Fran Semaya and Fred Pomerantz, members of the AIRROC Publication Committee, had the pleasure of interviewing Thomas E. Workman for an AIRROC Matters exclusive. Tom, with over four decades of insurance background, was appointed as the Independent Member of the Financial Stability Oversight Council (FSOC), for a term of six years on March 29, 2018 after nomination by President Donald J. Trump and confirmation by the United States Senate.
Francine Semaya: Tom, it’s our pleasure to welcome you this morning on behalf of AIRROC. Before we discuss FSOC and your current role with FSOC, it would be helpful for our readers to know your background in the insurance industry.
Tom Workman: As both of you know, I practiced law in Columbus, Ohio for 26 years. A significant part of my representation was on behalf of the life insurance industry in Ohio. One day, the phone rang and a gentleman asked me if I would be interested in a position in New York. I replied: “There is no way in the world that I would ever move to New York. Columbus is our home and I am happy practicing law here at Bricker & Eckler.”
Semaya: You didn’t want to come to our city?
Workman: I gave him three or four names and phone numbers and said, “I highly recommend that you call these people. They are great.” I turned it down three or four times over a period of several weeks, and then he called again and said, “but I haven’t had a chance to talk to you.” I said, “I know, but I think I understand what you are looking for and I know about the organization.” Not long after that I came to New York and then served as the CEO of the Life Insurance Council of New York (LICONY) for almost 17 years. Hard to believe. Not long after I concluded my work at LICONY, I received another unsolicited call and a gentleman said, “Roy Woodall is finishing his tour of duty on the Financial Stability Oversight Council (“FSOC”) as the “Independent Member with Insurance Expertise.” “Would you be interested?” I said, “Absolutely!” So, that process began. I was interviewed in June 2017 and then returned a month later and was interviewed by two of President Trump’s most senior people in the West Wing. There was a lot of vetting. We have many other things to talk about, but I do want to tell one story. My wife and I live here in Midtown. One day there was a knock at the door, something unusual in our building. Usually, someone will call from the desk downstairs to announce a caller. So, I went to the door. It was the next-door neighbor, a very nice lady. She and her husband have been our neighbors for all the years we’ve lived here. She stood there with a very serious look on her face, and held up this card and said, “Two FBI agents came to see me today.” She continued, “They wanted to know what kind of a person you are.” And I said, “Okay, what did you tell them?” She said, “I said you are a very nice person. We’ve been neighbors for a long time.”
After hearing her response I said, “That was the right answer!” Then I went through the full vetting process. One of the forms is 105 pages long. I went through the written process and then was nominated by President Trump in November, 2017. Because it was near year end, I had to be renominated in January 2018. I testified before the Senate Banking Committee on the 23rd of January. On February 8th, the Committee voted unanimously to recommend my confirmation, which I was most grateful for, and then in March 2018, the Senate voted by unanimous consent to confirm. So, that’s the background. I’ve been in the position now since the end of March, 2018 and it’s been quite interesting. The position is a product of the Dodd-Frank Act that became effective in 2011. All the other voting members lead the major federal agencies. I do not. So, I’m able to concentrate on the work of FSOC and the issues that are before the FSOC. My predecessor, Roy Woodall, had one of the seasoned professionals working with him establish an insurance working group. It was an informal working group, and when appropriate, that group has a conference call session where we have an expert speak on an insurance issue. An example of that is a discussion with Peter Gallanis, the President of the National Organization of Life and Health Insurance Guaranty Associations and Roger Schmelzer, President & CEO of the National Conference of Insurance Guaranty Funds. I was told they made a very fine presentation to our group. The group does not get together regularly but it is an interesting way to provide insurance knowledge to Federal officials, primarily staff personnel, who do not have a great deal of exposure to insurance issues.
Semaya: In this group, is there any representative of the NAIC who participates in the conference calls?
Workman: Yes. We involve representatives of the NAIC, — whomever the NAIC would like to have on the call because we embrace the NAIC and its interests.
Semaya: Am I correct that currently the President of the NAIC is a nonvoting Member of the FSOC?
Workman: That’s correct, and previously it was Peter Hartt when he was Director of Insurance in the State of New Jersey. The NAIC has appointed Eric Cioppa, the current NAIC President of the NAIC and the Maine Insurance Superintendent. Both terrific, seasoned professionals. Peter chaired the Macro Prudential Initiative, and then he came to the end of his term and Eric replaced him. Eric is just a wonderful person. He has, I am told, a lifetime of experience in financial regulation at the Maine Insurance Department. He’s a delight to know and work with. Actually, when we have a meeting of the Council, we invite the state insurance regulator on the Council and his staff person to join us for lunch beforehand.
Semaya: Why don’t you explain what FSOC is and what functions it has? Who are the members? How does it operate?
Workman: FSOC is a product of the Dodd-Frank Act; the Congressional response to the financial meltdown of ’08. FSOC has 15 members: ten are voting members, five are nonvoting. Each voting member is the head of a major Federal financial agency, which includes the Secretary of the Treasury, who is the Chairman of the Council, the Chairman of the Federal Reserve, the Chairman of the FDIC, the Chairman of the SEC, the Director of the CFPB, which is the Consumer Financial Protection Bureau, the Chairman of the Commodity Futures Trading Commission, the Director of the Federal Housing Finance Agency and the National Credit Union Administration Chairman. I think it’s important to identify them, so that people understand this really is the center of Federal financial regulation in America. Each of those folks has their agency leadership responsibilities. They each have a deputy assigned to support their work on the Council. The deputies meet as a committee, or as a group, every other week. The Council, by law, is required to meet every quarter, but the Secretary of the Treasury can schedule meetings more frequently, if needed. I attend the deputies’ meetings. I am not a member, but I go to observe because there is considerable policy discussion.
I have had many people ask, “How do you like it?” and, “What’s good and not so good?” The best part about the FSOC is the quality of the people on the Council, and the very fine staff. There is a separate staff that supports FSOC.
I think it’s important to focus on the statutory functions of the Council; there are three: The first: to identify risks to the financial stability of the United States that could arise from material distress or failure, or ongoing activities of large interconnected bank holding companies, or nonbank financial companies, or that could arise outside the financial services marketplace. That last phrase is particularly interesting. Not many people have noticed or paid attention to that language. The second is to promote market discipline by eliminating expectations of shareholders, creditors, and counterparties of such companies that the U.S. will shield from losses, if they fail; in other words, if it’s “too big to fail”. It’s hard to make such a call. The third one is to respond to emerging threats to the stability of the U.S. financial system. So, those are the three, and it’s from those three primary responsibilities that flows everything else that the FSOC does.
Fred Pomerantz: Either through FSOC action or effectively through court challenges, the designation of AIG, GE Capital, Prudential Financial and MetLife as “systemically important financial institutions” (“SIFIs”) have all been removed. Therefore, do you believe that the SIFI designation had a positive effect, or no effect at all, on U.S. financial stability?
Workman: The longer I am in this role, the more confident I will be of my answer to that question, but I would say that — I’m not sure. I guess the next thing is that I have developed an extraordinary respect for the Fed, and for their very fine, talented people, and so I can’t help but think that when they were in the role of an additional financial overseer of those insurance groups, that they likely were helpful in identifying additional things that the companies ought to think about when they are analyzing their financial strength. I think in that sense, it probably was positive for everybody, but whether or not it really made a difference, I’m not sure.
Semaya: In July 2013, the Financial Stability Board, (“FSB”), the international equivalent to FSOC, identified an initial list of nine multinational insurance groups it considered to be, and I’m quoting, “globally systemically important insurers,” (“GSIIs”) including three U.S. based companies, American International Group, MetLife and Prudential. These three insurance groups still remain on the GSII list, although they all have been removed from FSOC’s SIFI list.
Semaya: How do you reconcile, based on your experience, now that you are on the FSOC, or in your prior days as LICONY’s CEO — FSOC’s actions and the court’s determination in removing these same insurance groups from designations as SIFIs, yet they still remain on the international watch list?
Workman: It’s actually pretty easy to respond to that because we have our laws. We have our regulatory system. We have FSOC in its role. We have the Fed in its role. We don’t operate subject to financial regulators who are not elected or appointed by the U.S. government. It’s interesting to have the international viewpoints, but we have the responsibility to function under the laws and regulations of the United States.
Semaya: Do the U.S. companies look to FSOC to help them get off the FSB watch list?
Workman: I doubt that they do. Getting off the FSB list may be somewhat similar to an FSOC designated company seeking de-designation. They have to make their case, and there are the standards you look at that were applied when the company was designated under the FSOC law. The first one is the one that was utilized by the Council to designate, and that one is whether material distress could pose a threat to the financial stability of the U.S. economy. There’s a second one, and that one is more granular: you look at the nature, scope, size, scale, concentration, interconnectedness, or mix of activities of a nonbank. Roy Woodall strongly recommended that this second standard be utilized.
This standard wasn’t used and, in fact, it’s kind of an interesting little story. Roy asked that it be expressly stated in one or two of the designation decision documents that the Council was aware of the second standard and chose not to apply it. Roy wanted it on the record that there was a second standard, but it wasn’t used. The first one is more generic, it’s more general. It’s not as specific. Roy wanted to, as he said to me once, open up the hood and look inside, instead of just applying the general standard.
Semaya: From my perspective as an outsider, I suspect that if Woodall’s choice had been used, the results may have been very different.
Pomerantz: Nearly eight years after its enactment, the FSOC’s SIFI designation faces new scrutiny in the recommendations in the Treasury Department’s Report to the President on Financial Stability Oversight Council Designations that was issued on November 17th, 2017, assessing FSOC’s SIFI designation process. Treasury does not suggest structural changes in order to implement its recommendations. Instead, Treasury recommends a three-step process that involves 1) identifying financial products or activities that pose risks to financial stability, 2) coordination with State regulators to identify risks industry-wide, and 3) only if certain entities pose risk to financial stability after such consultation, should FSOC then consider individual SIFI designations. Has the FSOC implemented this so-called “Activities-Based Approach”, and if so, what evidence is there that this approach would be effective in today’s national financial environment?
Workman: That is quite a topic for discussion and consideration. First of all, I used to think that when someone referred to the ABA, it was the American Bar Association, or maybe the American Bankers Association, but in my new world, it’s “Activities-Based Approach”. Then there’s EBA, which is the “Entity-Based Approach”, so its activities, and its entities, and so, as you say, Fred, the Treasury’s Designations Report turns the focus more toward looking at activities, and, what is that? It is supposed to be across an industry looking at the products, looking at the operations, looking for weaknesses that may be out there, and then focusing on those weaknesses, and then going to the primary regulators and saying, ”We’ve done this analysis, this broad industry-wide analysis. We think you need to take a look at this,” and if they do, and if they resolve it, or do enough to be comforting, then FSOC leaves it alone, but if there’s still a problem, the ultimate tool is still available, which is designation as a SIFI. Therefore, many are saying now “They’ve done away with designations. There’s never going to be another designation.” Well, if you really look at what the Treasury has recommended, it is not the FSOC’s language but that of the Treasury, and the Secretary of the Treasury, who is FSOC’s Chair. So there is a fair amount of influence there, but what it does, it does in black and white, right there in the Report stating: “If all else fails, designation is still an option, it’s on the table.”
There’s actually a lot more about this, and I don’t want to get too carried away. I think it is useful to say that the FSOC staff has been working on a revision of the Interpretive Guidance that FSOC uses to apply the Federal law, and that Interpretive Guidance is currently in the development process. In the latest draft, it does put the emphasis on the “Activities Based Approach”, but much like the Treasury Report, it does recognize that if a problem arises after major efforts have been made with, and by, the primary regulators, then the EBA, the “Entity-Based Approach”, would still apply. We would still look at the individual company that could be causing this problem before making a final decision. There are a lot of commentators talking and writing about ABA and EBA. If you went on Google and searched “activities-based” and “entity-based”—just to give you an example, you would be surprised on how much comes up, but I read for the third time yesterday an 18- page paper stating that the best approach to financial stability oversight is to look at the relevant industries on a macro prudential basis, macro, not micro, and what these authors say is that the Financial Stability Board and the International Monetary Fund, are wrapping their arms around this very forward-looking macro prudential activities-based approach, but in reality, they are still looking at the financial numbers of individual entities, and these authors believe that’s not right. They think the better view is the more broadly, across industry, viewpoint. There’s a debate, but I just give you that as an example. In fact, the only way that I could fully appreciate it was to lift key sentences out of it, and put them in a separate list of key points for review. My staff and I are looking carefully at that paper to understand it; but I would conclude that I don’t think there is yet a complete understanding of what it takes to actually apply an activity-based approach analysis. I don’t think it’s been settled.
Semaya: That leads us into our next question. With the strong period of growth we have in the U.S. right now, and when you have such a long and strong period of growth, it is inevitable that what goes up must come down. Some financial experts are predicting that in the next year or so, we’re going to have a recession, maybe not, hopefully, as bad as 2008. If they’re still working out the kinks, for a better choice of words, on this ABA, or even the EBA approach, how will the FSOC be ready and how will it respond?
Workman: Well, that’s a very good question. There is a lot of thinking being done by the FSOC staff, thinking by the deputies, including in my shop and the other shops, and internally. I went to an International Association of the Insurance Supervisors (IAIS) meeting and talked to the gentleman who’s in charge of the working group that is focused on the activities-based, versus entity-based, approach. When we spoke at that time, and then I heard him on a call a couple of weeks ago, I understood him to say that the working group had determined they are going to stop using the ABA/EBA terminology, and just look at the issues that they think are relevant, Some of them will be macro, some of them will be micro, and that will be interesting. I have not heard that before, so we’ll see.
Pomerantz: The Annual Report of the FSOC comments on cybersecurity. And as noted from Section 6.1 of that Report there are numerous channels through which a cybersecurity event could threaten the broader stability of the broader financial system. Are you satisfied that the NAIC’s recently adopted Insurance Data Security Model Law, when developed and implemented in one form or another in all U.S. jurisdictions, will be adequate to protect the integrity of data that is critical to the stable functioning of the insurance industry and to protect personal data breaches of the magnitude and type that impacted Anthem and Premera BC in recent years?
Workman: Cybersecurity is a huge issue for everybody on a personal basis, let alone on a business basis, and I don’t think there is ever enough that can be done to prevent cyber intrusions because it is a moving target. The people who are engaged in nasty hacking and similar activities, are finding new ways all the time to get to personal and business data. The New York State Department of Financial Services was the first state to undertake a major effort at regulating, preventing and protecting against cyber risk. It influenced the NAIC draft and more recently the NAIC has come forward with its model law. I have not studied those, but everything that I hear is that it’s a very positive step, but is it enough? In fact, when I testified before the Senate Banking Committee, Senator Jack Reed from Rhode Island asked me about it. I just said that I think a lot of good things have been done by the states. I referenced the New York Department’s Regulation, but it’s just never enough. Is it adequate? No one knows.
Semaya: Only three states have adopted the NAIC Model Act: South Carolina being the first to adopt it; (the Director of the South Carolina Insurance Department chaired the NAIC Data Security Working Group); then Ohio and very recently, Michigan. Three states have the NAIC model, or a substantially similar version. New York has its very strong Regulation 500, but if all the states do not act, because right now this model law is not part of the NAIC accreditation program, do you think, in your opinion, that we will need a Federal law to preempt the individual states to either force them to adopt the NAIC model, or a Federal law that will preempt state insurance law?
Workman: Good question. I have two answers to that.
I should have mentioned a moment ago, that the FSOC has a security working group that the Treasury Secretary appointed several months ago, and they are hard at work analyzing the problem and developing recommended solutions. They have not produced their conclusions and recommendations, but the working group is very much engaged, and it is made up largely of folks from the financial agencies who are represented on the FSOC. The second thing I would say is I’m certainly not in a position to tell the states what they need to do and how they should do it, or, for that matter, how Uncle Sam should do it, or if he should.
Pomerantz: Does the NAIC’s President, Eric Cioppa, sit on any of these working committees?
Workman: No, he sits on the Council. He is a member of the Council, but the NAIC has an excellent staff in Washington, as well as at their home office, and they are very much engaged, but I don’t know specifically what they are doing on cybersecurity now that the Model Law has been adopted.
Pomerantz: Apart from cybersecurity risks, what do you envision as emerging threats to the stability of the U.S. insurance industry or the financial system as a whole?
Workman: There are a variety of considerations. For the insurance industry, these are things that are going to be very familiar to you: the historically low interest rates that have been adversely impacting the life industry. That’s a challenge. It’s improving because interest rates are up, and that’s helpful in enabling the companies to meet their guarantees. Second of all, long term care. It continues to be quite a challenge and very difficult to predict. I think the actuaries did not anticipate the persistency that has come about and so that’s a big issue, let alone issues of cost and longevity.
Looking at all these factors, it’s hard, and on top of that, you have people who are making regulatory decisions about long term care premium rates and nobody wants them to go up.
Semaya: So, it’s a problem?
Workman: Yes, it is. And we are seeing examples of disruptive business concepts, and particularly on the P&C side, and it’ll be interesting to see how those play out. New ideas have come along in the past, and this huge industry has been able to adjust and, likely, it will be able to adjust to this too. Those who didn’t start out in this new technologically advanced concept marketplace are catching on fast, and I think that’s a product of the insurance industry, when somebody else has built a better mousetrap, it’s not long before everybody has the mousetrap.
Semaya: And then someone is trying to change it?
Workman: There’s that, and, who knows what impact Brexit could have on domestic insurance business and, of course, there’s climate change, and catastrophic events. I know there are many folks who are convinced that it’s the end of the world and we’ve got only 12 years left, but then there are others who say it’s not an issue, but it certainly is a debate. There are those who think that it is a dramatic threat. Of course, health insurance is a big issue. On the U.S. economy side the list is long: U.S. public debt, entitlement programs, Social Security, Medicare, Medicaid, how those play out; public pensions, multiple employer pensions, the funding difficulties, cybersecurity that we just talked about, Brexit, and so forth. Those are just some examples.
Semaya: We assume a lot of issues that you’re probably dealing with are not just life insurance and other insurance issues. Correct?
Semaya: With life insurance being your expertise for many years, how has it been in acclimating yourself to other U.S. issues that are totally unrelated to insurance?
Workman: In our office we read many articles and papers that are published every day. My senior advisers identify and circulate that material regularly. Every now and then I surprise them by finding a couple of informative pieces that they haven’t found. You are exactly right, FSOC is not just focused on nonbanks, it has oversight responsibility for banks and nonbanks, including non-regulated entities, so I also need to become well-informed in all those areas. I have a long way to go on the banking side. When we have a discreet issue, I am able to consult with the experts, and make some logical judgments, but it is not as if I have 40 years of that experience.
Pomerantz: What are the most rewarding aspects and the most frustrating aspects of your role as FSOC’s independent insurance expert?
Workman: I think the most rewarding aspect is knowing and working with extremely talented people who have many years of experience in these complex areas. As an example, the Chairman of one of the agencies had a long, highly respected career at the pinnacle of the legal profession in New York, and instead of continuing to be a partner at that firm, he is in this agency position. That is a huge opportunity for the public to have someone of his capability. I’m talking about Jay Clayton; he’s the head of the SEC. Another wonderful person who was actually on the panel when I appeared before the Senate Banking Committee, who had been nominated by President Trump to be the head of the FDIC, is Jelena McWilliams; she is a bright star. It was quite a privilege to become acquainted with Secretary Mnuchin and to work with him and his staff. It was also great to meet the Federal Reserve Chairman Powell; he introduced himself to me as “Jay.” The Commodity Futures Trading Commission Chairman, Chris Giancarlo, is an extraordinary professional in an extremely complex area of finance. I could go on and on. The American people can feel confident that those whom President Trump has appointed to serve on FSOC—all of the current voting members—are extraordinarily capable and working very, very hard to serve in the highest traditions of high-level public service. So, that’s the best part, and also the staff people. The most frustrating part is keeping track of seventeen passwords, and not quite being sure exactly how to navigate the different computer systems, the travel restrictions, and the frequent ethics reporting obligations. Becoming familiar with the ways of the bureaucracy and learning how to navigate within it is one of my big challenges.
Semaya: Before we go on, I just want to go back to the list of concerns. Can we discuss the recent tariff war with China. We don’t know where it’s going, but would you consider the current tariff war with China, and I fear potentially with other countries, as this administration moves forward, can have a negative impact, or does it already have a negative impact on the U.S. financial system, and would it be something that FSOC would need to look at?
Workman: I guess I would have two responses to that: The first response is that it’s too early to tell. And the second response is from my personal experience. I understand there are many concerns also about the extraordinary trade imbalance that the United States has been living with, and very little has been done to try to solve it until this President stepped up to say, “We need to fix this.
Semaya: I guess we will have to watch and wait for further developments.
Pomerantz: How easy was it for you to adapt to your new responsibilities in your role as the insurance industry expert following your career in private advocacy and trade association representation?
Workman: Amazingly enough, very easy because I’ve been on the industry’s side all my life and I always wanted to be on the government side. I always felt that what I had learned from the outside could be beneficial to a government position inside, and I think that’s true. The other thing is that I like being an advocate for things I believe in, but this is not an advocate’s position. I like just looking for the right answer. We do have folks come to meet with us from time to time to give us their views on various issues in the financial services area. On more than one occasion, I’ve said, “Okay, I hear what you said, and it’s interesting and appealing, but what I’d like you to do is take your hat off and put my hat on. Put the public’s hat on. Put the FSOC hat on and look at this issue. What do you think about it then? That’s what I’d like you to do.” That puts a different perspective on things. I’ve had a couple of folks say “Oh, I haven’t done that,” but —now, if you’re a good advocate, you need to go through that mental exercise to really think through the right thing for the American public, and then build your case. I reread the article I mentioned earlier because I really wanted to understand it. I wanted to grasp it and then see if it could contribute to knowing how the FSOC should proceed forward on ABA and EBA, or macro and micro. Maybe because I’ve been a lawyer all my life, as an advocate, and I have the client, and I listen to their concerns and their views. In reality, I’ve got a client now and the client is the American public, and I am grateful for that.
Semaya: I find it fascinating that you’ve always wanted to do public service and we really respect that. I know you have a six-year term, and you’re just approaching the end of the first year, but have you given any thought that after this experience, where you will have learned so much about many different industries and what the economy should look like as opposed to what it does look like, and whether it’s ABA, or EBA, or some other acronym that will emerge; where would you want to be in your next career?
Workman: I don’t know. I’m just assimilating the current one. It’s very hard to think beyond that at this stage.
Semaya: Is there anything else that you’d like to share with us that you think would be of interest to the readers?
Workman: Not really. I think we’ve covered just about everything. Fred mentioned the FSOC Annual Report. I would just observe that that’s a great resource for information, not only about the FSOC, but also about the U.S. economy. The Annual Report is quite a fine document, and very interesting. It’s a good reference tool, and I think a lot of people don’t know about it and I think that it is important for the public to learn about it. I am grateful for this opportunity to serve. I’m grateful for the appointment by President Trump to this position. I am grateful for the fact that there were no dissenting votes in the Senate, and I am grateful for the help of many in that regard on both sides of the aisle.
Pomerantz: The Senate hearing was a topic that was skipped over; is there any one particular question or a line of questioning that stands out in your mind during the confirmation process?
Workman: To a fair degree, the hearing was focused on my independence. I have been an industry counsel, lawyer, and executive for a lifetime; how was I going to be independent, and so we had a lot of conversation around that. Then the other was just commenting about designations, and the process, and what I thought about it, and the elements of it. Those were the two primary ones.
Semaya: Thank you, Tom for joining us today.
Refer to page 6 in the Spring 2019 issue for article. https://www.airroc.org/assets/docs/matters/AIRROC-MATTERS-Spring-2019-Vol-15-No-1.pdf