Closing Arguments Ahead

By Collins, Kathleen W. | Independent Banker, February 2000 | Go to article overview

Closing Arguments Ahead


Collins, Kathleen W., Independent Banker


Financial reform 's final chapter on insurance sales remains to be written

One of the things America's bankers desperately wanted from the Financial Modernization Act of 1997 was certainty. After years of litigation and political intrigue, federal legislators dealt fairly directly with numerous issues such as banishing unitary thrift charters and eliminating barriers between banks, securities firms and insurance companies.

But when it came to banks selling insurance as agents-a low-risk, pro-consumer, already-working-- pretty-well function-Congress felt compelled to waffle, obfuscate and regulate. Bank insurance agents, for now anyway, will be complying with both federal and non-uniform state law and regulation.

The most unfortunate regulatory repercussion from the financial reform law's insurance provisions is the open acknowledgment that litigation may be necessary to resolve disputes between federal bank and state insurance regulators. Thus, banks selling insurance products are deprived of certainty in the marketplace, which should have been the hallmark of this sweeping reform legislation.

On a positive note, if the "place of 5,000" rule requirements were keeping your bank out of insurance, establishing a "financial subsidiary" at either the holding company or national bank level will now free you of this restriction. State "place of 5,000" restrictions should also recede as a result of state parity laws, which afford state banks an equal competitive footing with their national bank competitors. Some 46 states now possess these parity, or wild card, statutes.

Favorable Momentum

To put these developments in proper perspective, approximately half of the states allowed banks to sell insurance products before 1996. A 1997 report by the National Association of Insurance Commissioners found few problems with banks selling insurance in the permissive states. In March 1996, the U.S. Supreme Court decided the Barnett Bank case, ruling that a state could not "prevent or significantly interfere with" a national bank's ability to sell insurance.

The next three years saw most of the so-called antiaffiliation states-those that previously forbade bank insurance sales-enact enabling legislation. But these states frequently adorned the laws with loads of restrictions, usually under the guise of protecting consumers.

Who are the architects of most of these state bills? They are independent insurance agents' groups, which of course want to preserve any advantage over their new banking competitors. However, the Barnett Bank decision and the Supreme Court's instructions that a state law could not "prevent or significantly interfere with" a bank's ability to sell insurance doomed these restrictive state laws to ultimate federal preemption.

Bankers in Mississippi, Massachusetts, New York, New Jersey and Ohio took legal action to strike down restrictive legislation in their respective states and prevailed in all five suits at early stages, Several other states (Rhode Island and most likely West Virginia and New Mexico) awaited an OCC preemption determination on a request made by the Financial Institutions Insurance Association in September 1996 as to five manner-of-sale provisions in the Rhode Island statute.

Similar provisions were contained in other early state efforts in West Virginia and New Mexico. These provisions were clearly aimed at wreaking havoc with a bank's ability to operate an insurance agency in those states.

Faced with this litigation dilemma, independent agent groups next took up the fight on Capitol Hill, negotiating throughout 1998 and 1999 as to the terms under which banks would sell insurance. This effort came in spite of the decades-old agent position that insurance should only be regulated at the state level.

Lasting Standing limits

While the financial reform law mandates that federal bank regulators issue new insurance sales regulations within the year, none of these provisions affect an agent not affiliated with a bank! …

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