national banks. These rulings have allowed banks to extend their reach into the insurance area without proper regulatory oversight.

One of the worst decisions by the OCC was the rule that would allow banks to engage in non-banking activities, including insurance underwriting, through downstream operating subsidiaries.

This last development, known as the final Operating Subsidiary Rule, is the most serious expansion of regulatory power yet undertaken by the OCC. The purpose of these regulations is to provide banks with the opportunity to engage in non-banking activities though downstream operating subsidiaries, without oversight by state insurance regulators.

The Op-Sub rules, as they have become known, are purposely vague when it comes to who would regulate a bank's insurance subsidiary. The OCC contends that certain safeguards would be imposed on an operating subsidiary engaging in activities not permissible for the bank, including requiring the operating subsidiary to be adequately capitalized under "relevant industry measures". However, it is unclear what industry measures are intended to apply and which regulatory entity would be applying them. Moreover, certain prohibitions on affiliated transactions would apply, but the rules do not go so far as to prohibit tie-in sales.

The Op-Sub rule makes it very clear that the OCC will consider any application from banks to engage in any "non-bank" activities, including insurance underwriting. Furthermore, taking a cue from its past actions, the OCC could very well use these rules to establish itself as the regulator of all bank-operating subsidiaries, including insurance subsidiaries. I believe that the OCC overstepped its authority when it issued its Op-Sub rule and that their rule, unless curtailed by Congress, might very well serve as the foundation for future and drastically expanded erosion of state insurance regulation and consumer protection.

It should be abundantly clear to all that the OCC is engaged in a policy of incremental preemption of state insurance regulation, while expanding its own regulatory power. This policy benefits national banks at the expense of consumers, agents and insurers, creating anything but a level playing field.

We strongly believe that if banks engage in any phase of the insurance business, it should be conducted on a level playing field. To pre-empt state regulation or exempt the banking industry from state regulation of insurance is not a two-way street...it is not even a one-way street...it would be nothing more than a cul de sac...which would not provide consumers with adequate protections. Regulation of financial services must be focused on the specific function being performed and not on the corporate form.

True functional regulation focuses on the activity rather than the entity engaged in that activity. Under functional regulation, bank regulators regulate banking and the states regulate insurance activities, regardless of whether the activity is being conducted in a bank or an insurance company. Bank regulators lack the specialized experience and expertise needed for effective regulation of insurance activities of banks, just as insurance regulators are not competent to regulate banking activities of insurance companies or their affiliates.

Consumer protection is an important aspect of insurance regulation. This is due in part to the long-term relationship between a consumer and his or her insurance company in which the benefits of an insurance policy are not enjoyed until the risk the policy protects against has been realized. This period can be as long as one's lifetime, in the case of a life insurance policy. Generally, insurance claims can be made only under a policy that was in place at the time the loss or damage occurred. An insurance customer unhappy with the performance of a company cannot take his or her claim to another company.

Most consumers have a much different relationship with depository institutions. Checking and savings accounts can easily be moved from one institution to another. Once a loan has been made, the borrower's relationship with the lender ends except for payment and recordkeeping. In neither case does the bank customer pay today for a promise of long-term future performance, as is the case with insurance customers.

Consequently, state insurance laws and departments emphasize consumer protections in substance and procedure. Consumer protections imposed by bank regulators regarding bank customers purchasing insurance pale in comparison to those mandated by state insurance laws. Examples of state rules include the following: 1. Licensing. Insurance agents must be licensed by each state in which they sell insurance and are subject to the rules and regulations of that state. Agent applicants are subject to a back-ground investigation and must pass a licensing examination. Most states require agents to take pre-licensing educational courses before taking the licensing exam. To maintain their licenses, agents must meet continuing education requirements designed to ensure that they are knowledge

able about their product and professional in their conduct. State insurance regulators' enforcement authority includes the ability to deny, suspend and revoke a license as well as impose fines against wrongdoers. States share information about agents and applicants through the NAIC.

2. Marketing. Unfair Trade Practices and Competition Acts adopted by the states prohibit deceptive acts and practices by insurance agents and companies. Regulated practices include tying, rebating, advertising, manner of sale, privacy protection, and any other practice a state insurance regulator deems to be unfair or anticompetitive.

3. Underwriting. Insurers are required to file policy forms and rates either at the time of use or before, and in both cases, are subject to the state insurance regulator's review and approval. States also set minimum values on auto liability insurance policies sold within the state. States require insurers selling certain types of insurance, e.g. automobile liability, homeowners', and workers compensation, to participate in shared risk pools, thus promoting consumer access and affordability. Insurance companies are subject generally to stringent regulations relating to cancellation and nonrenewal of insurance policies.

4. Guaranty Funds. Most insurers are required to participate in guaranty funds so that claims against an insolvent company will be paid at least in part and the consumer so protected. Acts governing the rehabilitation or liquidation of insolvent insurers exist in all jurisdictions.

5. Company Service. Each state has a process to address complaints made against an insurer. Complaints received by the state regulator are automatically forwarded to the company and must be answered within time restrictions mandated by the state. A full explanation is required from the insurer regardless of the apparent merits of the complaint. The insurance regulator will continue to demand further explanations from the company and to encourage resolution between the complainant and the company.

6. Claims. Insurance companies also are subject to state fair claims practices acts. These acts require all claims to be handled fairly, timely and in compliance with the policy.

7. Market Conduct. The states examine for market conduct as part of the regularly scheduled financial examinations and at any other time determined by the state regulator. Companies that fail to comply with applicable statutes can be fined or have their certificates of authority suspended or revoked.

Federal banking rules do not include the type of insurance customer service and complaint resolution provisions found in state insurance laws. For example, the OCC guidelines provide that a bank should have an "orderly process for assessing and addressing customer complaints and resolving compliance issues." The guidelines suggest that banks use a complaint tracking process or complaint file and comply with state laws that require copies of customer complaints to be forwarded to the state insurance regulator, but do not impose the substantive and procedural provisions found in state insurance laws. The guidelines also state that the OCC expects bank insurance sales personnel to be licensed in accordance with state law. However, compliance with these guidelines is essentially voluntary for banks. Compliance with state laws is mandatory for insurance companies and agents

Federal rules prohibit a bank from tying, either by restricting the availability or varying the consideration, of a product or service on the condition that a customer purchase another product or service offered by the bank or by any of its affiliates. The Federal Reserve and the OCC have extended the tying prohibition to bank holding companies and their nonbank subsidiaries, and to operating subsidiaries of national banks, respectively. The anti-tying prohibition can be enforced by the bank regulators, the Justice Department or aggrieved private parties, although enforcement actions are rare.

This brief comparison between the insurance consumer provisions of federal banking rules and the consumer provisions of state insurance law illustrates the superiority of the states' consumer protections.

State regulation has a two-fold purpose. First, it is designed to assure that insurance providers treat customers fairly. Second, it is designed to protect consumers, and their long term financial needs, through solvency regulation and oversight of insurance companies.

During the last several years, significant strides and progress have been made in standardizing state financial reporting and monitoring requirements. Minimum standards of insurance company capitalization to assure individual company solvency are in place. These capitalization requirements differentiate among insurance product lines and their associated degrees of risks. Included in these standards are specific reserving requirements for various types of claims with which companies must comply. If banks were to be exempted from state insurance regulation, such

as the one I just noted, such reserving or other solvency provisions of state law would not be applicable to banks, creating an extremely dangerous situation for the public.

All states have rate regulations laws that assure insurance rates are not unfair, excessive, or inadequate. Exemption from such rate regulation would, it is so obviously clear, create an unfair and unlevel competitive environment in a particular state.

Through various "market conduct" regulations the various insurance departments of this country have promulgated a series of requirements and regulations designed to ensure that agents and companies comply with state laws and regulations in the marketplace. Market conduct laws and regulations apply to insurance practices and operations including: insurance nonrenewals and cancellations; review of agent conduct and activities; claims handling and processing procedures; compliance with unfair claims practices provisions; individual company underwriting practices; and assurance that appropriate rates are being charged for various lines of insurance. Such state regulations ensures that insurance products are being offered in a way so as not to create discrimination, that fair and prompt claims handling practices are being adhered to, and that honest marketing and sales practices are conducted. The fact is that these regulations effectively serve to protect consumers and assure the long term financial viability of those offering customers insurance products.

One additional feature unique to the state regulatory scheme has been the development and successful operation of state guaranty funds. These funds are in place in the various states and are funded by assessments of existing insurance companies. They are designed to assure long term protection of policyholders whose insurance companies may become insolvent. Any company involved in the insurance business must participate in such guaranty funds.

The United States does not need a dual system of regulation for insurance. A steady and sound insurance regulatory system has been in place for decades. State regulation of insurance is getting the job done effectively and efficiently. To exempt insurance offered by banks from state regulation would be unsound and counter-productive to protecting consumers of insurance products.

In conclusion, Nationwide supports H.R. 10, as it is currently drafted. However, we believe that several key elements are necessary to the success of financial services reform efforts, including:

1. All insurance activities should be conducted by an entity or entities separate from any depository institution, preferably in an affiliate of a bank or financial services holding company.

2. All such insurance affiliates should be subject to all the requirements of the appropriate state insurance regulatory authority;

3. Any structure permitting such affiliations should permit both stock and mutual insurance companies to engage equally in the business of banking and other activities in which depository institutions are permitted to engage, including the option of allowing mutual insurers to use a mutual holding company structure. Mr. Chairman and members of the Subcommittee, that concludes my testimony today and I wish to express, on Nationwide's and my own behalf, our deepest appreciation for the opportunity to appear before you today. We stand ready to assist you and other members in any way possible to affect positive and practical reform of the financial services industry. Thank you.

Mr. OXLEY. Thank you, Mr. Zimpher.

Our final witness, Mr. Scott Sinder, representing several insurance groups.

STATEMENT OF SCOTT A. SINDER

Mr. SINDER. Good afternoon, Mr. Chairman and members of the committee. My name is Scott Sinder. I am testifying today on behalf of the Independent Insurance Agents of America, the National Association of Life Underwriters, and the National Association of Professional Insurance Agents, which together represent virtually all of the insurance agents of America and their employees, nearly 1 million men and women who work in every part of the United States.

First, Mr. Chairman, let me thank you for holding this hearing today. Before proceeding with my comments, I must commend you

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for the role you played last term in brokering an historic agreement that resulted in a bill that was eventually passed by the House. Without your commitment and heavy involvement, no bill would have proceeded to the floor and, in all likelihood, we would be no closer to the enactment of a financial services reform bill today.

The insurance agents want you to know that they intend to do everything within their power to help you mold a bill that can take flight and become the law of the land. We want a bill to pass.

As you know, Mr. Chairman, the insurance agents strongly supported the H.R. 10 bill that you brokered and shepherded through the House. We recognize the need for eliminating the barriers that still exist between the banking and insurance and securities industries. We believe, however, that this concern also mandates insuring that consumer choices are well informed and freely made, and State regulators have been virtually the exclusive protectors of such interests since the creation of an insurance industry in this country. We, thus, have one basic concern: Ensure that every entity that is involved in the insurance business is subject to State regulation. Federal banking regulators are in no position to substitute for the comprehensive State insurance laws that have developed over the last 100 years.

The bill that you shaped last term included several provisions that the insurance agents believe to be essential to ensure adequate functional regulation of insurance sales activities. After that bill was passed by the House, however, the Senate Banking Committee drastically revised many of its most essential provisions, especially in the insurance sales context. For that reason, the insurance agents actively opposed the bill that was passed out of that committee.

After the Senate Banking Committee completed its work on the bill, Senator D'Amato mediated a negotiation among selected banking and insurance industry representatives. The insurance agents participated in those negotiations, but State insurance regulators were excluded. The exclusive focus of those negotiations in the insurance sales context was on the scope of the preemption safe harbors.

At the conclusion of the negotiations, the insurance agents made clear that they could not support the Senate proposal, but through the safe harbor improvements that had been agreed upon were sufficient to remove our outright opposition.

The Senate proposal was never considered on the Senate floor. When this Congress convened in January, however, the proposal was reintroduced as the 1999 version of H.R. 10. The Senate package was largely untouched by its consideration of the House Banking Committee. We therefore sit before you today in virtually the same position that we were in at the close of the Senate last year. The insurance agents do not support the current proposal, but we believe it can be improved in a manner sufficient to gain our support.

Banking industry representatives have been quite vocal in recent weeks regarding their belief that any changes that are made to the current proposal will eliminate any prospects for passage. At the same time, however, many of the same representatives have them

selves been requesting that some changes be made in the insurance sales provisions.

Many things have changed since last October. First and foremost, State insurance regulators, through the NAIC, have taken a harder look at the compromised proposal and have concluded that it would dramatically undermine their ability to adequately regulate insurance activities. In addition, the issuance of two recent court decisions calls into question the ability of the Comptroller, an ability that many had begun to take for granted, to unilaterally authorize national banks to engage in expanded insurance sales and underwriting activities absent congressional action.

It should be clear that both the insurance industry and the banking industry believe that the current proposal can be improved, and the insurance agents want a bill to be enacted. The current H.R. 10 proposal, however, would jeopardize many of the consumer protections already in place in as many as 30 States. In addition to the noninsurance sales amendments that the NAIC has presented for your consideration, the agents believe that three sets of changes also championed by the NAIC would alleviate these shortcomings. First, clarify that State insurance regulators are entitled to receive consideration of their views in court when disputes arise between regulators, regardless of when a State law that is challenged on preemptory grounds was enacted. The bill as currently drafted permits the views of State insurance regulators to be considered only in court challenges to laws enacted in the future. The inevitable deference to any OCC preemption opinions regarding current laws would place many longstanding State laws in jeopardy.

Second, the so-called nondiscrimination provision that blanketly prohibits the imposition of any rules that treat banks differently on their face, or that inadvertently treat banks differently, should be narrowed to delete the inadvertent treatment prohibitions set forth in section 104(c)2, and to clarify that the core nondiscrimination provision prohibits treating federally insured depository_institutions differently based on their insured financial status. Contrary to the suggestions of some members of the banking industry, consumer protection provisions that specifically address bank insurance sales practices are not impermissibly discriminatory, as 30 States and even the OCC itself have explicitly recognized in their enactment and support of such provisions.

Third and finally, the safe harbor provisions should be clarified. In our written comments we have outlined four small changes that we believe should be made to improve the existing safe harbor provisions and we have suggested that two more be added. One, protecting State laws that require execution of acknowledgment form of requisite disclosures already protected by the existing safe harbors where provided, and a second, protecting State laws to require banking institutions to separate their banking activities from their insurance activities within the bank. Both new safe harbors, like many of the other existing safe harbors, encompass provisions already mandated under the section 176 Federal consumer protection provisions.

Without enactment of legislation that includes changes such as those that we have outlined, the emerging regulatory void in portions of this industry will continue to fester.