Hearing on Financial Services Modernization

Prepared Testimony of Ms. Mary Griffin
Insurance Counsel
Consumers Union

4:00 p.m., Thursday, February 25, 1999

Consumers Union, publisher of Consumer Reports magazine, appreciates the opportunity to appear today to present the consumer perspective on proposed changes in the financial services market. We are testifying on behalf of Consumers Union and Consumer Federation of America.

Consumers are very much interested in a competitive marketplace, where they are treated fairly, have the ability to comparison shop and have access to basic, affordable financial services. Over the past few years, we have supported legislative 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 regulatorsí interests, and not the consumer interest. While some of the last yearís proposals held potential, we believe the current proposal is a big step backwards 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.

Ensuring a More Competitive Marketplace for All Consumers

While the changes in the financial services market have the potential to create more choice and competition and lower the cost 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 ever-increasing fees. Financial firms have become masters of a marketing frenzy to current and potential customers, invading consumersí 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. Changes to the market should result in more competition and choice for all consumers.

As banks have become full service financial centers, they have targeted the more wealthy customers for the best deals, leaving the vast majority of consumers with few or lousy deals. "ĎEveryone isnít the same anymore,í says Steven G. Boehm, general manager of First Unionís customer information center Ö 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. 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 help assure consumers that the changes to the financial services market will benefit them?

Enforceable Retail Sales Protections for "One-Stop Shopping:" Studies and cases reveal that some banks mislead customers about whether insurance and investment products are FDIC-insured or subject to risk of loss. To help prevent confusion and coercion, consumers need:

While we appreciate and support the inclusion of a package of retail sales protections for insurance in the proposal, they have no teeth. Unlike other consumer banking bills, there are no provisions to hold banks that violate the rules accountable to consumers. The bill also fails to include protections for securities products and suitability requirements to ensure that sales are based on a customerís financial needs rather than solely on the level of commissions produced by the sale (which are typically not disclosed to the customer).

We believe states should have the right to enact stronger measures than those provided in section 201. But section 201 undermines consumer protections because 1) federal protections will not apply where there are inconsistent or contrary state laws; and 2) even if federal regulators decide the federal provision provides greater consumer protection than state law (which, presumably, means federal law would apply), it gives the states three years to "override such preemption."

Functional Regulation to Ensure Protections Apply 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.

Because the proposal does not repeal the bank exemption from the definition of broker-dealer, apparently there is nothing to prevent a bank and its subsidiaries/affiliates from conducting all of their securities sales directly in the bank. That would allow banks to circumvent the Rules of Fair Practice that provide key investor protections. We fail to see how there can be real competition if some players do not have to play by the same rules as their competitors.

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. And, according to the Wall Street Journal article, banks consider those with less than $1,000 in the bank and who use the bank services "bad" customers. In addition to those hard-hit by fees, there are an estimated 12 million households that currently have no checking accounts.

Many people need basic bank accounts but cannot maintain the high minimum deposits required to avoid high monthly charges. Low-cost deposit accounts, with reasonable service fees and low or no minimum initial deposit or balance requirements in exchange for limitations on the number of transactions, would help make bank services available to more consumers. We urge you to reinstate this essential protection, which was contained in the House-passed bill last year.

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 consumerís knowledge or consent becomes great. Surveys show that eight out of ten Internet users say that protecting the privacy of their dealings over the Internet is a primary concern. The consumer concern over financial privacy was demonstrated recently when bank regulators received over 14,000 responses to the know-your-customer rules, many of which expressed grave concern about banks collecting information on customersí financial activities.

The Fair Credit Reporting Act (FCRA) contains the only financial privacy protections for consumers and is proving to be deficient for the new marketplace because of serious gaps. For example, not only can Citigroup affiliates share financial information about their over 90 million customers to use for cross-marketing (in many cases without the customerís 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:

The bill (S. 187) introduced by Senator Sarbanes and others on the Committee represents a good first step toward achieving some of these goals. The bill needs to include liability and "opt-in" provisions but its intent to give consumers control over information about their transactions with the financial institution .

Meeting the Needs of Communities: The Community Reinvestment Act (CRA) has resulted in demonstrable benefits to low- and moderate-income communities. Congress should be at the forefront of fortifying the law, not narrowing it. Unfortunately, the proposal fails to include as a condition of affiliating with other financial institutions that banks have satisfactory or above CRA rating. The proposal also fails to update these laws by bringing insurance and securities firms under a duty to help meet the needs of communities. This is a lost opportunity to address the discriminatory practices in those industries and put the trillions of assets they hold to work in communities they should serve.

In addition, the proposal changes current CRA examination law. Section 303 would limit the ability of affected communities to raise issues in a merger application process

because it deems an institution in compliance unless substantially verifiable information to the contrary arising since the time of its last exam is presented. This limits the overall goals of the partnership between communities and banks to ensure that adequate lending is available in all communities.

The provision under discussion to criminalize otherwise legal conduct, e.g., commenting on mergers, is overly broad and would have a chilling effect on bank-community partnerships as well as free speech. We believe the provision should not be included in any financial modernization bill.

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, federal bank regulators have shown a lack of respect for state authority to protect consumers. The Office of the Comptroller of the Currency (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 stop the wave of preemption.

Any modernization bill must restate the traditional authority of states. Instead, this proposal undermines state authority by 1) failing to clarify statesí authority to enforce consumer laws vis-a-vis national banks; 2) using an overly broad nondiscrimination standard for state laws applicable to "any activity," which could tie the hands of states to enact and enforce laws against depository institutions; and 3) using the overly broad "prevent or restrict" standard to determine whether state laws apply (section 104).

We appreciate the stated intent of section 104c and 111 to preserve state law and direct the Board to defer to the SEC and state law decisions, but the proposal provides no real framework for "functional regulation" and merely states the status quo. In addition, as previously discussed, functional regulation of securities cannot be achieved unless the bank exemption from securities laws is repealed. We believe the proposal will do little to clarify state authority to apply consumer laws to banks or rein in the preemption activities of federal bank regulators.

Some of the financial services modernization proposals also contain a provision that would permit mutual insurance companies to move to other states to avoid having to adequately compensate their policyholders in conversions to stock form. We believe such proposals trample on policyholdersí rights and we appreciate that such provisions are not included in this proposal.

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.

The proposed 25% commercial "basket" and "reverse basket" under discussion would open up the banking system to exposure to huge losses. For example, if a bank holding company was comprised of the biggest insurance, securities and insurance firms, 25% of such companyís revenues and assets would permit large-scale mergers with huge commercial firms. While we appreciate the intent to limit full-scale banking and commerce through a basket, baskets still pose great risk to the taxpayer-backed bank system. Whether a bank can own commercial interests or a commercial firm is allowed to own a bank, the risk still exists.

In addition to the baskets, the bill would allow continued banking and commerce through the unitary thrift loophole. This is not only disconcerting because it keeps the banking and commerce door open, but also because thrifts do not have to comply with many state laws, limiting the ability of states to protect consumers as unitary thrifts proliferate.

Minimize Taxpayer Risk: Activities such as insurance and securities underwriting that pose risk should only be permitted through a separately capitalized affiliate. We agree with the approach of the proposal that requires underwriting activities to be conducted in affiliates but do not believe there is a need to permit banks with total assets of $1 billion or less to conduct these activities in operating subsidiaries.


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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