March 11, 1998

New Version of HR10 Spells Trouble for Consumers

Dear Representative:

We are writing to alert you to the anti-consumer provisions in the compromise on HR 10. The most recent compromise goes a long way to appease special interests but does not adequately protect the consumer interest in a rapidly changing world of financial services. The bill fails to ensure adequate consumer protections, allows unwarranted intrusion into states' authority to protect their citizens and breaks down the barrier between banking and commerce, exposing taxpayers to risks of future bailouts. We urge you to oppose the bill unless it is amended to meet the needs of consumers.

The Bill Allows States to Give a Green Light to Banks to Mislead and Deceive Consumers: Banks are now selling a variety of insurance and investment products. Studies indicate consumers are often at risk when they shop at a bank for these products because they may be misled about whether the products are FDIC-insured or are not informed that investment products are subject to risk of loss when the market goes down. While section 308 directs federal bank agencies to develop a package of minimum consumer protections intended to target the abusive practices by depository institutions when they sell insurance, under section 308(g)(2) the protections would not apply if a state has a law, regulation, order or interpretation bill that is "inconsistent with or contrary to" those protections. This standard renders the consumer protections meaningless and creates an unprecedented and unconstitutional standard that permits states to preempt federal law with contrary law.

What does this mean for consumers? Section 308 requires banks to disclose that insurance products, including annuities, are not FDIC-insured and are subject to investment risk where applicable. A state could issue an order that allows banks to not inform consumers that the products are FDIC-insured or subject to investment risk. The confusion over products sold by banks would only grow worse. Rather than protecting consumers with mandatory minimum federal protections, section 308 would permit states to sanction misleading and deceptive practices by banks.

The Bill Permits Unprecedented and Overly Broad Preemption of State Laws: State authority to regulate businesses operating within their borders is a well-recognized principle. Yet, this principle is continually undermined by actions of Congress and federal bank agencies. For example, the OCC has issued decisions permitting national banks to ignore important state consumer laws, such as New Jersey's basic banking law that requires low-cost checking accounts to those who cannot afford the exorbitant fees banks now charge. With the recent passage of H.R. 1306, which lets state chartered banks ignore state consumer laws whenever a national bank may do so, it is more important than ever to protect state consumer laws. Rather than clarifying the importance and applicability of state laws that are not in direct conflict with federal laws, the bill creates broad preemption standards that could eviscerate or undermine state authority and harm consumers.

• Section 104 Permits Broad Preemption of State Laws that Apply to Depository Institutions: Despite its intended purpose of ensuring that the Barnett standard remains in tact for banks and at the same time placing some limits on federal bank regulators' authority to preempt state insurance sales laws, section 104 goes way beyond that goal and creates a broad new preemption standard for virtually any bank activity. Under section 104 (b)(1), a state law, regulation, order or interpretation that "prevents or restricts" a depository institution from engaging in any activity authorized under any provision of federal law is subject to preemption, with limited exceptions. This standard could allow wholesale preemption of a host of consumer laws if they are determined to "restrict" either "directly or indirectly" the ability of banks to engage in any authorized activity.

  What does this mean for consumers? It means that important state consumer laws could be preempted with a showing that they "restrict" an activity. Connecticut, for example, has a prohibition on ATM surcharges. Under this standard, that prohibition could be preempted if it is determined to "restrict" the ability of banks to provide deposit services, strangling the ability of states to protect their citizens.

• The Bill Preempts State Laws that Provide Protections for Policyowners of Mutual Insurance Companies: Mutual insurance companies, unlike stock companies, are owned by the policyholders. Under traditional demutualization, when a mutual converts to a stock, policyowners are entitled to adequate compensation for their ownership interests. But mutual insurance companies have successfully pushed for state laws that permit a mutual to convert to stock through a "mutual holding company" structure that allows them to avoid compensating policyowners. Subtitle B would preempt state laws that provide policyowner protections by permitting mutual insurance companies to "redomesticate" to another state to take advantage of the anti-consumer mutual holding company structure as long as minimal protections are in place. Under the bill, consumers could lose their right to an interest in billions of dollars they are otherwise due when a mutual converts to stock.

  In justifying this provision, mutual insurers argue that traditional "demutualization" is too cumbersome and expensive a process. Prudential recently announced its plan to demutualize, without a mutual holding company. If Prudential, the largest mutual life insurer in the country, can demutualize without a mutual holding company, it is unnecessary to permit mutual insurers to avoid state laws that protect policyholders' interest in the companies.

• Uniform Insurance Agent Licensing (NARAB): While we do not oppose the concept of a self-regulatory organization (SRO) to help prevent bad practices by insurance agents, we are concerned that its current structure and preemption powers may tie the hands of states to discipline or get rid of bad agents. In addition, it is unclear who would direct the organization (board membership) or who/how the SRO would be overseen. To protect consumers, there must be public participation and continuing authority of the states to discipline and apply their laws to agents.

The Bill Opens Up the Banking System to a Host of Risks: We believe any financial services legislation must ensure the safety and soundness of the banking system. It was not long ago that taxpayers were called on to bail out the S&L industry. Rather than preventing another such bailout, the bill would expose taxpayers to more risk.

• Permitting the Mixing of Banking and Commerce: The compromise bill permits financial holding companies to own commercial firms as long as the commercial firm does not amount to more 5% of the holding company's revenues or 15% for those firms that already own commercial firms. While these baskets are subject to dollar limits, there is no limit on their growth once the commercial firm merges with the financial services firms. Allowing taxpayer-backed depository institutions to merge with commercial enterprises could skew the allocation of credit and lead to greater levels of economic concentration. For example, if the largest bank, insurance company and securities firm merged, the holding company would be huge and could purchase a rapidly growing high-tech company. If the commercial firm went under, the taxpayer-backed bank could be called on to bail it out. The situation in Asia should be a warning to Congress to proceed with utmost caution and retain the long-standing barrier between banking and commerce.

Congress should enact safe and consumer friendly financial services modernization legislation. Unfortunately, the compromise bill fails to do so. We urge you to oppose the bill unless major changes are made to address the needs of consumers in the rapidly changing world of financial services.

Sincerely,

Mary Griffin
Insurance Counsel
Washington Office