The U.S. House of Representatives passed legislation on Thursday that would remove the ability to designate insurers and other nonbank financial institutions as “too big to fail.”

The Financial Choice Act, which passed by a 233-186 vote, would eliminate or revise several features of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including retroactively repealing the authority of the Financial Stability Oversight Council to designate nonbank firms as systematically important financial institutions, which subjects these institutions to heightened capital requirements and reporting rules.

In July 2013, the council voted to designate New York-based American International Group Inc. and Norwalk, Connecticut-based General Electric Capital Corp. Inc. as SIFIs, with Newark, New Jersey-based Prudential Financial Inc. also designated as a SIFI in September 2013. 

In December 2014, the council voted to designate New York-based MetLife Inc. as a SIFI, but the insurer won a court challenge against the designation in March 2016 — a decision currently under appeal by the government. In June 2016, the council voted to rescind GE’s SIFI designation after the company changed its business by divesting assets and changing its funding model. 

All these designations would be retroactively repealed under the legislation, a prospect welcomed by the insurance sector.

Wes McClelland, vice president for federal affairs for the American Insurance Association in Washington, said in a statement on Thursday that “the Choice Act provides much needed clarity to FSOC’s nonbank SIFI designation process and reaffirms that insurers are not systemically risky.”

The legislation would also replace the Federal Insurance Office with the Office of the Independent Insurance Advocate to advocate for policyholders on prudential aspects of insurance matters, said Larry Platt, a Washington-based partner and member of Mayer Brown L.L.P.’s financial services regulatory and enforcement practice.

“Presumably, for example, if there were concerns about the financial strength of an insurance company and policyholders were concerned about the benefits of their policies, they could go to this new independent insurance advocate to act on their behalf, but it doesn’t really say what they would do,” he said. “It does give them authority to observe all aspects of the insurance industry and identify issues that could contribute to a systemic crisis in the insurance industry.”

The bill demonstrates “unfettered contempt” for regulatory agencies, per its “evisceration” of the Consumer Financial Protection Bureau, Mr. Platt said. The agency would be restructured as an executive branch agency with a single director removable by the president and subject to Congressional oversight, and its supervisory function would be eliminated, according to the legislation.

The CFPB provisions, as well as the repeal of the Volcker rule banning proprietary trading by investment banks and hedge funds, are among the reasons why Senate adoption of the legislation as it stands is unlikely, he said.

“There’s certainly some rollback that could occur, but nothing like what’s been proposed,” Mr. Platt said.