the funding of consumer protection initiatives through fraud penalties could lead to overly aggressive prosecution of banks.

“Such a funding mechanism would create a clear conflict of interest, which would result in inappropriate findings of bad deeds and inappropriate imposition of these penalties,” he said.

Ellen Melchionni, president of the New York Insurance Association, a trade group, said she was “very pleased” that the new agency makes clear distinctions between the banking and insurance industries, while Cuomo’s initial proposal did not.

“These two industries have come to look more similar lately than they had previously, but there are still some important differences,” she said.

Details on the new regulatory agency are scant and will be included only in the final budget. The Legislature has yet to draft all of the budget but is expected to pass it by March 31, which is Thursday.

(Editing by Joan Gralla, Chris Sanders and Jan Paschal)

NY state to boost financial oversight of new products