FINANCIAL SERVICES: UP THE LEARNING CURVE

FINANCIAL SERVICES: UP THE LEARNING CURVE

It took years of struggle for financial-services modernization to be approved. Now comes the effort of implementing it.

Signed into law by President Clinton on Nov. 12, the Gramm-Leach-Bliley Act repeals Depression-era laws restricting affiliations among banks, securities firms, insurance companies and other financial services providers.While the act addresses the future relationship between federal bank and state insurance regulators on the subject of insurance activities by financial institutions, disputes over regulators' respective jurisdictions will be inevitable.

However, the new law creates a new legal framework for resolution of disputes between these regulators.

The principle enunciated by the Supreme Court in the case of Barnett Bank vs. Nelson - which provided that state regulators may not discriminate against depository institutions engaged in insurance activities - is now codified.

But there is an exception for state laws regarding sales, solicitation and cross marketing in effect before Sept. 3, 1998. For state laws enacted after that date, a new ''without unequal deference'' standard of review will apply, complemented by an expedited dispute-resolution mechanism.

The Gramm-Leach-Bliley Act also specifically enumerates 13 safe-harbor areas of insurance sales, solicitation and cross marketing where state regulations are not preempted, as long as they are not more burdensome than the standards described in the act.

However, state regulation is preempted if it does not fall under one of the safe harbors and prevents or significantly interferes with the ability of a depository institution (or affiliate) to engage in insurance activities.

One particular type of insurance - title insurance - has a special set of rules that allows states to preclude national banks from selling this coverage as agent, except to the extent their own state banks are allowed to do so.

State-by-state licensing of insurance producers has become problematic for insurance agents and brokers, among others, who have supported adoption of uniform standards to facilitate their operations across state borders.

The new law affirms the primacy of state regulation of insurance and directs federal bank regulators to issue standards requiring persons selling insurance for depository institutions to be appropriately qualified and licensed.

However, the law also advances the cause of uniformity by allowing the states three years in which to enact agent/broker licensing reciprocity - at least among a majority of the states - or face creation of a National Association of Registered Agents and Brokers.

This non-profit organization would establish membership criteria based on specified professional standards, although the state insurance commissioners would continue to perform the actual licensing functions.

New federal regulations will also address consumer protections. For instance, banks will be required to keep their insurance products separate from deposit-taking and to disclose that the insurance products are not federally insured.

Some who thought that the old playing field for banks and insurers was not level are still unhappy. But most financial institutions seem anxious to step out onto the Gramm-Leach-Bliley field.

Analysts have been predicting a rash of mergers and enhanced competition among the players. President Clinton has suggested that there will be savings to consumers from all this activity of billions of dollars.

Federal Reserve Board Chairman Alan Greenspan also recently discussed the ''regulatory implications'' of affiliations between insurance companies and a banks. He indicated that the act is not intended to spread bank-like regulation to non-bank financial firms, including insurers.

He explained that the federal regulators with responsibilities over the new financial-services holding companies are required to rely on the state insurance authorities for information on insurance company affiliates, intervening with direct examinations only when an undue material risk is posed.

Greenspan indicated that adjustments to the federal capital requirements may have to be made to reflect the requirements already imposed on insurance companies by state regulators.

Finally, in what might be described as an understatement, the Federal Reserve chairman said that cooperation by all parties involved will be necessary to make the changed regulatory environment a success.

''There will understandably be some tensions as we all move up the learning curve,'' he added.