My name is Mary Griffin, and I am Insurance Counsel for the Washington, D.C. office of Consumers Union(1) publisher of Consumer Reports magazine. Today I am testifying on behalf of Consumers Union and Consumer Federation of America.(2) Thank you for this opportunity to present our views on the "Financial Services Act of 1998" (H.R. 10).
We support financial modernization legislation if it promotes competition, provides a regulatory structure that ensures safety and soundness and protects consumers as they attempt to understand and navigate in an increasingly complicated marketplace. This bill goes a long way to providing consumer protections that are necessary in this changing financial services landscape but falls short in a number of areas that need improving if consumers are to benefit from changes envisioned by the bill. We will first outline those provisions designed to make the market work better for consumers and investors and then we will focus on the major gaps in the bill.
Consumer Protections for Retail Sales of Insurance and Investment Products
When consumers walk into a bank, they are faced with a wide array of choices ranging from mutual funds to stocks to life insurance. Notwithstanding the changes that will be brought about by this bill, retail sales of insurance and investment products has been a rapid growth business for banks over the past few years. According to the FDIC, banks reported more than $2.4 billion in fee income from their mutual fund and annuity business in the first three quarters of 1997 and a 46% increase from the previous year in their sales of these products. According to the Association of Banks-in-Insurance (ABI), 90% of banks surveyed sold annuities in 1996 and insurance premiums collected by banks totaled more than $16.5 billion.
This expansion in sales activities by banks results from a series of decisions of Federal banking agencies authorizing banks to expand their insurance and investment activities. But this expansion has not been accompanied by an expansion or updating of consumer protections, which has added confusion and risk for consumers.
The need for strong, enforceable safeguards for the world of "one-stop shopping" is clear. Study after study, including one issued by the FDIC, reveal that many banks are failing to inform consumers that non-banking products are not insured by the FDIC or that such products are subject to risk. They also show that banks recommend products that are inappropriate. For example, consumers who need a steady stream of income are recommended products that are subject to huge market fluctuations that could place their entire investment at risk. And banks, as providers of credit, are in a powerful position to coerce loan applicants into purchasing other products that they do not need or want, as they have with credit insurance.
Unfortunately, the federal banking agencies have not responded forcefully and effectively to this problem. In response to the strong evidence, the banking agencies issued non-binding guidelines for retail sales of nondeposit investment products in 1994 and the Office of the Comptroller of the Currency ("OCC") issued "guidance" to banks on their insurance sales issued by the in 1996. Only recently has the OCC acknowledged the need for stronger enforcement. However, no action by the banking agencies has been taken to date.
To fill this void, the bill provides a package of consumer protections for bank sales of insurance to help prevent confusion about whether financial products sold by banks are FDIC-insured or subject to investment risk. In addition, the bill repeals the exemption of banks from the definition of broker-dealer, bringing most of bank-securities activities under the panoply of investor protection rules that have long applied to sales by registered broker-dealers. Specifically, the bill provides:
Consumer Protections for Retail Sales of Insurance, Section 308: Federal bank agencies are directed to develop regulations to help prevent confusion and deceptive practices when banks sell insurance that include:
Repeal of Exemption of Banks from Securities Laws, Title II, Section 201 and others: Under current law, banks are exempt from the definition of broker-dealer which means 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. The bill tries to close this major gap in investor protection by bringing most bank-securities activities under the securities laws. For those activities that do not come under the securities law protections, the bill includes a package of investor protection rules that banks must comply with if they sell securities to the public.
Improved Disclosure of Costs and Fees, Section 251: To help promote comparison shopping and competition, it is essential that consumers know and understand the costs of the products they are considering. The bill includes a provision requiring all financial services regulatory agencies to prescribe or revise rules to improve disclosure of fees, commissions and other costs of financial products.
Bank fees are going up and up and up, both in number and cost. The 1996 Consumer Reports study on bank fees 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. Minimum balances required for the average checking account also shot up 40 percent higher than in 1994(3). According to a recent study by USPIRG, the average cost of a checking account is $264 per year; that amounts to more than $9 billion a year in bank fees for families keeping less than $1,000 in their accounts.(4)
At the same time fees have been going up for consumers, banks have enjoyed huge earnings, exceeding $60 billion in 1997. This is not a surprising phenomenon considering that approximately one-third of those revenues come right out of consumer pocketbooks in the form of fees.(5) In the wake of these increasing fees and decreasing services, consumers are skeptical about the great benefits that will inure to them if banks can expand further into non-banking activities.
As Mr. Greenspan pointed out last week to this Committee, the banking industry does not operate as a free market. It is an industry supported and backed by Federal guarantees and taxpayer dollars. Unless the benefits of such a system are shared with the taxpayers who support it, our government is merely socializing losses and privatizing profits to the detriment of those most in need of basic financial services in this country.
Estimates of the unbanked vary from 10% to about 20% of American households. While there are many reasons why people are not using banks, their alternatives are often high-priced check-cashers or other "fringe-banking" providers. Congress cannot ignore those in need of affordable bank services.
As a condition of enjoying the benefits of the financial services holding company structure, H.R. 10 requires that qualifying depository institutions offer and maintain low-cost bank accounts. As banks continue to gouge consumers with higher and higher fees, this is critical measure which will help ensure low-income consumers have access to banking services. It is especially important to provide this through federal legislation because the OCC has rendered New Jersey's state lifeline banking law inapplicable to national banks and other such state laws may also be at risk of preemption.
Congress needs to ensure any changes in the banking laws 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 just a few years ago.
We oppose permitting federally-insured institutions to combine with commercial entities or engage in commercial activities because of the potential to skew the availability of credit; the economic concentration it could create; conflict of interest issues between lenders and their affiliates to whom they lend; and general safety and soundness concerns from expanding the safety net provided by the government. As both Chairman Greenspan and Secretary Rubin stated before this Committee last week, the symbiotic relationship Asia allows between its banks and industrial firms is one of the reasons for the crisis its countries now experience.
The bill does not permit banks to affiliate with commercial firms or engage in commercial activity but includes a grandfather provision for activities so long as they do not amount to more than 15% of the revenues of the financial services holding company. The bill requires these activities to be divested within 10 years but an extension can be granted for an additional five years. We are concerned that under the unitary thrift provisions, the unitary thrifts' would not only be grandfathered but the thrifts could engage in commercial activities even after ownership is transferred. This loophole should be closed.
The bill requires high risk activities such as insurance and securities underwriting to be conducted only in an affiliate. While we realize it is impossible to safeguard federally-insured deposits from all risks, we believe there is less risk in the affiliate approach. By having a parent between the separately capitalized affiliate and the bank affiliate, any negative ripple effect from losses of the affiliate could be more easily stopped at the parent company.
Preemption of State Consumer Laws
The need for Congress to preserve the right of states to protect their consumers is greater than ever. Over the past few years, 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 recent passage of the "Riegle-Neal Clarification Act" (H.R. 1306), pushed through Congress last year with little consideration and debate, state banks can ignore state consumer protection laws whenever a national bank may do so., making it even more important to rein in preemption activities.
The already weakened power of states to provide consumer banking safeguards is further hampered by HR10. Of particular concern to consumers is the sweeping language in Section 104(b)(1) and (b)(3) which could give expanded authority to regulators to allow federally chartered banks to avoid state consumer law even where there is no federal law or regulation providing such consumer protections. Section 104 was designed to address regulatory turf battles between insurance, securities and banking interests and codify the Barnett standard for certain activities. But the language is overly broad, bringing under the "prevent or significantly interfere" standard any activity authorized under "any other provision of Federal law," putting at risk a host of state consumer protections, including ATM surcharge prohibitions.
In the Conference Committee report on the 1994 Riegle-Neal, this Committee reiterated the importance of protecting the ability of states to regulate businesses operating within their borders. Rather than providing more leeway for preemption determinations, Congress should send a strong message that such preemption is inappropriate by clarifying that state consumer laws apply unless they are in direct conflict with federal law. We urge you, at a minimum, to delete language in section 104 that opens the door unnecessarily to more preemption.
Permitting Mutual Insurance Companies to Avoid State Policyholder Protections
As mutual insurance companies often boast, they are owned by the policyholders. Under traditional "demutualization," policyholders are entitled to adequate compensation, e.g, cash or stock, for their ownership interests when a mutual converts to stock form. On the other hand, mutual holding company laws, which the industry has successfully pushed for in some states, permit the companies to convert to stock ownership through a mutual holding company structure, allowing them to escape compensating policyholders adequately for their ownership interests. These laws often provide stock options for directors and management of the mutuals, creating huge windfalls for executives and obvious conflict of interest issues. As pointed out in a recent article in the Washington Post: "The problem with mutual holding companies is that the policyholders end up with only "membership interests" of dubious value in a company that owns part of the public company. They don't get cash or stocks."(6)
Title III, Subtitle B of the bill permits a mutual insurance company to transfer to another state or "redomesticate" to avail itself of the mutual holding company law. While the bill establishes minimum standards for the state laws, it does not sufficiently protect the interest of policyholders. This bill provides an incentive to states to weaken their policyholder protection laws to encourage companies to relocate to their states or to keep them there. We urge you to delete this section or, at a minimum, strengthen the standards to help ensure policyholders are adequately compensated.
Lack of Strong Privacy Protections for Consumers
As financial services firms diversify and "cross-market" an array of financial products, their interests in obtaining information about consumers is on a collision course with consumers' interest in protecting their privacy. Recent newspaper reports about banks disclosing information to outside parties and the SEC's action against NationsBank which involved NationsSecurities representatives selling uninsured products to unknowing customers based on information and maturing CD lists from bank personnel, highlights the ease with which banks share information among affiliates and others and the potential problems this raises for consumers.
We believe legislation should prohibit depository institutions and their affiliates from sharing or disclosing information among affiliates or to third parties without first obtaining the customer's written consent. At a minimum, Congress should close a loophole in the Fair Credit Reporting Act ("FCRA") that permits banks to disclose "experience" information without coming under FCRA protections. Because of this loophole, any experience information a bank may have with its customers such as large deposit transactions or loans can be freely shared and disclosed without the protections provided by the FCRA, including the requirement that the consumer be given the chance to say no.
Need for Commitment to Communities
Insurance and securities firms represent a major segment of the financial services industry but they do not necessarily serve all segments of the population. Several studies as well as litigation reveal that insurance companies unfairly discriminate against residents of minority and low-income communities. As these entities enjoy the advantages of merging with taxpayer-backed depository institutions under the financial services holding company structure, they too should be required to commit to serving the needs of communities, particularly under-served urban and rural areas. By making sure that residents of these communities have access to adequate insurance at fair prices and that financial affiliates invest in these areas, Congress can help ensure these communities are not further under-served by financial modernization but benefit from it.
Strengthening Approval Process to Preserve Safety and Soundness Protection
While the bill requires banks that are part of the financial services holding company to obtain prior approval before being permitted to join the holding company, no similar requirement applies to non-depository institutions. We believe that prior review by federal bank regulators and opportunities for public comment are important when banks merge with insurance and securities firms in order to protect the safety and soundness of our banking system from risks posed by these other activities.
The financial services landscape is changing rapidly. We urge you to address the public interest
and improve H.R. 10 to meet the needs of consumers. And, regardless of whether Congress can
enact sweeping legislation such as H.R. 10, we urge you to move quickly to enact the consumer
provisions in the bill because as a result of regulatory inaction, consumers are facing confusion
and costly deceptive practices.
1. Consumers Union is a nonprofit educational membership organization chartered in 1936 under the laws the State of New York to provide consumers with information, education and counsel about goods, 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 Consumer Federation of America is a nonprofit consumer advocacy organization representing more than 250 local, state and national consumer groups with a combined membership of more than 50 million Americans.
3 "How Good is Your Bank?," pg. 10, Consumer Reports, March 1996.
4 Big Banks, Bigger Fees: 1997 PIRG Bank Fee Survey, USPIRG, July 1997.
5 Based on FDIC Call Data for 1997, $19 billion of bank revenues derived from service charges on deposit accounts.
6 Sloan, Allan, "Policyholders May Not Be Beneficiaries of
Insurance Company Conversions," Washington Post, June 2, 1998.
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