Illinois may have found the key to financial reform.

A Prairie State law is increasingly being viewed as a possible solution to industry disputes that have blocked efforts to let banks affiliate with insurance and securities firms.

Effective Oct. 1, banks in Illinois will be able to sell insurance from any location. Any bank employee, including loan officers, may become licensed to sell insurance and may earn referral fees.

Banks selling insurance would be regulated by the Illinois Department of Insurance and subject to the state insurance code.

Even Comptroller of the Currency Eugene A. Ludwig, who has criticized congressional proposals on insurance sales, is pointing to the Illinois law as a model for federal legislation.

"The Illinois agreement is something to be looked at closely," he said in a recent interview. "This has the potential to meet the needs of both sides-the banking industry and the insurance agents. I'm really quite hopeful that something can be worked out."

The House Commerce Committee, which is expected to vote on pending financial modernization legislation this week, had considered incorporating provisions mirroring the Illinois law. But the panel now appears willing to leave the issue to individual states.

"There's a feeling that states can work this out," said Edward L. Yingling, chief lobbyist for the American Bankers Association.

The Illinois law is among nine liberal state bank insurance measures passed since March 1996, when the Supreme Court said national banks may sell insurance from small towns. In all, nearly 20 states have passed laws regulating bank insurance sales since the court's decision-with varying degrees of restrictions.

Disputes over bank insurance sales rules have been a major obstacle to legislation that would let banks merge with insurance and securities firms. Insurance agents have fought to prevent the Comptroller's Office from preempting state insurance laws, while banks have argued that such a move would make them vulnerable to discrimination by state officials.

Brokering a deal between bankers and insurance agents in Illinois wasn't easy, according to state House Majority Leader Ralph Capparelli. The Chicago Democrat had won close House votes on legislation permitting bank insurance sales in 1993 and 1995, only to see the bills die in the state Senate.

On his third attempt, Rep. Capparelli tried a new tack. In January he asked bankers and insurance agents to work out a deal without using their lobbyists.

"We told the lawyers to stay out of it and put the bank and insurance people to work," he said. The talks took six months, but Rep. Capparelli finally got a deal. The bill passed the House and Senate easily and was signed July 1 by Gov. Jim Edgar.

"It was really quite remarkable," said Susan J. Dubs, president and CEO of Richmond Bank. "Both sides had to compromise, but all in all it's good for both industries."

Phil Lackman, a lobbyist for the Professional Independent Insurance Agents of Illinois, agreed.

"It was good to bring in people doing business every day and to take some of the political rhetoric out the talks," he said. "We're not happy with everything that's in it and neither are the bankers. So maybe that's an indication it's a pretty good compromise."

Though bankers in Illinois fought off some restrictions sought by insurance agents, they did agree to several constraints intended to protect customers and prevent banks from getting an unfair advantage over other insurance sellers. For instance, banks will have to tell customers that policies are not federally insured and that their credit applications will not be affected if insurance is purchased elsewhere.

Insurance sales at large branches, those with more than $100 million of deposits, must be conducted from separate locations within the bank.

The insurance industry, on the other hand, wants banks to give customers a "cooling off" period between approving credit and soliciting insurance, as pending legislation in New Jersey would do.

"Illinois' legislation is not as strong as others," said David Turner, director of state relations for the Independent Insurance Agents of America. "But it was the best deal we could possibly get and it covers our core areas-solid consumer safeguards and strong state regulation of insurance."

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