House Financial Services Committee Considers Anti-Investor Disclosure Bill
Unpacking the Insurance Industry’s “Social Inflation” Lie
The FAA Reauthorization Act of 2023: What it is and Why it Matters
What’s at Risk if We Lose the CFPB?
House Financial Services Committee Considers Anti-Investor Disclosure Bill
By: Micah Hauptman, Director of Investor Protection and Dylan Bruce, Financial Services Counsel
The House Committee on Financial Services is currently engaged in a comprehensive deregulatory agenda, including efforts to expand private securities markets at the expense of public securities markets. That this effort is happening at a time when deregulation in the financial system has led to a series of large bank failures should not be lost on the Committee.
As part of this effort, one bill they have offered is the so-called “Improving Disclosure for Investors Act of 2023.” Despite its Orwellian name, it is clear that the bill would do the exact opposite of improving investor disclosures and would instead diminish protections for investors in public markets. It is a gift to the financial industry, at the expense of retail investors, and is indicative of efforts to make private, under-regulated markets even more competitive with public markets.
Specifically, the bill would allow firms to default retail investors into receiving electronic delivery (e-delivery) of important regulatory documents required by our securities laws, including investment disclosures and account statements. It would do so when there is no evidence that investors who prefer e-delivery face any difficulties in exercising that choice—it is a solution in search of a problem—and would ignore extensive evidence that the change is likely to reduce investor readership of key disclosures.
Financial firms persistently seek to convert investors from paper to electronic delivery and they make it incredibly easy for investors to make this change. As a result, virtually all investors are aware that electronic delivery is an option for receiving investor communications. It’s clearly evident that investors who want communications by mail, and have up to now not chosen e-delivery, have made their choice. That choice should be respected; they should not be forced to jump through new hoops to make it again.
Under the current e-delivery framework, in order to encourage more investors to choose electronic delivery firms are incentivized to improve their users’ experiences with e-delivery and to present shareholder disclosures on their websites in more user-friendly ways. Unfortunately, most electronically delivered communications consist of email messages with a link to a login screen to access information that is presented in static PDFs. This multi-step process can frustrate and dissuade recipients from reading important disclosures and can be especially harmful to those with less tech savvy or limited access to email and internet.
Unsurprisingly, most electronic deliveries today from financial institutions result in very low click-through rates to the disclosures they provide. For example, the email click rate for the financial services industry is on average about 1%, meaning only 1% of people clicked a link within an email, relative to the number of emails that were successfully delivered.
Recognizing that investor account statements are incredibly important disclosure documents, on March 2, 2023, the SEC’s Investor Advisory Committee recommended that paper delivery continue as the delivery default, stating: “We recommend that account statements continue to be delivered to investors by paper as the default delivery method. For those investors who opt for electronic delivery of statements, the SEC and/or FINRA should encourage the use of technology to enhance disclosure and investor understanding of electronic account statements, such as the use of layered disclosure through embedded links, etc.”
But rather than heed that recommendation, this bill would do the opposite. First, it would allow a “notice and access equals delivery” approach, allowing firms to make disclosures available online and providing a notice (typically through a link) of the disclosure’s availability instead of directly mailing disclosures, including account statements, to investors. The bill would also allow another “electronic method reasonably designed to ensure receipt of such regulatory document by the investor,” giving firms the ability to decide how to effectuate disclosure delivery, which could further shift the burden onto investors to have to seek out and find the disclosures they are required to receive.
This bill would also apply to the delivery of investors’ personal account statements, even though there is strong evidence that many investors want to receive these disclosures in paper form. And to the extent investors have already decided to receive these documents in paper, this bill would override their decision and force them to reaffirm the decision they have already made.
In addition, the bill requires the SEC to review its rules and eliminate regulatory references to “in writing” requirements, thus impeding the Commission’s ability to require written disclosures, instead favoring oral disclosures. Importantly, oral disclosures are not subject to oversight, either by a firm or the SEC, and are also less likely to be salient and memorable for investors. In combination, the result would be less informed decision making and a host of quality control problems.
This bill would allow financial firms to deliver disclosures in a way that makes it more difficult for investors to access them and would establish a default that is contrary to many investors’ preferences. At worst, this bill could provide an avenue for financial firms to effectively hide information (e.g., fees and conflicts) from investors and provide vague, inaccurate, or misleading oral disclosures instead of accurate and reliable written disclosures, further undermining investors’ ability to make informed decisions.
For these reasons, CFA is fighting against this misguided bill, and we urge Financial Services Committee members to oppose it.
Unpacking the Insurance Industry’s “Social Inflation” Lie
By: Michael DeLong, Research and Advocacy Associate
Insurance companies are very fond of increasing their policyholders’ premiums and then crafting an explanation for the hikes that fits their interests, even if it doesn’t fit the data. Their latest fable: that rampant premium increases for businesses, non-profits, doctors, and truckers among other commercial insurance policyholders are the result of a new trend the insurance industry has dubbed “social inflation.” According to this account, lawyers, lawsuits, judges, and juries are suddenly becoming more aggressive and endorsing massive payouts in court, causing insurance costs to spike. But is this story true?
A new report by Consumer Federation of America (CFA) and the Center for Justice and Democracy (CJ&D) – INVENTING SOCIAL INFLATION 2023 – details the two key lies in the story industry executives and lobbyists are pitching. When we look at the data, the theorized “social inflation” does not exist and claims payouts by insurers are not skyrocketing. Instead, insurance companies are hyping up this assertion as an excuse to price-gouge businesses and consumers.
In recent years commercial insurance premiums have risen substantially and insurers are pinning the blame on the invented phenomenon of social inflation. This phenomenon, depending upon who is telling the story, stems from:
- #MeToo and child sexual abuse claims
- Lawyer advertising and case funding
- Securities class actions
- Millennials as jurors
- Big verdicts resulting from worsening truck crashes
- Growing number of lawsuits brought by shareholders, especially activists
Despite the new term, we have heard this before. As the CFA/CJ&D report (and the 2019 report it updates) explains, this is all part of the insurance industry’s economic cycle in which companies raise rates, blame the litigation environment for the hikes, push for restrictions on consumer legal rights, and – win or lose those battles – eventually forget about the problem when the economic cycle turns. This has happened about every 12 to 13 years over the last half century. The only thing different this time is the name.
Importantly, the basic underlying arguments don’t stand up to scrutiny. CFA and CJ&D reviewed claim and premium data from A.M. Best, which is the largest credit rating agency for insurance companies. Our review found that over the last twenty years, after adjusting for inflation and population growth, insurance claims payments have stayed essentially flat (and for some lines of insurance, payouts have gone down), while premiums have gone up and down in sync with the insurance industry’s economic cycle.
Furthermore, the number of lawsuits against insurance companies has not increased. Before the COVID-19 pandemic, the frequency of cases against insurance companies was flat for the prior three years and in 2019, the average settlement value dropped to the lowest in a decade. During the COVID-19 pandemic, case filings sharply declined, and the number of lawsuits filed in 2022 was even lower than the amount filed during 2021.
When we looked at some of the insurance coverages in which businesses face some of the most severe rate hikes, the data contradict the industry narrative.
For example, insurance companies say that medical malpractice premiums are rising because of growing pressure from lawyers, lawsuits, and jury awards. But, in fact, there has been a substantial decline in medical malpractice lawsuits over the last few years. According to a survey of over 4,300 doctors across 29 specialties conducted from May 21 through August 28, 2021, “U.S. physicians saw a decline in malpractice lawsuits during the pandemic.” But more than 6 in 10 medical groups reported that their doctors’ malpractice premiums went up since 2020, with an average increase of 14.3%.
So, if lawsuits are not driving up claims costs for medical liability insurers, what is? Nothing! 2021 saw the smallest level of claims payments, on an unadjusted basis, in more than a decade and the lowest level, on an adjusted basis, of all 23 years in the dataset.
Truckers hear the same thing. There is a real safety issue in the trucking industry that needs to be addressed, as CJ&D explained in a report last year. The trucking industry’s own studies show that horrifying large truck crashes are increasing while oversight is weakening, and further studies show that too many trucking companies knowingly disregard public safety. But less than 2% of trucking insurance claims turn into lawsuits. And while there are not many large jury verdicts, some are necessary to get a bad company’s attention and to alert an industry that reckless disregard for public safety will not be tolerated. And when you evaluate the data, claim payments on commercial auto policies (including those that cover long-haul truckers) are up about 34% over the last decade, but the premiums charged have increased by about 70%. That disconnect is evidence that insurance company greed is the real inflationary pressure facing policyholders.
For fifty years, businesses and consumers have been the victims of periodic eruptions in insurance premiums, and insurers try to convince people that lawsuits and juries, or “social inflation,” are to blame. But historical data and our new report show that this has never been true, and it is not true today. Insurance costs are not going up because of large jury verdicts, frivolous lawsuits, or because Millennials are sympathetic to consumers and biased against large corporations. Instead, insurance premiums are rising because of insurer avarice, mismanagement, and inefficiencies. All the while, the insurance industry sits on a mountain of surplus cash and invests millions in lobbying campaigns to tame the chimerical social inflation by trying to squelch the ability to file lawsuits against them, and to reduce any payouts they would have to make if they are found liable.
The only way to stop these premium hikes is through better oversight and regulation of the industry and stronger consumer protections. Policymakers and regulators should reject insurance industry propaganda and focus on increasing industry accountability in order to better protect American businesses, nonprofits, and other consumers.
The FAA Reauthorization Act of 2023: What it is and Why it Matters
By: Alan Darby, J.D. Candidate, The George Washington University Law School and Erin Witte, CFA Director of Consumer Protection
It would be difficult to overstate the problems with air travel in 2022. Record numbers of flights were delayed and cancelled, consumers were left stranded, baggage was lost, and an aging and vulnerable infrastructure nearly collapsed under the stress. One of the most important pieces of legislation that Congress will consider this year is the Federal Aviation Administration Reauthorization Act. More than ever, American consumers depend upon airlines for their business and personal lives, but they are inconsistently protected when these airlines get it wrong. This recent spate of airline disasters has highlighted the “pressure points” in air travel, and the public has become much more aware of the lack of available protections. What are air travel consumers to do when an airline overbooks their flight or blindsides them with any number of “junk fees” the industry has become synonymous with? The 2023 Federal Aviation Administration (FAA) reauthorization presents a critical opportunity to expand consumer protection in these and other areas and ensures that the FAA meets its policy objectives during its next period of reauthorization.
As a federal agency, the FAA is accountable both to the American public and its aviation stakeholders, and its mission is “to provide the safest, most efficient aerospace system in the world.” Its structure and funding require routine reauthorization, though “reauthorization” is partially a misnomer. This process is actually a routine funding approval packaged in a legislative act with additional legislative changes. Though the airline industry was deregulated in 1978, the practice of FAA reauthorization originated with the Airport and Airway Revenue Act of 1970 which created the Airport and Airway Trust Fund (Trust Fund)—used to finance FAA investments. The authority to collect taxes and to spend from the Trust Fund must be routinely reauthorized to meet agency and consumer needs.
This unique reauthorization process presents both opportunities and challenges. It creates a regular opportunity to revisit funding decisions, projects, and research initiatives. It also presents a regularly re-occurring opportunity to hold the FAA accountable for mandates it has not fulfilled, to respond to recent problems in air travel, and to advocate for stronger consumer protections. However, any changes enacted in reauthorization acts are only set for a specific period.
The last FAA reauthorization occurred in 2018 and expires this year. The FAA Reauthorization Act of 2018 was the first multi-year reauthorization since 2012 and the first five-year reauthorization since 1982. Legislators may include proposals in reauthorization acts about a wide range of issues not limited to the topic of aviation regulation. For instance, the 2018 Act included legislative changes concerning sports medicine licensure and the Intelligence Reform and Terrorism Prevention Act of 2004. This is why it is critically important to pay attention to this legislative process.
Consumer Protections in the 2018 FAA Reauthorization Act:
- Directed the Department of Transportation (DOT) to examine and analyze the causes of flight delays and cancellations;
- Mandated regulations requiring carriers to promptly refund to passengers any ancillary fees paid for services that the passenger does not receive;
- Directed the DOT to appoint an Aviation Consumer Advocate;
- Promoted use of the consumer complaints hotline and evaluation of future mobile phone applications for consumer feedback; and
- Required the DOT to develop Airlines Passengers with Disabilities Bill of Rights.
What may happen in the 2023 Reauthorization? The failure to sign a reauthorization would be catastrophic for air travel. The FAA would be encumbered with the uncertainty of short-term extensions and cast doubt on its ability to obtain the funding it needs to invest in its critical priorities. Short-term extensions do not allow the opportunity to provide needed legislative changes in the form of an act passed by Congress.
The recent disasters in air travel have exposed the myriad areas where consumers need better protection. CFA has pushed for stronger protections for years, and 2023 is a critical time to continue this work. Congress should use the 2023 Reauthorization Act to respond to the air travel disasters and enormous criticism about the lack of available redress for harmed consumers. CFA and a group of national advocates for air travel safety and consumer protections have authored a letter to Congress asking to prioritize several key topics in the 2023 Reauthorization, including:
- Requiring compensation when consumers’ flights are delayed and canceled, and holding airlines accountable for publishing unrealistic flight schedules;
- End junk fee practices in air travel, including prohibiting fees for family seating and for other such services, and requiring all-in pricing;
- Ending federal preemption of airline regulation and allowing state attorneys general and individuals to hold airlines accountable;
- Encouraging stronger DOT enforcement of passenger protections; and
- Prioritizing consumer voices and experiences.
For a copy of the full letter and complete list of priorities, click here.
What’s at Risk if We Lose the CFPB?
By: Rachel Gittleman, Financial Services Outreach Manager
Lat month, the U.S. Supreme Court granted the Solicitor General’s cert petition on behalf of the Consumer Financial Protection Bureau (CFPB) in CFSA vs. CFPB. This petition appeals a Fifth Circuit Court of Appeals ruling that found the CFPB’s independent funding structure unconstitutional. This erroneous ruling has already started to affect the CFPB’s ability to do its critically important job, which will leave consumers open to potential harms and abuses in the financial marketplace.
It also creates an unprecedented amount of uncertainty in the marketplace, especially for honest businesses who are trying to do right by consumers. Additionally, this decision has the potential to destabilize other parts of the federal government that also rely on an independent funding structure, including Social Security, Medicare, and most federal financial regulators.
In the aftermath of the 2008 financial crisis, which left 21 million Americans without work and more than nine million families without homes, Congress passed the critical Dodd-Frank law which created the CFPB. The CFPB is charged with enforcing federal consumer financial laws and has a number of tools to accomplish that task effectively, including law enforcement, statutory authority to combat unfair, deceptive or abusive act or practices, direct supervision of financial institutions, and public education.
Like most other federal financial regulators, the CFPB was provided an independent funding stream to ensure that it could do its job effectively and consistently, insulating it from political gamesmanship that often delays and affects the annual appropriations process. This reliable funding stream is critical to the CFPB’s ability to govern large sectors of our economy, enforce consumer protection laws, and protect consumers and honest businesses alike.
However, the independent funding stream does not mean that Congress lacks sufficient oversight over the CFPB. The opposite is in fact true—the Dodd Frank Act placed a number of intentional controls on the CFPB’s authority to ensure that the agency pursues its consumer protection mission in a balanced and responsible manner. For example, the CFPB Director must testify semi-annually and the Bureau must regularly provide Congress with various reports on the financial marketplace. In addition, the Bureau must coordinate and consult with other federal financial regulators, and its enforcement measures are appealable, and many other controls.
The CFPB’s independence allows it to govern, oversee, and regulate the financial marketplace, with sufficient oversight and accountability by Congress and other agencies. However, the Fifth Circuit’s ruling calls that and far more into question.
Effect on CFPB’s Ability to Do Its Job
Since its doors opened, the CFPB has issued rules and guidance to make the credit reporting, debt collection, mortgage servicing, credit card, and banking industries more transparent, equitable, and accountable to the public. It has fought discrimination in the banking, credit, and housing marketplaces. It has protected consumers from being denied services or charged higher rates because of their race, sexuality, gender identity, or national origin. The CFPB has educated consumers about how to apply for financial products, spot risky practices, and exercise their rights in the financial marketplace. It has provided critical research about how payday loans create a cycle of debt, overdraft practices disproportionately harm low-income consumers, students are targeted by unsafe and deceptive products, and service members and their families face unique harms in the financial marketplace. This is just a sampling of the critically important work the CFPB has accomplished over the last decade to strengthen the financial marketplace by making it more competitive, equitable, fair, and safe.
Beyond its regulatory, research, and education work, the CFPB is an enforcement agency, it is tasked with enforcing critical consumer protection laws that govern consumers rights across the financial marketplace, and Congress granted the CFPB a myriad of tools to effectively hold wrongdoers accountable. During its tenure, the CFPB has collected $16 billion in consumer relief, on behalf of 192 million consumers who have been wronged by financial providers. This relief takes many different forms, including monetary compensation, principal reductions, and canceled debts. In addition, it has charged $3.7 billion in penalties to violators of the law.
Many consumers are already affected by the repercussions of this case. Since the Fifth Circuit decision, there have been a number of enforcement actions that have been dismissed or stayed pending the Supreme Court’s decision.
For example, MoneyGram, a repeat offender and the remittance provider for 47 million consumers in the US, has argued that the remittance rule is “void and unenforceable” because it was codified with unconstitutional funding. This argument, and subsequent stay of the case, leaves those 47 million Moneygram consumers unprotected and potentially open to further harm. The remittance rule is a critical regulation that governs necessary consumer disclosures, cancellation, refund, and error resolution rights, and it imposes provider liability. Should consumers’ rights be further violated, the Fifth Circuit decision makes it even harder for those consumers and the CFPB to hold Moneygram and other violators of the remittance rule accountable.
Further, MoneyGram is not the only offender who has used the Fifth Circuit ruling to the disadvantage of consumers. An enforcement action against First Cash and Cash America West, a repeat offender for violations of the Military Lending Act (MLA), has been stayed in the wake of the Fifth Circuit decision. The MLA protects active duty servicemembers and their families from predatory lending, and this case leaves servicemembers and their families in Louisiana, Mississippi, and Texas at risk of further violations of the MLA.
In addition, the CFPB is not the only enforcement agency whose authority has been hampered. State Attorneys General have also begun to see the effects of this harmful ruling. In Pennsylvania v. Mariner Finance LLC, Mariner Finance, six states alleged widespread violations of multiple consumer protection laws which resulted in $121.7 million in premiums and fees for add-on products that, along with other practices, kept consumers in a cycle of debt. As a result of the Fifth Circuit ruling, Mariner argued that the Consumer Financial Protection Act, the basis for the CFPB and states’ authority to enforce consumer financial protection law, is generally unenforceable. Mariner Finance is a subprime installment lender that targets low- and moderate-income consumers with over 480 locations in 27 states.
A stay of litigation in these cases means that the conduct at issue—violations of critical consumer protection laws— may very well be ongoing, and it will be increasingly difficult to undo.
The CFPB’s enforcement actions, along with those brought by state AGs, make markets more competitive, create a level playing field for honest businesses, and produce a safer, more equitable, and more transparent financial services marketplace for consumers. With wrongdoers and violators of the law using this case to skirt state and federal enforcement authority, consumers are suffering the consequences.
Bigger than the CFPB
The logic applied in the Fifth Circuit decision is not unique to the CFPB. The CFPB is far from the only agency or program to receive independent funding, and opponents of the CFPB have made it clear that they will not stop there. The Competitive Enterprise Agency has said that “no executive agency should receive a monetary supply without the affirmative consent of Congress every year.” It is difficult to overstate the potentially catastrophic nature of a ruling that calls our entire financial system into question.
The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Federal Housing Finance Agency, the National Credit Union Administration, the Farm Credit Administration, the Farm Credit Insurance Corporation, the Bureau of Engraving and Printing, the Public Company Accounting Oversight Board, and Federal Prison Industries, along with Medicare, Medicaid, Social Security, the Affordable Care Act, unemployment benefits, child nutrition assistance are all funded outside of the annual appropriations process. Congress, in setting up these critically important agencies and programs, understood that independence and reliable funding, coupled with sufficient oversight, were key to the success of these agencies and programs.
In fact, the FDIC has already voiced its concern for the Fifth Circuit ruling and the risk it poses for the FDIC to govern the U.S. banking system. In a recent report, the FDIC’s Office of the Inspector General warned that “there is a risk that the Fifth Circuit’s ruling could also be applied to the FDIC.”
Industry and experts have affirmed this fear.
For example, Peter Conti-Brown, a noted expert on the Federal Reserve at the University of Pennsylvania’s Wharton School, stated that “if the CFPB’s budgetary autonomy falls, then the Fed’s should fall immediately thereafter and that would be catastrophic. That would be the end of Fed independence because then anyone in the House of Representatives or the US Senate could hold the Fed hostage for any purpose or no purpose every single year.”
The CFPB is not alone in how it is funded, and while this ruling stands, will not be the only affected agency. Another independent agency, the Public Company Accounting Oversight Board, has already been the subject of lawsuit alleging its independent funding stream is also in violation of the Appropriations clause.
Congressional Attempts to Undermine the CFPB’s Independence
Finally, the House Financial Services Committee has already noticed numerous bills that would hinder the CFPB’s ability to protect small businesses, servicemembers, consumers of color, and more broadly, consumers.
For example, the Taking Account of Bureaucrats’ Spending Act, also known as the TABS Act, would replace the CFPB’s stable funding mechanism and subject the agency to annual appropriations by Congress. As illustrated above, this legislation, or any legislation that attempts to change the CFPB’s leadership structure or enact procedural hurdles for the agency to use its rulemaking authority, will hamper the CFPB’s authority and weaken its critical oversight and regulation of the financial marketplace.
What is Next?
The Supreme Court has accepted the Solicitor General’s cert petition on behalf of the CFPB, which means that the Supreme Court will hear the case next term. In the meantime, we can expect more fallout in the marketplace, for consumers, and for the financial regulatory system, at a time when consumers are already struggling with rising interest rates and record levels of inflation.
Ultimately, the Supreme Court should reverse the Fifth Circuit decision for the sake of consumers and the economy.