New FSOC Rule Adds Mandatory Hurdles for Regulating Systemic Risk at Nonbank Financial Companies

The “Financial Stability Oversight Council Improvement Act of 2025” introduces a significant procedural change to how the Financial Stability Oversight Council (FSOC) can address large, nonbank financial companies—think massive hedge funds, insurance companies, or payment processors—that could pose a risk to the entire economy if they collapse. The bill mandates that the FSOC cannot vote to designate one of these nonbank companies for enhanced supervision unless the Council first determines that “another action is impractical or insufficient to address the threat posed by the company.” This determination must be made after consulting with both the company itself and its primary regulator.

The New Regulatory Speed Bump

Before this proposed change, the FSOC had the authority to designate a company based on the threat of “material financial distress” or the sheer size and interconnectedness of its activities. This bill essentially creates a mandatory new step: the FSOC must now prove that all other, less drastic options have failed or are impossible before pulling the designation trigger. For busy people, this is like adding three extra steps and two consultation meetings to a fire drill—it slows down the response time when the house is burning. While it offers companies a formal procedural shield, it also means that if a massive nonbank firm starts wobbling—say, a huge mortgage originator suddenly faces a liquidity crisis—the FSOC has to spend crucial time documenting why a quick, less formal fix won't work before it can impose the enhanced supervision needed to stabilize the situation. The threat is defined broadly as either the company’s financial distress or the “nature, scope, size, scale, concentration, interconnectedness, or mix of the company’s activities.”

Due Process vs. Disaster Response

The most immediate impact is on the speed of regulation. This new requirement (found in the proposed new paragraph (3) of Section 113(a)) gives the company and its existing primary regulator a formal seat at the table before the FSOC can act. For the nonbank company, this is a clear win for due process; they get a chance to make their case and push back against designation. For the public, however, the concern is that this added bureaucracy could delay critical interventions. When the 2008 crisis hit, the speed at which systemic risks emerged was frightening. If a similar threat arises from a massive shadow bank today, the FSOC’s ability to act swiftly is paramount to protecting the broader financial system—and by extension, your retirement savings and the stability of your local bank.

The “Submit a Plan” Loophole

There is one exception to this new procedural hurdle: the FSOC can bypass the “impractical or insufficient” determination if the company “promptly submits a written plan” and the Council determines that the action proposed in that plan is itself insufficient or impractical. This provision essentially gives the nonbank company the power to initiate the regulatory dialogue. It’s a smart incentive for companies to self-correct, but it also opens the door for strategic delays. A company facing scrutiny might submit a vaguely worded or deliberately weak plan just to force the FSOC to spend time reviewing and rejecting it, thus buying the company more time while the underlying risk continues to grow. For the average person, this means the regulatory oversight meant to protect the economy might get bogged down in procedural paperwork and strategic maneuvers, potentially leaving the financial system exposed for longer than necessary.