Consumer groups Tuesday demanded tighter customer protection laws be included in sweeping financial reform now before Congress.
Without tougher rules, banks should not be allowed to add products, consumer advocates testified during a hearing by the House Banking Committee's financial institutions and consumer credit subcommittee.
"Expansion will not benefit consumers unless protections are in place to address the current and likely abuses in the market," said Mary Griffin, insurance counsel for the Consumers Union.
The warnings expressed by Ms. Griffin and others stood in stark contrast to industry statements that customers would be the primary beneficiaries of "financial modernization."
Trade groups have repeatedly asserted that increased competition would reduce the cost of financial services.
But Ms. Griffin told lawmakers that too many banks sell high-risk mutual funds or unneeded products such as credit life insurance to unsuspecting customers.
Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group, added that gaps in customer protection laws let banks escape the scrutiny applied to securities brokers and insurance agents.
"The abject failure" of bank regulators to supervise properly the sale of nonbank products "leaves us wary of any proposal to broaden these powers," said Mr. Mierzwinski.
The consumer activists asked that any reform bill include investor protection rules identical to those imposed on brokers registered with the Securities and Exchange Commission.
"Unlike nonbank brokers, a bank has no duty to assess whether a particular investment is appropriate for the consumer's financial needs, an essential safeguard," said Ms. Griffin.
Anti-tying restrictions that prohibit institutions from requiring purchase of insurance products to obtain loans or other bank products are also needed, they said.
"Credit life, which is increasingly and aggressively being added to numerous bank credit card offers ... is frequently sold to consumers who do not need it," Mr. Mierzwinski said. "This example does not bode well for expanded bank insurance powers."
Additional provisions urged by the consumer groups included:
Letting customers sue bank employees who violate sales rules.
Prohibiting bank loan officers and tellers from selling insurance or securities products.
Forbidding banks to use customer information to cross-market products.
Rep. John LaFalce, D-N.Y., who has co-sponsored a bill to expand bank powers, agreed that consumers need more protection. At the hearing, he distributed a Feb. 24 letter to Comptroller of the Currency Eugene A. Ludwig saying Congress should pass tougher laws on sales practices.
"It is essential that these sales activities be conducted so that consumers and investors are adequately protected," Rep. LaFalce wrote. "I know the OCC has published some guidelines in this area, but I am not convinced they are tough enough and that guidelines alone are sufficient."
Also calling for additional regulation was Allen J. Fishbein, general counsel at the Center for Community Change.
Mr. Fishbein asked lawmakers to expand Community Reinvestment Act obligations to bank-owned finance companies and other nonbank subsidiaries as well as to other financial services firms.
Because bank control of the nation's financial assets has been cut in half, to 30%, since 1977, he said, CRA would become "functionally obsolete" unless additional companies are forced to comply.
