Banks Gain Court Victory Over Insurers : Savings: Justices rule that national banks can sell insurance annuities. Consumer groups, insurers warn of potential risks.
The imaginary wall separating banking and insurance crumbled a little more Wednesday when the U.S. Supreme Court ruled that national banks can sell insurance annuities in their branches.
Bankers immediately predicted that the decision will spur rapid growth in insurance annuity sales by banks, which already sell between a fifth and a quarter of the nation’s annuities. At the same time, consumer groups and insurers warned of potential risks in purchasing such products in banks.
National banks such as Wells Fargo, Bank of America and Citicorp will now be able to directly sell annuities--financial contracts whereby the purchaser pays now for the right to collect set payments at regular intervals sometime in the future, most often at retirement. Prior to Wednesday’s ruling, the banks were able to sell annuities only indirectly through joint marketing agreements with insurers and through subsidiaries.
State-chartered banks in many states, including California, already have the unfettered right to sell certain insurance products. However, national banks have been able to directly offer insurance products only in towns with 5,000 or fewer residents where consumers would otherwise have few choices.
The unanimous ruling, a coup for bankers and a bitter loss for insurers, had been widely watched by industry and consumer groups, who had been battling over the issue since 1990, when a key banking regulator determined that annuity sales were a permissible bank activity. Insurers sued, and the issue has been volleyed back and forth in appellate courts since.
While hundreds of banks already sell insurance annuities and other investments in their branches, many national banks have had to offer the products through these back-door arrangements mainly because insurers have argued that federal banking laws limit the right of banks to sell these products in big cities.
“We expect to see an explosion of joint marketing between national banks and insurance companies to offer these products to their customers,” said Philip Corwin, director of retail banking at the American Bankers Assn. in Washington. “This gives the unanimous green light for national banks to offer both fixed and variable annuities.”
But insurers threatened to bring the issue before Congress.
“The decision throws into question the status of annuities under other federal and state laws, including laws that provide consumer and solvency protections,” said Karen Addis, a spokeswoman for the American Council of Life Insurance. “While we interpret the decision to preserve the authority of states to regulate the insurance activities of national banks, banks and their regulators may not agree. As a result, it may be necessary for Congress to intervene.”
In her ruling, Justice Ruth Bader Ginsburg said: “Modern annuities, though more sophisticated than the standard savings bank deposits of old, answer essentially the same need. By making an initial payment in exchange for a future income stream, the customer is deferring consumption, setting aside money for retirement, future expenses or a rainy day . . . like putting money in a bank account, debt instrument or a mutual fund.”
The wording in the legal decision indicates that the court might be willing to allow banks to offer other insurance products too, as long as the products’ main selling feature was not the death benefit, Corwin said.
Banks have been barred from selling and underwriting insurance since the 1933 Glass-Steagall Act, which aimed to separate banking and commerce. But in the past decade, Glass-Steagall has been under constant barrage. Bankers argued that mutual funds, mortgage bankers, insurance companies and brokerage firms were able to offer bank-like products, thus it was unfair to bar bankers from getting into the related businesses.
Banking regulators have become increasingly willing to open the doors, allowing banks greater ability to sell everything from insurance to mutual funds in their branches. However, these changes have often been opposed by industry groups that say blurring the line between insured bank products and financial products that pose principal risk is dangerous for consumers.
Consumer groups, meanwhile, said additional competition in the insurance industry is good but that consumers need to be more careful when dealing with bankers. Tellers are frequently offered referral fees to send their depositors to agents, who sell insurance and investment products that put the customer’s principal at risk.
“It seems odd to be saying, ‘Don’t trust the bank,’ ” said Gail Hillebrand, an attorney with Consumers Union in San Francisco. “But consumers need to realize that for these purposes, it is not acting like a bank. You must be as cautious as you would be if you were dealing with a stockbroker or an insurance salesman.”
* PASSENGER RECOURSE
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* PROTRACTED CASES
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