Senate Banking, Housing and Urban Affairs Committee

Hearing on H.R.10 - "The Financial Services Act of 1998"
(Second Hearing in a Series)

Summary of Testimony

Robert A. Miller, a licensed life insurance agent in New York, New York, is Vice Chairman of the New York State Association of Life Underwriters and Chairman of the Financial Institutions Task Force of the National Association of Life Underwriters. He is testifying on behalf of the nation's insurance sales force.

Insurance agents and brokers urge Congress to enact financial services reform this year. The opportunity to move comprehensive reform legislation has never been better. And if the opportunity is not seized, it will likely evaporate. Banking regulators will continue to expand banking powers by administrative fiat, without congressional input, and insurance companies will continue to apply for and obtain thrift charters: the industries desire for legislation will wane considerably. If Congress is not to be rendered irrelevant in the process of financial modernization, it must act now. Unelected bureaucrats and the marketplace should not be allowed to shape the future of these all-important industries.

Our support for H.R. 10 demonstrates that this is not a Main Street versus Wall Street issue -- insurance agents and brokers are the quintessential small business people. And we are convinced that small business, including small banks, have more to fear from unregulated, unstructured financial services affiliations than they do from H.R. 10 or its equivalent.

Insurance agents and brokers' main concern is that the entities that result from the newly formed affiliation of insurance, banking and securities be properly regulated. That is, there must be functional regulation of the activities of such entities. In the context of insurance, this means State regulation -- the historic source of consumer protection and regulatory oversight of the insurance industry.

Regulation of banks' involvement in insurance sales activities has been a problem. Congress must address the current state of uncertainty, where some banks are claiming that they are (or should be) free from state regulation and the Office of the Comptroller of the Currency (OCC) is threatening to declare that some state insurance laws and regulations are preempted as applied to national banks. Under these circumstances, state legislators and regulators are understandably uncertain as to whether their consumer protection laws can be applied to banks' insurance activities and the extent to which they can exercise enforcement against such banks and their affiliates. The Supreme Court's decision in Barnett Bank established the controlling standard -- States can regulate bank insurance sales activities so long as they do not "prevent or significantly interfere" with banks' insurance sales authority -- but the reach of the "significant interference" test is unclear.

We support H.R. 10 because of its efforts to strengthen functional regulation and to clarify the ability of States to regulate the insurance sales activities of every entity and person, including banks and their affiliates. While the bill is far from perfect, from our perspective, it is better than the current situation. Two particular aspects of H.R. 10 are important to us.

First, it is critical that any financial services reform legislation make clear that the insurance activities of every entity will be regulated (based on that function or activity) by the States, albeit subject to the Barnett limitations. H.R. 10 makes this clear. Especially given some of the arguments banks have made in the past, and statements of the OCC, it is also important that the legislation expressly states that anyone that sells or underwrites insurance must be licensed by the appropriate State(s), in accordance with state law, as H.R. 10 provides. And, most important, there must be a clarification of the Barnett standard. H.R. 10 is the minimum we could accept in this regard. The bill codifies the Barnett "prevent or significantly interfere" standard, precisely as it was articulate by the Supreme Court. Arguments that the provision somehow cuts back on Barnett are meritless; if anything, H.R. 10 expands upon the decision and further limits state regulatory authority. H.R. 10 also creates a "safe harbor" for any state law or regulation regarding the solicitation or sale of insurance that is no more restrictive than the statutory provisions of the recently enacted Illinois consumer protection legislation. That law is the product of negotiations between the insurance and banking industries in Illinois and was enacted with bipartisan support by the State legislature. This should not be controversial safe harbor, since the OCC has expressly stated that it does not believe the Illinois law would be preempted under Barnett. This is a very low hurdle. Many States have provisions that are, in some sense, more "restrictive" than the Illinois provisions. For that reason, it is critical that there be no presumption created that these other laws are automatically preempted (because they do not fall within the safe harbor). As to them, banks must make a showing of "prevention or significant interference" in order to escape their application. H.R. 10 includes the necessary provision eliminating any such presumption.

Second, any financial services reform bill must eliminate the unfair advantage federal banking regulators might get in court challenges involving the question whether federal banking law preempts state regulation of insurance sales activities. Federal banking regulators enjoy this advantage solely because of the historical fact that there is no federal insurance regulator. There is no logical basis for such unequal deference in the context of the constitutional question of preemption and where the federal banking regulator has no expertise whatsoever in insurance matters. As to this narrow preemption question, courts should address the question de novo on the merits, without unequal deference to any regulator. H.R. 10 creates the avenue for this level playing field by creating a special expedited proceeding applicable only where the views of the federal banking regulator and the state insurance regulator differ and either regulator chooses to invoke the provision.

In sum, we believe financial services reform can be accomplished this year, and must be accomplished this year if Congress is to play a significant role in setting public policy in this area. We urge the Committee to move H.R. 10, or its equivalent, to the Senate floor as soon as possible.

Full Text of Testimony

Good morning, Chairman D'Amato and members of the Committee. I am pleased to have the opportunity to address you regarding the state of the financial services marketplace and need for legislative reform.

My name is Robert A. Miller. I am a licensed life insurance agent making my living in New York, New York. I am Vice Chairman of the New York State Association of Life Underwriters and also serve as Chairman of the Financial Institutions Task Force of the National Association of Life Underwriters (NALU); I am also a Past President of the New York City Association of Life Underwriters. I am testifying today on behalf of the 110,000 life, health and multi-line agents represented by NALU, as well as the additional nearly half million independent insurance agents and agency employees represented by the Independent Insurance Agents of America, Inc., the Council of Insurance Agents and Brokers, and the National Association of Professional Insurance Agents. Together, these associations represent this country's insurance sales force.

The state-licensed insurance agents and brokers on whose behalf I testify solicit and sell all kinds of insurance. Although we may have some input in designing insurance products to meet our customers' needs, we do not manufacture the product -- we are not underwriters or "principals" in that sense. However, unlike most insurance companies, we have direct contact with the insurance policyholder -- our customer. Some of the agents, particularly in the life insurance industry, work for one (or principally one) insurance company; other agents and brokers, particularly in the property & casualty insurance industry, are "independent" of any one company and represent many companies. Indeed, especially in the commercial lines arena, brokers may piece together, or package, policies from more than one company to serve the needs of a particular client.

You have asked us today to address issues relating to H.R. 10, and we are happy to do so. We actively participated in crafting the bill in the House and urge the Senate to move the bill to enactment this year.

We want to stress that this can be accomplished this year. At first glance, the prospect of enacting legislation this Congress may seem daunting, particularly given the relatively few working days left. But we would suggest that the toughest hurdle -- passing the House -- has already been jumped. Unlike the House, the Senate has fully considered financial services reform in the recent past -- passing bills twice in the 1980's, only to the have the House not take them up. Now the House has handed you a blueprint for reform; the opportunity to make history should not be lost.

Why must financial services be accomplished this year? To begin, if Congress does not act now, it is virtually certain to be made essentially irrelevant in the process. Everyone should recognize that mega-mergers, represented most recently by the announced merger of Citicorp and Travelers, will happen with or without HR 10. The legislation will not change marketplace forces that are driving these mergers. More insurance companies are sure to apply for and receive charters for thrifts. Put simply, federal banking regulators will give banks what they want -- permitting ever greater expansion into other businesses -- and the industries will be less and less willing to support legislative reform. While Congress stands by, the regulators and the marketplace are not standing still. If Congress is to exercise its role in formulating policy in this all-important area, it must act now. Unelected regulators and the marketplace should not be dictating how financial services reform is shaped.

I want to dispel the notion that small business people do not support H.R. 10. This is not a Main Street versus Wall Street issue. The insurance agents and brokers whom I represent are the quintessential small businesses that have made this country great. Some have grown to be relatively large agencies or brokerages, operating across the country, or even internationally. But the vast majority are truly small -- and are located in small, medium-sized and large communities, serving the needs of this country's citizens to ensure against risks and prepare for the future.

We recognize the need for financial services reform and, in particular, for Congress to take the leading role in shaping that reform. Only through Congress' involvement will a level playing field be assured, so that competition can continue to flourish in these all-important industries. Only through Congress' involvement can insurance policyholders -- your constituents -- be assured the protection they need, and expect, as banks, insurance companies and securities firms cross their traditionally separated boundaries in this new world of financial modernization.

Insurance agents have a simple position: Congress has a duty to ensure that these new "mega" companies are properly regulated, and, in particular, that their various different activities are regulated by the appropriate authorities. We should learn from history. The S&L crisis, prompted by improper oversight of the S&L industry, cost the American taxpayer billions of dollars. Congress cannot permit haphazard, backdoor deregulation of the banking, securities and insurance industries to result in another costly crisis.

As small business people, the insurance agents I represent are concerned about the implications of these affiliations for the customer. What will such consolidations bring? Like other small businessmen and women, insurance agents must obtain capital to operate their businesses, and in particular, to expand and grow. Like banks, insurance agencies are consolidating and getting bigger. The pace of mergers and acquisitions is ever increasing, which means agencies are

increasingly looking to the capital market. When we hear about the merger of huge banks and financial services entities, we cannot help but be worried that the availability of credit will shrink. We understand such limitations are not necessarily the result, but we remain concerned. Nevertheless, we do not believe it is Congress' role to halt these consolidations and affiliations.

Insurance agents and brokers have accepted the reality that banks and insurance companies will become affiliated. These mega-mergers, like the affiliations contemplated by congressional proposals, will not dramatically change the ability of banks to sell insurance. Banks can sell insurance now -- from the bank itself or through an operating subsidiary. Financial services reform will, however, change the general landscape of the industry. The unfettered ability to affiliate will almost certainly result in increased bank involvement in insurance sales.

Regulation of the resulting affiliated entity remains a problem. In this testimony, we will focus specifically on regulation of the insurance sales activities of such integrated companies. Presumably, one of the reasons these entities want to affiliate is to cross-market their products: to provide so-called "one stop shopping" for their customers. We are not here today to address whether customers really want all their financial services from one source. But we do want to discuss the need for clarification as to the regulation of those sales activities.

Clarification of State Regulation of Bank Insurance Sales Activities.

In 1944, the Supreme Court aptly observed that "Perhaps no modern commercial enterprise directly affects so many persons in all walks of life as does the insurance business. Insurance touches the home, the family, and the occupation or the business of almost every person in the United States."⁽¹⁾ Insurance is practically a necessity to business activity and enterprise. In addition to protecting a large part of the country's wealth, insurance is the essential means by which the "disaster to the individual is shared by many, the disaster the community shared by other communities; great catastrophes are thereby lessened, and, it may be, repaired."⁽²⁾ It is thus not surprising that lawmaking bodies across the country have recognized that insurance so far affects the public welfare as to require governmental regulation.

The insurance industry -- both underwriting and sales -- is regulated almost exclusively by the States. Unlike other financial services, notably securities and banking, there is no federal regulator of insurance. Indeed, even the Federal Trade Commission is without authority to regulate the industry. The McCarran-Ferguson Act has ensured little congressional oversight of the business as well. As a result, there are at least 50 different regulatory regimes, dating back over one hundred years; no State insurance code is completely the same as that of another State, although the industry and the state regulators are initiating an increasing amount of uniformity and reciprocity.

These different regimes can be particularly frustrating for entities engaged in insurance sales across state lines. Agents and brokers must be licensed in every State in which solicitation and sales activities are undertaken, and the various state insurance consumer protection laws must be followed. Banks, who are generally used to answering to one primary regulator, are particularly frustrated by this regulatory environment. It is therefore not surprising that they are resisting state regulation. We have witnessed such resistance over the years, even without mega-mergers. A national bank in Mississippi has sued the state insurance department alleging that its sales activities could not be regulated by the State at all; the bank has gone so far as to allege its agents do not even have to obtain licenses from the State. A national bank in Illinois refused to allow the state insurance department to examine its records when questions arose about the legality of the bank's insurance sales activities under the Illinois Insurance Code. The affiliation of banks and insurance companies -- and especially the mergers of entities operating across the country -- will only exacerbate this resistance to state regulation on the part of banks and their affiliates.

The tension has risen because of banks' increased involvement in insurance sales activities -- spurred by the Office of the Comptroller of the Currency's expansive interpretation of federal banking law to allow such activities -- and the uncertainty created by the Supreme Court's Barnett Bank decision regarding States' ability to regulate such activity. This is where Congress must act. Neither the banking and insurance industries, nor state legislators and regulators, can wait for years of further litigation in the hopes the ground rules will be set. We need clarification now.

In Barnett, the Supreme Court ruled that States can regulate the insurance sales activities of national banks so long as they do not prevent or significantly interfere with the banks' authority to engage in such activities. Prevention is clear enough. But what constitutes "significant interference"? This question has haunted state legislators and regulators as they try to formulate sensible consumer protections, with the OCC looking over their shoulders and threatening to "preempt" any regulations the federal banking agency considers inappropriate. Since the Barnett decision, roughly twenty States have enacted consumer protections particularly designed to address the issues raised by banks' involvement in the sale of insurance. Other States had such protections on the books when the Barnett decision came down. None of the state insurance regulators charged with enforcing those laws, however, can be assured that banks will not challenge them as "significantly interfering" with their business.

The mega-mergers and affiliations that loom on the horizon simply increase the need for clarification in this area because there will be an increased need for state regulation. Three concerns motivate state regulation in this area -- consumer confusion, consumer coercion, and confidentiality of customer information. Consumers may be confused as to the nature of the product they are purchasing from the bank or its affiliate -- whether it is FDIC-insured or otherwise backed by the government. Consumers may be coerced into purchasing insurance from the bank or its affiliate in order to secure a better credit relationship. Confidential personal information supplied to the bank in the context of the banking relationship may be used by the bank or its affiliate to market insurance to the customer, without the customer's knowledge or consent that the information is being so used. All of these concerns are heightened when the bank and the insurance company and/or agency are part of the same entity. The possibility of a consumer confusing an insurance product for a bank product is increased; the possibility of coercion (including voluntary coercion on the consumer's part) is greatly increased; and the likelihood that confidential customer information will be shared without the customers' knowledge or consent becomes virtually certain.

States need instruction from Congress as to whether the consumer protections they have put in place are secure -- whether they can be applied to banks and their affiliates or not. It is this need for clarity that has led us to support H.R. 10. Although the bill does not answer all the questions surrounding functional regulation of insurance sales activities, it is far better than the current climate. It clarifies that States are the primary regulators of insurance activities, regardless of the entity engaged in the activity. This is done through the simple mechanism of stating that insurance sales activities should be "functionally regulated" by the States -- subject, of course, to the Barnett limitations on state regulation.

While H.R. 10 codifies the Barnett "prevent or significantly interfere" standard, it makes clear that any state law or regulation regulating insurance sales that is no more restrictive than the recently enacted Illinois consumer protection legislation will not constitute "significant interference." This is, in our view, a very low hurdle. Many State laws (such as Tennessee, Pennsylvania, Massachusetts, and West Virginia), including those negotiated and agreed to by representatives of the banking and insurance industries, would not fall within the "Illinois" safe harbor. But it is a start. And it should not be controversial, since the OCC itself has said it does not believe the Illinois statutory provisions significantly interfere with national banks' ability to sell insurance.

We have, in the past, tried other safe harbor approaches -- for example, attempting to articulate precise statutory language or general areas of regulation. But we were never successful in reaching terms that parties could agree upon. The Illinois law -- negotiated by the banking and insurance industries of that State and enacted by a broad bipartisan vote -- is a sounder approach. While it may seem unusual to cite to state law in a federal statute, it is not unprecedented and the state law referenced here is well known by all interested parties.

At the same time, it is important that Congress not create a presumption that those many state laws and regulations that are different from Illinois' law do constitute "significant interference." That is an issue that should be left to the courts. Accordingly, we support H.R. 10's inclusion of a "jump ball" provision, making clear that there is no inference to be drawn as to these other state laws and regulations. Contrary to bank complaints, urged on by the OCC, banks are not at risk when it comes to these other state laws: they need only demonstrate that application of the laws to them "prevents or significantly interferes with" their ability to engage in authorized activities, in order to have them preempted. That is as it should be -- banks should not get an automatic exemption from the application of legitimate state insurance regulation.

We have heard claims that H.R. 10 reduces banks' protection against overly restrictive state insurance law. But Section 104 of the bill merely codifies the clear standard adopted by the Supreme Court, much as the OCC and some banks would apparently like to read more into the Barnett decision. Indeed, a district court in New York -- at the OCC's urging -- recently adopted and used this very "prevent or significantly interfere" standard in the first post-Barnett preemption case and struck down a New York consumer protection law as applied to national banks' insurance sales activities. Leaving no room for doubt, Section 104 expressly demands that the standard be "in accordance with the decision of the Supreme Court in Barnett."

Far from rewriting the Barnett decision in a way that disfavors banks, H.R. 10 actually goes far beyond the decision itself, further limiting States' regulatory authority. Barnett dealt solely with the application of state insurance regulation to national banks' insurance sales activities. Section 104 of H.R. 10 applies the "prevent or significantly interfere" standard not merely to national banks, but to all insured depository institutions (including state-chartered entities), wholesale financial institutions, subsidiaries of either, and their activities in conjunction with affiliates. Moreover, Section 104 is not limited to assessing the impact of state insurance law on banks' insurance sales authority; it expands the Barnett standard to all state laws impacting all activities of banks -- even if they are authorized in the future. These restrictions on state authority were not addressed by the Supreme Court in Barnett. And it is these broadened restrictions that have concerned the National Association of Insurance Commissioners.

Criticizing a more narrow "functional regulation" provision in H.R. 10, the OCC has asserted that Section 302 of the bill grants "sweeping" authority to States to license any person or entity that underwrites or sells insurance in the State. But the bill's licensing mandate is expressly limited by Section 104's "prevent or significantly interfere" standard. Therefore, state insurance licensing laws, like other forms of state insurance regulation, are subject to preemption challenges. There is absolutely nothing "sweeping" about this provision. In fact, the OCC has been seeking to assure the public, legislators and regulators that banks are getting all applicable relevant licenses now. The OCC's complaint thus suggests that the agency, in fact, does not believe national banks have to obtain state licenses to sell or underwrite insurance -- even though every other entity engaged in such activity must do so. The OCC's reaction actually highlights the need for this specific licensing provision in H.R. 10.

No "Unequal Deference" Among Regulators in Disputes Regarding Preemption.

To make it a truly level playing field, we have consistently maintained that there must be a provision that permits the courts to address the preemption question de novo -- without deference to a federal banking agency's views without similar respect for state insurance regulator's views. Such deference, established under the so-called Chevron doctrine, in the context of interpreting ambiguities in federal laws, is particularly inappropriate in the context of addressing the constitutional question of whether Congress intended federal law to displace state law. In this sensitive area of federal-state relations, the views of an unelected federal bureaucrat should ordinarily hold no sway. We therefore support the provision of HR 10 that creates an expedited review proceeding, allowing a court to review the conflicting views of a state insurance regulator and a federal banking regulator on the preemption question, without "unequal deference" to either regulator.

Despite the OCC's and some banks' protestations, the provision is extremely narrow. H.R. 10 provides that where there is a dispute between a state insurance regulator and a federal banking regulator (the OCC is not singled out) regarding two narrow issues ((1)whether a product is a banking product or an insurance product for purposes of the limitation on bank operating subsidiaries' ability to underwrite insurance; and (2) assessing whether a state law regulating insurance sales is preempted under Section 104) -- either regulator may take advantage of a new, expedited, federal-court procedure to resolve the issue. And, in such proceeding, the court will grant neither regulator "unequal deference" in resolving the merits of the case. The court will resolve all issues de novo, on the merits.

The message of this provision is plain: in the context of these two narrow issues, Congress has determined that neither the federal banking regulator's views nor the state insurance regulator's views (when they clash) should be deemed to be supreme. They are co-equal. This is particularly appropriate in the context of this melding of two different industries, with two different primary regulators. All H.R. 10 does is eliminate the banking regulators' advantage in such a dispute, an advantage based on nothing other than the historical development that insurance has been regulated by the States rather than a federal entity (and therefore State regulators do not come under Chevron). The OCC apparently wants special treatment when its views differ with those of state insurance regulators. Congress has not endorsed such disregard for the expertise of state regulators.

The OCC and national banks complain that H.R. 10 cuts back on the Supreme Court's pronouncement in Chevron -- a decision that had nothing to do with national banks or the OCC. The Chevron doctrine is only a matter of interpreting Congressional intent: the court decides that Congress must have wanted an administrating agency's reasonable interpretation of ambiguous terms in a statute it administers to be given deference. H.R. 10 expressly states Congress' position on this issue in these narrow contexts. There is no need for the courts to try to figure out what Congress would have wanted; Congress says no regulator gets "unequal deference."

If either the "unequal deference" provision or the state functional regulation provisions, including the Illinois safe harbor, is eliminated, our support of HR 10 will evaporate. We cannot accept a world in which state insurance laws are preempted because there is no federal insurance regulator who is granted deference. Nor could we accept a world in which massive amounts of state insurance consumer protection laws were preempted, as would be case if the Illinois law were to become a federal ceiling for state regulation, rather than a safe harbor, or if States' authority to regulate were further eroded.

* * * *

In sum, we believe the recently announced mergers underscore the need for Congressional leadership in shaping the course for the provision of financial services in the twenty-first century. In particular, we urge you not to lose sight of the need to bolster functional regulation of the various activities of these affiliated entities. In the context of insurance sales, this means state regulation -- state regulation with critically important clarifications as to its boundaries.

We urge you to bring H.R. 10, or its equivalent, to the § Senate floor this year. The time is ripe. If Congress does not take this opportunity to act, the chance to do so may evaporate. And unelected regulators and the marketplace will shape the future of financial services in this country. No one will be the better for that approach.

Thank you. I would be happy to answer any questions you have, and to provide any additional information you would find helpful.

Notes:

1. United States v. SouthEastern Underwriters Ass'n, 322 U.S. 533, 540 (1944).

2. German Alliance Ins. Co. v. Lewis, 233 U.S. 389, 412 (1914).

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