MetLife Mounts First Legal Challenge to FSOC Process
Norbert Michel /
Life insurance company MetLife has been locked in a battle with the Financial Stability Oversight Council (FSOC) for months. Last July, the FSOC, a sort of super-regulatory agency created by the 2010 Dodd–Frank Act, designated MetLife for special regulation by the Federal Reserve even though MetLife fought the process at every step. Tuesday, MetLife announced it will continue fighting the FSOC—this time in federal court.
This entire process, whereby the FSOC identifies a company as a so-called systemically important financial institution (SIFI), is flawed for many reasons. To begin, if the goal is to prevent taxpayer bailouts of too-big-to-fail firms, it makes no sense to identify the companies whose failure regulators feel could cause a financial crisis.
Furthermore, the premise that a large firm’s failure could bring down the entire financial system is based on conjecture, and there is absolutely no evidence that increasing federal regulation will make financial markets any safer. If anything, the evidence suggests this sort of solution makes markets less safe.
The MetLife lawsuit also highlights many of the flawed procedural details in the FSOC’s designation process, and raises legitimate questions that Congress should be publicly debating. For example, while the FSOC’s designation for Fed supervision can be challenged in court, Section 113(h) of Dodd–Frank limits this challenge to “whether the final determination made under this section was arbitrary and capricious.”
Given that firms suing regulators already face a difficult task due partly to a 1989 Supreme Court case, the arbitrary and capricious requirement could be an insurmountable burden. If, for example, the FSOC’s formal three-stage process—no matter how flawed—was followed, a court may be hesitant to rule the FSOC acted arbitrarily.
Nonetheless, MetLife is forcefully arguing that the FSOC ruling was arbitrary and capricious, and the outcome of the lawsuit is certain to shape future FSOC policies. The stakes are high because giving regulators virtually unlimited authority to impose rules and regulations usurps Congress’s authority and is counter to the core principles of limited government.
There are many problems with the FSOC and its designation process, but the very existence of the FSOC is the real problem. The FSOC, with its broad, ill-defined mandates, will lower competition, increase financial risks, and cost consumers money.
The FSOC can ultimately require new regulations for any financial company for virtually any stability-related reason, and it can do so largely in the absence of further congressional action. The mere existence of the FSOC is wholly incompatible with the functioning of a dynamic private capital market.
The outcome of MetLife’s lawsuit could have something to say about these issues, but so can Congress. Short of a full repeal of Dodd–Frank, Congress should focus on eliminating the FSOC.