WASHINGTON — WellPoint Inc., an Indianapolis health insurer, has succeeded where others, including Wal-Mart Stores Inc., have failed: getting the Federal Deposit Insurance Corp. to approve its application to open an industrial loan company while continuing to engage in commercial activities.
Perhaps more peculiar, the approval was granted at a closed-door meeting Tuesday only after the FDIC asked the Federal Reserve Board to weigh in, even though the FDIC is the sole federal regulator for industrial banks. At issue was whether WellPoint’s disease management and mail-order pharmacy services disqualified it from receiving an ILC charter under the FDIC’s temporary moratorium on approving applications for firms that engage in commercial activities. In an unusual move, the FDIC sought comment from the Fed to determine whether those activities were financial in nature.
In an order late last week, the Fed said that the activities were not financial in nature, but were “complementary” to WellPoint’s financial operation — essentially saying the activities were consistent with the standards of the Bank Holding Company Act. Disease management and mail-order pharmacy offerings help customers limit their insurance costs and “complement the financial activity of underwriting and selling health insurance,” the order said.
After getting the Fed’s order, the FDIC granted WellPoint deposit insurance. The Utah Department of Financial Institutions is still considering the ILC’s charter application.
The approval raised eyebrows among industry observers, who said the collaboration by the FDIC and the Fed on an ILC application is extremely rare. Observers also wondered whether other companies should be allowed to seek similar relief from the moratorium, which is set to expire Jan. 31. “It’s sort of baffled a few people,” said George Sutton, a private lawyer in Utah who represents several ILCs.
He said the decision “makes sense” and raises hopes for others trying to get in the door.
“I’ve got other clients that are blocked by the moratorium who are again asking this question: ‘Well, what’s the difference? Why are we foreclosed?’ They consider themselves very reputable, legitimate companies who only want to get into banking for the right reasons.”
In the past the FDIC and the Fed have differed on their views of ILCs. The Fed has said that no commercial company should be able to own one, and that it does not feel the FDIC has sufficient supervisory authority over ILC parents. Former FDIC officials have repeatedly defended their regulation of such companies.
But more recently the two agencies have appeared to find common ground.
The Fed said recently that it supported a bill that would give the FDIC consolidated holding company authority over ILC parents. The FDIC has said it would not approve any commercial company’s ILC application while Congress considers a bill on the issue.
But observers said the latest collaboration was even more surprising.
“Are the two agencies now going to sort of be in cahoots vis-a-vis ILCs?” asked Lawrence Kaplan, a partner at Nelson Mullins Riley & Scarborough LLP. “Are they going to rely” on the standard that “if this is going to be OK for a financial holding company, then it’s going to be OK for an ILC? Is this what we have to look forward to for the future of regulation? I think it’s a possibility on the margins where things are unclear.”
WellPoint proposed in February to charter a Utah ILC, called Arcus Financial Bank, to offer health savings accounts. Under the FDIC’s approval, the bank initially would raise at least $36 million of capital.
To be sure, the parent company is mostly financial in nature. The disease management and mail-order pharmacy activities would not exceed 2% of WellPoint’s total assets, nor would they exceed 5% of its annual revenue, the FDIC’s order said.
The company said it was pleased by the approval.
“By opening an industrial bank, we’re going to be able to more efficiently provide a number of products and services to those who are enrolled in one of those consumer-driven health plans,” a WellPoint spokesman said, though “it would be premature to speculate on the timing” of the ILC’s opening.
For regulators and lawmakers, ILCs remain a tricky policy issue. The debate, sparked by an application Wal-Mart filed in 2005 (but withdrew in March), has included House passage in May of a bill to ban commercially owned ILCs and give the FDIC consolidated authority over ILC owners.
The bill would bar ownership by any firms that get at least 15% of their annual revenue from commercial activities. But the FDIC used a much stricter standard — the Bank Holding Company Act — to determine which firms could be processed under the moratorium. That law prohibits bank owners from virtually all commercial activities, and it gives only the Fed license to decide which activities meet the test.
Many firms, including health insurers, have been tripped up by the moratorium, and some have abandoned their ILC plans altogether. The Blue Cross Blue Shield Association said in February that it would open a Utah thrift to offer HSAs, instead of waiting for FDIC action on its ILC application.
In March the FDIC approved applications for three financial firms to own ILCs. But two of the firms, CapitalSource Inc. and Marlin Business Services Corp., have yet to sign their approval orders, which contain a host of conditions aimed at limiting the effects of commercial activities on the ILCs. In May, CapitalSource announced plans to buy a thrift in Nebraska.
The FDIC has previously made a clear exception from the moratorium. In November, when the moratorium applied to both commercial and financial firms, it allowed an investor team led by Cerberus Capital Management LP to buy GMAC Automotive Bank from General Motors Corp.
