Top Compliance Issues for Insurance, Financial Sectors in 2023

At the start of the year, we took a look at some of the legislative issues we believed would get the most attention from state lawmakers in 2023 within the realms of health, insurance/finance, labor and technology. This week, with the guidance of attorneys Celeste Mitchell-Byars and Karen C. Yotis of the LexisNexis Practical Guidance and Analytical Team, we’re delving into the compliance side of one of those spheres. Here are some of the most pressing state-related regulatory concerns for the insurance and financial services sectors this year.

Access to New Anti-Money Laundering Data

Beginning on January 1, 2024, under the terms of the federal Corporate Transparency Act and as part of the Anti-Money Laundering Act of 2020, American corporations will be required to reveal to the U.S. Department of Treasury their true or “beneficial owners.” The mandate is a sweeping attempt to prevent criminals and Russian oligarchs from hiding anonymously behind shell companies.

The collected data will be entered into a still-to-be-developed Financial Crimes Enforcement Network (FinCEN) database called the Beneficial Ownership Secure System or BOSS.

State financial regulators are awaiting direction from FinCEN on the precise nature of the data they’ll be expected to collect and report. And they’ll desperately need that guidance, as this is information they’ve never collected before.

But states are also pushing back against the limits included in the proposed FinCEN database access rules, contending that they need access to the beneficial ownership data to properly suss out criminal activity. It remains to be seen which state-level agencies, if any, will be granted access to this treasure trove of sensitive information.

With implementation of this new, all-encompassing regulation coming into effect in less than a year, guidance is expected to be issued in early 2023.

Increasing Oversight of Cryptocurrency Transactions

While the cryptocurrency market is in a bit of a shambles right now, financial and insurance regulators are increasingly eying this emerging technology to ensure they’ll have some oversight of it.

Many states, most notably New York, have pursued legislation to incorporate cryptocurrencies into their financial services laws, thereby allowing their state-level regulators to have oversight of them.

In the insurance sector, regulators and the industry itself are struggling with how to handle liability issues related to cryptocurrencies. At this point, no one is paying their insurance premiums with Bitcoin or Ethereum, but the sector does have to begin grappling with how it will respond when, inevitably, claims are filed on transactions involving cryptocurrencies.

Additionally, while cryptocurrencies are seen primarily as an issue for the financial sector—which is regulated mainly by the federal government—insurance is largely regulated by the states, which poses the potential for a patchwork of regulations across the country.

Lack of Banking Services or Insurance for Cannabis Businesses

Another source of consternation for both the financial services and insurance sectors is cannabis-based businesses, like marijuana dispensaries.

Because state governments are increasingly legalizing weed but the federal government still considers it to be a Schedule 1 substance under the Controlled Substances Act, legal businesses growing, processing, transporting or distributing marijuana or marijuana-based products face a host of difficulties.

For one, the federal government’s Schedule 1 classification prevents marijuana-related businesses from banking with federally licensed institutions, essentially forcing the industry to be primarily cash-only. As a result, many states are pursuing safe harbor laws that allow banking institutions within their borders to work with marijuana-related businesses without facing legal blowback.

Marijuana-based businesses also have a very difficult time obtaining insurance coverage for similar reasons. In fact, Yotis said she’s aware of only one company that offers a product to insure businesses operating in the cannabis market.

“The lack of the industry to insure itself is very dangerous,” she said, noting that marijuana-based businesses face very real liability concerns, such as a fire starting in a grow room.

Without proper access to coverage, these businesses, a growing number of which are mom-and-pop startups, risk going bankrupt.

Growing Importance of Data Privacy and Use of Technology

Data protection, understandably, is a pressing issue in every industry these days. But it’s proving particularly difficult for the insurance sector, which is contending with greater privacy concerns than ever before, as well as issues with equity and diversity.

Several jurisdictions, including California, Hawaii, Maryland, Michigan, and Massachusetts, ban or limit insurers from using credit scoring to determine policy rates, as such factors—despite their ability to accurately predict a likelihood of an insurance loss—are considered by some groups to fall disproportionately on certain minority and low-income groups. 

Washington State issued a regulatory order that prohibited credit scores from being used to set rates on homeowners, renters, and auto insurance, but a state court overturned that ruling. Other states, like Oregon and Utah, do not allow insurers to use credit history information in specified circumstances.

The insurance industry is also struggling with how to handle data collected from driverless cars, an issue that is only going to grow in importance as time goes on.

The National Association of Insurance Commissioners, a quasi-governmental organization composed of chief insurance regulators from all 50 states, the District of Columbia and five U.S. territories to coordinate multistate regulatory issues, has developed two model laws dealing with consumer data privacy.

Greater Coordination of Banking Regulation

State financial regulators have been increasingly concerned about the burdens being placed on smaller or community banking institutions and non-banking service providers, which are subject to both federal and state oversight and examination.

Under the Bank Service Company Act, federal and state banks are required to notify federal regulators of their relationships with financial technology companies and other non-bank service providers that meet the definition of a bank service company. Federal risk management guidance has been issued for banks using bank service companies, and federal regulators are examining these companies, particularly where the service provided is critical to a bank’s operations.

The dual oversight creates an increased regulatory burden. As state banks fail to provide notice of service companies, examinations are not always coordinated between federal and state regulatory agencies. And many third-party, non-bank service providers are not made aware of federal regulators’ oversight authority over their operations under the Bank Service Company Act.

Recently, in Congress, Reps. Gregory Meeks (D-New York) and Roger Williams (R-Texas) reintroduced the Bank Service Company Examination Coordination Act (BSCECA) of 2023 to streamline banking supervision.

Looming ESG standards

Environmental, social, and governance, or ESG, standards are of concern to compliance staff in both the financial services and insurance sectors.

It’s top of mind for financial institutions as they await guidance and proposed rulemaking for the climate-related financial risk reports that will be required under President Biden’s Executive Order 14030.

In the wake of that order, the Securities and Exchange Commission has begun evaluating disclosure rules and requested public comment on ways businesses can improve their climate disclosures. At the same time, the Federal Reserve Board and Office of the Comptroller of the Currency have begun assessing climate-related financial risks to financial institutions.

In short, the executive order will require federal regulators to make changes to laws and regulations that incorporate changes that are still being contemplated and rolled out.

 --By SNCJ Correspondent Brian Joseph

Please visit our webpage for more information on the bills mentioned in this article, or to speak with a State Net representative about how the State Net legislative and regulatory tracking solution can help you react quickly to relevant legislative and regulatory changes. 

Anti-ESG Legislation on Rise in States

Last year 17 states introduced—and a dozen enacted—legislation prohibiting government entities, including public retirement systems, from taking environmental, social, and governance (ESG) criteria into account when making investment decisions or from doing business with financial institutions that “boycott” companies on ESG grounds, according to the law firm of Morgan, Lewis & Bockius LLP. At least 25 states have introduced such anti-ESG bills this year, according to State Net’s legislative tracking system.