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Morris Manning & Martin, LLP

Financial Service Reform: Are We Approaching The End of the War Or Is This Just Another Battle?

On May 13, 1998, the U. S. House of Representatives passed the Financial Services Act of 1998 (H.R. 10). In past Congresses, it was the Senate that had been able to act on financial services reform and the House that was dilatory. However, a strong effort by the Republican House leadership produced, to the surprise of many, the 214 to 213 vote. 

While a one vote victory in the House hardly produces significant momentum to push the legislation through the Senate, it does represent a substantial achievement. The intense competition between the banking and insurance industries has previously prevented the passage of legislation. However, the rapid development of the financial services marketplace, as most recently evidenced by the proposed Citicorp/Travelers’ merger, has pushed the Congress to take action.

H.R. 10 is particularly significant to the insurance industry for numerous reasons. Most importantly, H.R. 10 would permit affiliations between banks and insurance companies. It would allow banks to conduct insurance, securities and other sales activities through operating subsidiaries, but would not allow insurance underwriting. Underwriting would have to occur through a separate entity which could be part of a holding company system. It would curb the deference given to the Comptroller of the Currency and would continue the ability of states to regulate insurance activities unless such laws "prevent or significantly interfere" with national bank activities. It would enact into legislation "functional regulation" of financial activities. Finally, it would facilitate the redomestication of mutual insurers by preempting state laws which restrict redomestication and would ease multistate qualification of insurance agents and brokers by establishing the National Association of Registered Agents and Brokers.

Nonetheless, substantial impediments remain to passage of H.R. 10 during this Congress. The November election not only restricts the number of legislative days for the Congress, but also pressures politicians not to take any action that would alienate a prospective voter or contributor.

From the perspective of national banks, H.R. 10 contains two very unattractive provisions which would (1) prohibit an operating subsidiary from engaging in insurance underwriting and (2) restrict the regulatory authority of the Office of the Comptroller of the Currency. This authority has been, in recent years, exercised very much in favor of national banks. A recent example is OCC Interpretive Letter No. 824 (February 27, 1998) which circumvented the limitation on the establishment of an agency to a "place of 5,000" under 12 U.S.C. § 92 by finding that it is the "business of banking" for a national bank to act as a "finder" under 12 U.S.C. § 24 (Seventh). A "finder" in this context (the sale of insurance) can be considered to be the equivalent of an "agent". This is an example of the expansive approach to regulation that has been undertaken by the OCC. 

The most likely outcome for H.R. 10 is that the Senate will run out of time to pass a comparable bill or, if a comparable bill is passed, the Congress will run out of time to iron out the differences in the Conference Committee. Nonetheless, there still is a measurable possibility that the Congress will be able to enact financial service reform. 

Regardless of the outcome, however, the fact that the House passed H.R. 10 is very significant. Even though a bill, such as H.R. 10, that is passed by one house of the Congress dies if not enacted into law, the House of Representatives in the next Congress would be hard pressed to take a substantially different position on financial services reform. Assuming that the Senate will be reasonably receptive to reform, and given the impetus towards reform that has been generated by the financial services marketplace, passage of legislation has become inevitable, although its timing remains unpredictable.