Consumers Union (1) , publisher of Consumer Reports magazine, appreciates the opportunity to appear today to present the consumer perspective on the "Financial Services Act of 1999" (HR 10).

Over the past few years, we have supported efforts to modernize the financial services industry so long as such efforts moved in the direction of the consumer, not just the financial services industry. We understand the challenges Congress faces in restructuring the financial services industry to balance the interests of the industry, regulators and consumers. Thus far, we have been disappointed that the balance has been tipped too much in favor of industry and regulators' interests, and not the consumer interest. While last year's efforts held potential to bring a more balanced approach to the restructuring of the financial services market, we believe this bill represents a step backward for consumers. Congress must realize that financial modernization can only succeed if fair treatment of consumers goes hand in hand with the elimination of the walls that separate the industries.

Meeting the Needs of Consumers in a Changing Financial Services Market

Although the restructuring of the financial services market as envisioned under HR 10 will have major impacts on consumers, many of the changes are occurring in the market in the absence of legislation. And rather than being a boon for consumers, consumers have been misled and deceived about the products banks sell and found themselves nickle-and-dimed to death with a plethora of fees. Financial firms have become masters of a marketing frenzy to current and potential customers, invading consumers' mailboxes and telephone lines with abandon and almost no checks on their practices.

Unlike other private industries, as Chairman Greenspan has pointed out, the bank system is not a free market system. Depository institutions enjoy support from taxpayers in several forms, including the deposit insurance system and access to the discount window. Congress should not permit "modernization" to be used as a code word for further catering to the wealthy while leaving out the middle and lower income consumers, making services more and more costly for those people who have the fewest resources.

As banks have become full service financial centers, they have targeted the more wealthy customers who they believe have more fee-generating potential for them. "'Everyone isn't the same anymore,' says Steven G. Boehm, general manager of First Union's customer information center …. After years of casting a wide net to lure as many customers as possible, banks and many other industries are becoming increasingly selective, limiting their hunt to "profitable" customers and doing away with loss-leaders," as the Wall Street Journal recently reported." (2) A multi-tiered structure has formed where the wealthy get better access to services and better deals and the middle and lower income customers are struggling to pay for access and basic services.

First Union employs a red-yellow-green light system to differentiate among customers and weed out the less profitable or "redlighted" customers while giving better deals and fee waivers to the "greenlighted" customers. Many of those customers who were "redlighted" may be called upon in the future to bail out the very institutions that denied them the service and deals they deserve.

What does Congress need to do to assure consumers that the changes to the financial services market will benefit them?

Enforceable Retail Sales Protections for "One-Stop Shopping:" To help prevent confusion and coercion, consumers need:

· effective disclosure of which products banks sell that are not FDIC-insured or guaranteed and subject to risk of loss;
· requirement that sales activities be conducted in an area separate from where banks take deposits and make loans and compensation structures that promote suitable sales;
· anti-coercion rules that require sales people to wait to make sales until after the loan is made to prevent banks from taking advantage of loan applicants;
· suitability rules to ensure the products consumers purchase meet their financial needs; and
· a process for consumers who lose money when banks violate these rules to recover their losses.

While we appreciate and support the inclusion of a package of retail sales protections in the bill, these protections need to be strengthened. For example, the bill fails to include the suitability requirements that were contained in the bill approved by this committee last Congress. In addition, language in section 307(g)(2) creates a "reverse preemption" situation by permitting the federal regulations to be preempted by state laws that are inconsistent or contrary to the regulations. Such language is not necessary and undermines the goal of consumer protection.

Functional Regulation to Ensure Protections Available Regardless of where a Consumer Shops: Banks engaged in securities activities are not subject to federal securities laws because they are exempt from the definition of broker/dealer and investment adviser. Consequently, the investor protection rules issued by the Securities and Exchange Commission ("SEC"), including the ability to receive compensation through arbitration from unscrupulous sellers who violate SEC rules, do not apply. Any financial modernization proposal should do away with this out-dated exemption.

While HR 10 contains provisions that attempt to close this loophole, it falls short of providing consumers with full protection afforded by securities laws. The language contained in the version passed by the House last Congress provides stronger investor protections and is preferable to the approach in this bill. With regard to the regulation of insurance, we are concerned that provisions in the bill could limit the ability of states to enforce their rules on bank insurance activities and tie the hands of states to enact strong consumer protections as needed (see discussion below).

Updating Privacy Laws: As banks, insurance and investment firms merge into huge "money centers," the risk of confidential customer information being shared or sold without the consumer's knowledge or consent becomes great. The consumer concern over financial privacy was demonstrated recently when bank regulators issued the "know-your-customer" proposal and received over 14,000 responses, many of which expressed grave concern about banks collecting information on customers' financial activities. Surveys show that eight out of ten Internet users say that protecting the privacy of their dealings over the Internet is a primary concern. (3) The majority of users also believe that only legislation and enforcement will make most businesses observe good privacy policies.

The Fair Credit Reporting Act (FCRA) contains the only financial privacy protections for consumers and is proving to be deficient because of serious gaps in protection. The Citicorp-Travelers merger is an example of why privacy protections are urgently needed. Not only can Citigroup affiliates share financial information about their over 90 million customers to use for cross-marketing (in many cases without the customer's knowledge or consent), but they also can pool data and create their own databases without complying with the FCRA. To adequately address financial privacy and ensure consumer control over whether and the extent to which information is shared or disclosed about them, Congress needs to do the following:

· close off the loopholes in the FCRA that permit financial institutions to disclose important financial information without the customer's knowledge or consent and create data pools exempt from the protections of the FCRA;
· change the opt-out feature of the law to an "opt-in" opportunity, which ensures consumers control over how and when personal financial information is shared;
· give consumers the power to determine what information the institutions hold on them and what their rights are; and
· obligate banks and other financial firms to protect the confidentiality of customers' financial and personal information and hold these institutions legally responsible when a bank or other financial firm violates the confidentiality standards because of a breakdown or failure to protect the data.

Low-Cost Deposit Accounts: As banks focus more and more of their efforts on attracting upper income consumers to their "one-stop shopping" money centers, middle and lower income consumers are fighting a losing battle against fees. In a 1996 study, Consumer Reports identified 100 separate fees that banks now impose on consumers. The size of those charges has been rising at better than twice the rate of inflation, jumping more than 50 percent on checking accounts between 1990 and 1996.

Recent Federal Reserve data show that almost half of American families, 48 million households, keep a $1,000 or less balance in their checking accounts. Consumers may have to maintain minimum balances of as much as $750, $1000 or more in their accounts at all times or maintain an average balance of even more if they want to avoid paying substantial fees. In addition to those hard-hit by fees, there are an estimated 12 million households that currently have no bank accounts at all.

Most people need banks, but many cannot maintain the high minimum deposits required to avoid monthly charges. Low-cost deposit accounts, with reasonable service fees and low or no minimum initial deposit or balance requirements, are needed to lessen the financial burden on low and moderate income consumers. The House voted for a bill that included low-cost accounts last Congress. We urge you to reinstate this essential protection.

Meeting the Needs of Communities: The Community Reinvestment Act (CRA) has resulted in demonstrable benefits to low and moderate income communities. While CRA has come under attack, Congress should be at the forefront of fortifying it, not narrowing it. Banks should not be permitted to avoid CRA obligations when their affiliates conduct lending activity. All lending activity conducted by banks and their affiliates should come under the CRA. As insurance companies and securities firms merge with depository institutions, they should come under obligations comparable to the federal CRA and other obligations of the type applied to banks to ensure they too meet the needs of all communities, not just the wealthiest. The insurance and securities industries must be held to account for unfair and discriminatory dealing. The trillions in assets they hold should be put to work to assure the communities where they do business stay vibrant and working.

Ensuring the Authority of States to Protect their Residents

States have long had the authority to regulate businesses operating within their borders. It is essential that states have the ability to enact and enforce laws that protect their consumers, especially as the banking industry is further deregulated.

The need for Congress to preserve the right of states to protect their consumers is greater than ever. Over the past few years, the Office of the Comptroller of the Currency (OCC) has showed a lack of concern about consumer protection by preempting state consumer laws. The OCC has issued opinion letters telling national banks that they do not have to comply with such essential protections as state lifeline banking laws that protect consumers from price gouging on checking accounts and laws that prohibit prepayment penalties when consumers sell their homes and pay off their mortgages. And, with the passage last Congress of the Riegle-Neal Clarification Act (HR 1306), state banks can ignore state consumer protection laws whenever a national bank may do so making it even more important to rein in the OCC.

Rather than including a provision that restates and clarifies the application of state laws, provisions in HR 10 would undermine states' rights. With regard to state regulation of insurance, we are very sensitive to work that was done to develop a compromise that addressed the concerns of the insurance industry. We believe section 104, however, undermines state authority to protect consumers. While no state should prevent a bank from exercising its insurance authority, we are concerned that "restrict" language is too vague. The "safe harbor" and overly broad nondiscrimination standards could tie the hands of states to enact measures designed to protect consumers from misleading or deceptive practices by banks. We are also concerned that some of the language in section 104 could be interpreted to preempt state laws other than those dealing with insurance and securities. While changes were made to the original language to address some of these concerns, section 104 may still be interpreted to affect the applicability of other state laws.

The provisions in Subtitle B of Title III that permit mutual insurers to move to other states to take advantage of "mutual holding company" laws and avoid laws that provide greater protections for policyholders should be deleted. These provisions would enable mutual insurers to convert to stockownership without giving policyholders, who have an ownership interest in the mutuals, their accumulated ownership value. Over the past several months, mutual insurance companies have moved to convert to stock under traditional "demutualization." These transactions demonstrate that mutuals can successfully convert to stock without the aid of the mutual holding company structure, a structure that fails to adequately compensate policyholders.

Guarding the Safety and Soundness of Our Financial System

While banking laws need to be modernized, Congress needs to ensure that they are done in such a way as to preserve the safety and soundness of the banking system. Congress must be vigilant to protect against a repeat of the same mistakes that forced taxpayers to pay billions to bailout the s&l industry.

Keep Banks and Commercial Firms Separate: The separation of banking and commerce should be retained. We oppose permitting federally-insured institutions to combine with commercial interests because of the potential to skew the availability of credit, conflict of interest issues, and general safety and soundness concerns from expanding the safety net provided by the government. The federally-insured deposit insurance system should not be put at risk merely because companies have holdings in commercial firms or want to expand into such businesses. We support provisions in HR 10 that retain the barriers between banking and commercial interests, although we believe the grandfather period should be much shorter.

Minimize Taxpayer Risk: Activities such as insurance and securities underwriting that pose risk should only be permitted through a separately capitalized affiliate. Our understanding of the bill is that such activities are not permitted to be conducted in operating subsidiaries, which we support.

Conclusion

Congress has been tackling financial services modernization for several years. In the meantime, regulators have expanded the powers of banks and the market has experienced dramatic changes. Unfortunately, consumer laws have not kept pace with these changes. We urge you to ensure that as you break down the walls that separate banks and insurance and securities firms, you ensure the market serves the needs of all consumers and does not simply cater to the wealthiest.
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Footnotes:

(1) Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about good, services, health, and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with approximately 4.5 million paid circulation, regularly, carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.

(2) Wall Street Journal, January 7, 1999, p. A1.

(3) "E-Commerce and What Net Users Want," survey conducted by Louis Harris and Associates, Inc. and Dr. Alan Westin, June 1998.
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Financial "Modernization" Shouldn't Ditch Consumers (press release) 

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