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Over the past few years, banks have been expanding into non-traditional banking services such as the sale of insurance and investment products. While federal and state banking agencies have given greater authority to banks to conduct non-banking activities, they have failed to provide the consumer protections that are needed to address the current and likely abuses in the bank sales market.
Congress is now considering legislative proposals that would give banks broader powers to provide new products. Congress should not focus exclusively on the bankers' "modernization" wish list -- which involves letting federally-insured banks get additional new powers to pursue non-banking businesses such as insurance and securities underwriting. (This means that Nationsbank could own Prudential Insurance and Merrill Lynch!) Consumer protection laws need to be "modernized" as well. Until consumer protections dealing with bank sales activities are enacted, neither Congress nor the states should expand bank powers in the area of insurance and investments.
Banks are now extremely active in all kinds of insurance, from homeowners to auto to life, and investment products such as mutual funds and stocks. According to the industry estimates, bank insurance premiums in 1995 totaled approximately $16.3 billion. Bank annuity sales accounted for one-third of all annuity sales in that year. And, an estimated $20 billion of mutual funds were sold out of banks in 1996.
Bank activities in the area have demonstrated more benefit to banks' bottom lines than to consumers' pocketbooks. Study after study reveals that many banks are not informing consumers that non-banking products such as insurance and securities are not insured by the FDIC or that such products are subject to risk. The banking agencies issued guidelines for bank sales of investment and insurance products but studies show that many banks do not comply with them and, most importantly, guidelines do not have the force and effect of law.
Banks have abused consumers in the past when they used their limited insurance powers. For example, a recent "60 Minutes" expose showed the excessive prices and deceptive practices some banks have used when they purchase "forced placement" insurance for their car loan borrowers.
Years of experience with credit insurance demonstrate banks continued willingness to offer rip-off products. According to a recent survey released by Consumer Federation of America and U.S. Public Interest Research Group (U.S. PIRG), the national loss ratio for credit life insurance was 43% for 1993-95, despite the minimum loss ratio target of 60% established by the National Association of Insurance Commissioners (NAIC). That means that only 43 cents out of every premium dollar goes to pay claims. The rest goes to profits and administrative expenses, including high commissions paid to banks.
Banks also use their position as lenders to coerce consumers into purchasing products they don't need or want. For example, a consumer in Colorado who expressly stated that he did not want credit insurance for his loan found it was included in the loan documents when he went to closing.
To address these problems and ensure consumers have real choices in the market, consumer protections are needed. Such protections should be enacted by Congress for federally chartered banks and by the states for state-chartered institutions.
