The challenges the financial services industry faces with a 50-state regulatory system cannot be remedied by a dual charter system. The advocates of such a system liken the insurance industry to the banking system, which has benefited from the choice of state or federal charters, but the analogy is wrongly applied.
Banking systems, state and federal, were conceived to provide access to the monetary system. Their founders clearly understood that the free market growth potential in any nonbarter economy cannot be realized without a fair and orderly access to a uniform currency and the movement of funds throughout the nation. Stimulating trade and commerce was the objective. It was not until the Federal Reserve Act of 1912 and the 1916 passage of the National Bank Act that the federal government began regulating banking and banks.
Insurance went largely unregulated until 1945 when oversight was ceded to the states by the McCarran Ferguson Act. This authority was confirmed in the Gramm-Leach-Bliley Act of 1999. It seems unlikely that more regulation centralized in Washington is an answer to the complexity of operating an insurance business or that it is the solution to flaws in the state-by-state regulatory scheme.
The Financial Institutions Insurance Association, or FIIA, supports the push toward uniform state regulation, not federal regulation. Uniform state regulation is not only a more practical solution but also quite in keeping with the trend toward decentralization of government and the shift to self-determination and responsibility. The FIIA supports the National Association of Insurance Commissioners' effort to achieve uniform state regulation, and it applauds the recent report, "Accepting the Challenge: Redefining State Regulations," prepared by the National Association of Mutual Insurance Companies.
Lack of uniformity in licensing insurance carriers, insurance agents and agencies, and in overseeing distribution systems is problematic for financial institutions doing business nationwide. The expense of complying with a crazy quilt of state requirements is wasteful.
Avoiding the extremes of supervision is exactly what the insurance commissioners' group is trying to achieve in its new role as state facilitator of an effort to avert enforcement of the National Association of Registered Agents and Brokers provisions of Gramm-Leach-Bliley. The FIIA supports the Producer Licensing Model Act, which provides for specific, multistate reciprocity. Reciprocity is not the whole answer but is a major step toward establishing uniformity.
The very fact that Gramm-Leach-Bliley is now the law of the land is sufficient motivation for otherwise independent-minded state insurance regulators to embrace uniformity. The political power of the old distribution entities has been dispersed, and the states and regions that were havens for lax regulation (which led to consumer fraud) have been brought into line through the push for uniformity. If the states do not embrace uniformity, they will face a threat of replacement by a federal system that supersedes them.
The insurance commissioners' leadership is proving effective at bringing around reluctant states to its way of thinking. The majority required by Gramm-Leach-Bliley is looking very achievable. But we cannot stop there or even slow down.
As a practical matter, establishing a federal insurance bureaucracy would require the repeal or major amendment of the McCarran Ferguson Act. It is one thing to get state insurance commissioners to embrace uniformity, but it quite another for them to endorse repeal of the legislation on which their authority is based.
The state tax consequences of such a move would probably be significant. Neither independent agents and their trade associations nor state's rights advocates from either side of the aisle would support such an action. And the business of insurance, at this moment anyway, is not a sufficiently big part of banking to warrant the funding of as major a lobbying effort as it would require.
It is also worthwhile to consider that the congressional pendulum swings both ways. It recently completed an arc that brought down Glass-Steagall, which had separated banking from other financial services for nearly 70 years. This swing was seen as benefiting banks. Chartered financial institutions should be prepared for the pendulum to swing back before they can expect to gain such a sweeping new concession as federal insurance regulation. Furthermore any bill perceived as a boon to banks will be immediately counterweighted with strictures on privacy, ATM fees, and other issues. A real nonstarter, in other words.
It is interesting, then, to consider the real motivations of the groups calling for a dual charter system. If the purpose really is to stimulate uniformity of state laws, why not say so, and go to work?
Uniform state regulation would accommodate product and distribution innovation by every type of insurance company, and it would foster the creation of companies whose competitive presence would benefit consumers. Innovation and consumer benefits are not the top-of-mind hallmarks of any present federal regulatory entity. The enlightened regulators that brought banks solidly into the insurance business fought hand-to-hand court battles to validate the powers granted before Gramm-Leach-Bliley was enacted and were thanked for their efforts by attempts in that law to limit their powers.
The FIIA also encourages the development of model agreements between federal bank regulators and the National Association of Insurance Commissioners that would enhance and speed uniform state enforcement. The dual-chartered banking system has undeniably brought many benefits to the United States, but states no longer have separate deposit insurance funds. The insurance system's problems are quite different from those of the banking and monetary system. The push and pull of state's rights issues that existed when the dual banking system was created does not exist for the insurance industry, and the banking solution would be misapplied. State laws with provisions that significantly interfere with banks' rights to sell insurance or that violate other tenets of Gramm-Leach-Bliley should be preempted, another step toward uniformity and easier marketing.
Meanwhile, the FIIA will work to further the principle today of uniform state regulation, and it welcomes other interested parties to join in.
Mr. Starr is chairman of the
