The lead lawyer for the Comptroller's Office said Wednesday that the latest version of Rep. Jim Leach's sweeping financial services legislation would let states ban bank insurance sales.
Julie Williams, the agency's chief counsel, said in an interview that the new bill effectively eliminates the gains the industry won in the Supreme Court's Barnett Bank decision. In that March 26 ruling, the justices said banks can sell insurance from small towns.
In an April 8 memo to Comptroller Eugene Ludwig, Ms. Williams said, "Recent news reports have described the newest Leach insurance language as incorporating and being consistent with the Barnett decision. It is not."
Rep. Leach unveiled his new bill April 3. In addition to insurance, the legislation would eliminate most barriers between the banking and securities industries and modify several consumer protection laws that banks consider burdensome.
Aides to Rep. Leach and insurance industry officials sharply disputed Ms. Williams' interpretation of the bill.
The Comptroller's Office "is trying to create a horror story for turf reasons," an aide to the Iowa Republican said. "Both the Supreme Court decision and Rep. Leach's legislation use the same standard - state regulators cannot interfere with banks' insurance activities. They are 100% simpatico."
"I don't understand how they come up with that interpretation at all," agreed Robert Rusbuldt, federal affairs vice president at the Independent Insurance Agents of America. "I don't know where in the new Leach proposal they think that state law can override what the Supreme Court did."
But Ms. Williams said loopholes in the Leach bill would give states the means to ban bank insurance sales. For example, a section of the bill would permit states to write "nondiscriminatory" rules governing the sale of insurance. Rules that appear nondiscriminatory on their face, Ms. Williams said, could affect banks more than insurance agents.
For example, a state may refuse to license companies that don't derive most of their income from insurance sales. That rule would have the effect of discriminating against banks, even though it applied to all institutions, Ms. Williams said.
"State regulation would be validated if it was nondiscriminatory, even though its effect was to impair a national bank's ability to conduct authorized insurance agency activities," she wrote in her memo to Mr. Ludwig.
Banking lawyers said Ms. Williams has correctly pegged the problem.
"She's right on," said Kathleen W. Collins, a partner at the Washington law firm of Morgan, Lewis & Bockius and counsel to the Financial Institutions Insurance Association. "Our members would be better off with just the Barnett decision. We don't need this."
In her memo analyzing the Leach bill, Ms. Williams also criticized provisions allowing common ownership of banks and insurance companies. She said related provisions allow states to single out bank holding companies for special restrictions that wouldn't apply to other insurance company owners.
She said the bill would ban the Office of the Comptroller of the Currency from finding some insurance activities incidental to banking and would be permitted under the National Bank Act. This is the same path the industry used to enter the annuities market.
Finally, Ms. Williams said the bill would let states define what products qualify as insurance. That means a state could prevent a bank from selling annuities or any other product by declaring it insurance. "What is a permissible banking product today may be an impermissible insurance activity tomorrow," she wrote.
Separately, the Comptroller's Office said it plans to finish best practices guidelines for bank insurance sales by the end of June. Ms. Williams declined to discuss the document, but industry sources said it will address licensing and consumer protection issues.
The OCC also is considering issuing an interim statement reaffirming its view that the Barnett decision only affects state laws that discriminate against banks. All other state rules apply, she said. The agency said it only plans to release the bare bones document if enough banks call with questions, she said.
Bill McConnell contributed to this report.
