Financial Services Reform Means A New Way Of Doing Business For Banks And Consumers
(RIVERWOODS, ILL., November 3, 1999) More than 60 years after
legislators first laid out a structure for banking in the U.S., it appears Congress is
ready to change the shape and look of financial services offered by banks and to
consumers, according to CCH INCORPORATED (CCH), a leading provider of business and
financial law information, software and services. It now seems likely that after almost 20
years of discussion and many failed attempts at reform, Congress will pass and the
President will sign legislation overhauling the ground rules for banks, thrifts,
brokerages and insurance companies.
As congressional and administration negotiators overcome final differences over bill
provisions, the financial services industry anxiously awaits passage of legislation aimed
at tearing down the barriers between commercial banking, investment banking and insurance
that were first erected in a Depression-era law known as the Glass-Steagall Act and
reinforced in later legislation.
While certain institutions had circumvented these restrictions to some extent by taking
advantage of regulatory loopholes, there has been no simple and straightforward way for
American banks to offer the panoply of services routinely offered by their foreign
CCH banking law analyst and attorney John Pachkowski notes that under the new system,
consumers whether they are individuals or small or large businesses will be
able to take advantage of "one-stop shopping" for their financial needs, as
banks will be able to offer their customers brokerage and insurance services.
"Potentially, youll be able to insure your car or a fleet of vehicles
at the same time you arrange for financing," Pachkowski said.
Staving Off Commercial Companies an End to Unitary Thrifts?
While the overall theme of the reform legislation is expansive, severe restrictions
perhaps amounting to an eventual death sentence have been placed on one type
of institution known as a "unitary thrift."
Under current law, there are no restrictions on what a unitary thrift holding company
can own, or who can own a unitary thrift. Specifically, commercial firms have been
permitted to own unitary thrifts.
"This runs counter to the general prohibition against banks affiliating with
commercial companies, and the fact is that there is very little difference between a bank
and a thrift to the ordinary person," said Pachkowski.
Unitary thrifts were seen as a potential entry-point into financial services by any
firm that saw a potential "fit" in offering lucrative financial services to its
customers. But the combination of commercial and financial enterprises also raised red
flags to legislators and regulators.
"For instance, it could be argued that a commercial company, finding itself in
financial straits, could look at the thrift as a source of revenue by requiring the thrift
subsidiary to make excessive dividend payments or other transfers. And, indirectly, the
thrift may be directed to conduct operations in a way that destabilizes the thrift or
otherwise detracts from the thrift's lending and other business operations,"
In the end, the conferees agreed on provisions that outlaw the future acquisition or
creation of new unitary thrifts by commercial enterprises. But applications made before
May 5 of this year can still be approved, and Fidelity Investments and Aetna received
approval for their unitary thrifts in the days following the conference agreement, and
applications were pending from Wal-Mart, Nordstrom, Ford Motor Company and General Motors
Concerns that large, multi-faceted financial institutions might abuse the information
they collect about their customers caused privacy protections to be written into the
legislation. For the first time, the bill will give customers a right to "opt
out," or refuse permission to have their personal information traded between
unaffiliated organizations. But sharing customer information within a family of companies
between a bank and its insurance affiliate, for example, will be allowed.
The legislation also targets pretext calling by third parties trying to obtain
personal customer information through fraud or deception, a practice of many so-called
"information brokers." Pretext calling often involves contacting a bank and
pretending to be a customer who has forgotten an account number. The pretext caller then
obtains account details often including exact balances and recent transactions
and sells the information to lawyers, collection agencies or other interested
parties. Pretext calling will become a federal crime under the bill.
But one of the most highly charged privacy issues sharing of health information
between an insurance company and an affiliated bank is not addressed at all in the
"The conferees took out all the medical privacy language from the bill, because
the White House wants to deal with this issue separately," Pachkowski said. Critics
believe that this omission could harm consumers. For instance, a bank upon discovering
that a customer has a fatal disease may refuse to make a 30-year mortgage to that person.
It should be noted that President Clinton unveiled a new set of privacy protections
that would prevent doctors, hospitals and health plans from releasing certain health
information without a patients written consent. This would curb the current
practices where data is often released to financial institutions. This set of protections
is limited to electronic records and does not cover all paper records.
Another highly charged issue addressed in the final compromise was the Community
Reinvestment Act (CRA), which requires financial institutions to make loans in the
low-income and minority neighborhoods from which they also receive deposits. Banks must
periodically undergo CRA reviews.
A "satisfactory" CRA review will be a prerequisite for national banks to
engage in new activities through subsidiaries, and the banking operations of bank holding
companies must get a "satisfactory" rating before their parent companies could
For smaller institutions those with less than $250 million in assets the
bill offers the possibility of regulatory relief in the form of a longer period between
examinations. An institution rated "outstanding" on its CRA review will be
subjected to another review only after five years, rather than the normal three between
reviews. An institution rated "satisfactory" would go four years before being
In a concession to Sen. Phil Gramm (R-TX), who wanted to repeal the CRA outright,
community groups who receive funds in excess of certain amounts from banks must disclose
to the banks how those funds are used. Gramm contended that many such payments are in
effect payoffs to stave off challenges to mergers or attempts to expand services.
"Woofies" Controversy a Sign of Things to Come?
At one point, the legislation sanctioned a new type of financial entity: wholesale
financial institutions, known as "woofies." These were supposed to accept
deposits only in excess of the $100,000 which would not be insured by the FDIC.
Questions about just how woofies should be structured and regulated plagued the conferees
and drafters, and in the end they were taken out of the bill.
But the number of issues raised about woofies indicates how fluid the financial scene
is about to become, according to Pachkowski.
"Its remarkable that with such high stakes and such a long history of failed
legislation, it looks as though all the crucial issues have been resolved," he said,
"but how things will play out in real life, with many different federal and state
regulators trying to assure the soundness of the new-look institutions is another question
CCH has been tracking, reporting and analyzing banking law since 1914 and is the
publisher of industry-standard reference works such as Federal Banking Law Reports,
the Bank Compliance Guide and the Consumer Credit Guide. CCH also owns
Bankers Systems, Inc., a leading provider of solutions for training, operations, and
regulatory compliance for the financial industry.
Upon passage of the Act, CCH will issue The Financial Services Reform Act of 1999:
Law, Explanation and Analysis, which will include the final text of the Act, Committee
Reports and explanation and analysis by CCH banking and legal experts.
About CCH INCORPORATED
CCH INCORPORATED, founded in 1913, has served four generations of business
professionals and their clients. The company produces over 700 print and electronic
products for tax, legal, banking, securities, human resources, healthcare and small
business markets. CCH is a wholly owned subsidiary of Wolters Kluwer U.S. The CCH
web site can be accessed at www.cch.com.
Editors Note: Media interested in speaking with CCH banking law analysts,
obtaining a banking law timeline or requesting a copy of the CCH publication, can contact
Leslie Bonacum at 847-267-7153 or email@example.com.
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