DANIEL J. FORTE
Removes ‘artificial walls’

The U.S. District Court issued a favorable opinion Wednesday in its declaratory judgment action, resolving a case for banks that want to engage in insurance sales. Bankers said the judgment enhances options for consumers and Massachusetts banks alike.

The plaintiffs in the federal court suit – the Massachusetts Bankers Association and several of its member banks – argued that the federal Gramm-Leach Bliley Financial Modernization Act and a more recent interpretation of the National Bank Act by the Office of the Comptroller of the Currency, preempted certain provisions of Massachusetts insurance law.

The court agreed that the challenged local statutes interfere with a bank’s ability to sell, solicit and cross-market insurance. Consumers are at a disadvantage because they may not have access to more insurance choices and good pricing, the MBA said.

“[The] decision brings Massachusetts in line with most of the states throughout the nation,” said Daniel J. Forte, president and chief executive officer of the MBA.

According to the MBA, almost 70 banks are currently licensed to sell insurance in Massachusetts. Almost all of them have done so by setting up or purchasing independent subsidiaries.

“We now may have the opportunity to bring more banks into the business and remove some of the artificial walls that have been separating the two functions while leveraging the visibility and cross-selling capabilities of our bank branches – all the while making it more convenient for consumers,” said Forte.

While the court ruling would clear the way only for federally chartered banks for exemption from the state statutes, Forte said on Thursday that the Massachusetts Legislature put a provision into law in 1997 that gives commissioner of banks the authority to ensure state-chartered banks have the same ability to sell insurance if a ruling such as this was issued.

The defendants, including the commonwealth and its bank and insurance commissioner, previously filed suit in the U.S. Court of Appeals for the First Circuit, seeking to set aside a determination by the OCC, which dated back to March 2002, that the Massachusetts statutes were preempted by federal law. In February 2003 the First Circuit court dismissed the commonwealth’s petition, suggesting that the issue would be best resolved at the trial court level.

David Cotney, senior deputy commissioner at the Division of Banks, said no decision had been made as of Thursday about an appeal of the court’s decision. However, he said if all the language in the decision is acceptable, the DOB has no immediate intention to file an appeal. He added that the DOB does not wish to put state-chartered banks at a competitive disadvantage and would likely pave the way for state institutions to enjoy the same insurance-sale abilities the ruling would give to federally chartered banks if the court decision stands.

This latest suit was filed by the bankers in August of 2003.

The provisions challenged in the lawsuit included:

• The referral prohibition: Massachusetts prohibits bank employees from referring customers to the bank’s insurance agency unless the customer first asks about insurance.

• The referral fee prohibition: Massachusetts prohibits banks from giving additional compensation to non-licensed employees who refer customers to the bank’s insurance agency.

• The timing restriction: Massachusetts prohibits banks from discussing insurance with loan applicants until after a loan has been approved and the bank has made extensive disclosures to the applicant.

• The separation requirement: Massachusetts requires banks to keep both loan and deposit activities physically separated from the bank’s insurance activities.

In its March 2002 determination, the OCC concluded that the first three restrictions significantly interfered with and were preempted by federal law as applied to the ability of nationally chartered banks to sell insurance. In the Jan. 12 ruling, the court determined that all four provisions are preempted under GLB.

“Clearly, the Gramm-Leach-Bliley Act spells out the rules governing modernizing the financial services industries, which ultimately benefit consumers through increased competition among providers,” said Forte. “While we respect the position of the commonwealth of Massachusetts, this decision recognizes the need for financial modernization, and the reality is that Congress saw fit to give consumers more choices.

“We look forward to working with the commissioners of banking and insurance, and the attorney general, to ensure a smooth implementation of the court’s decision and applying it to national and state-chartered banks.”

In the upcoming months, Cotney said the DOB will work with the Office of Consumer Affairs and commissioner of insurance to determine what the next steps will be in moving the process forward.