Massachusetts Bankers Assoc. Reports Favorable Federal Court Decision on Bank Insurance Sales

January 13, 2005

The Massachusetts Bankers Association (MBA) on Thursday announced that the U.S. District Court has issued a favorable opinion in its declaratory judgment action, resolving a critical case for banks that want to engage in insurance sales, reportedly enhancing options for consumers and Massachusetts banks for decades to come.

The plaintiffs in the Federal Court suit – the MBA and several of its member banks – had argued that the federal Gramm Leach Bliley (GLB) financial modernization act which passed in 1999, as well as a more recent interpretation of the National Bank Act by the chief regulator of nationally chartered banks, the Office of the Comptroller of the Currency (OCC), preempted certain provisions of Massachusetts Insurance law.

The court agreed that the challenged statutes significantly interfere with a bank’s ability to sell, solicit and cross-market insurance. Consumers are reportedly disadvantaged by such statutes because they may not have access to more insurance choices and good pricing.

“Today’s decision brings Massachusetts in line with most of the states throughout the nation,” said Daniel Forte, president and CEO of the MBA.

The defendants, including the Commonwealth and its commissioners of banks and insurance, previously had 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 of 2002, that the Massachusetts statutes were preempted by federal law.

In February of 2003 the First Circuit dismissed the Commonwealth’s petition, suggesting that the issue would be best resolved at the trial court level – and thus this suit was filed by the bankers in August of 2003.

The provisions at issue in Massachusetts and 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 Thursday’s 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 national and state-chartered banks.”

Nearly 70 banks are currently licensed to sell insurance in the Commonwealth of 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.

The Massachusetts Bankers Association represents 215 commercial, savings and co-operative banks and savings and loan institutions in Massachusetts and New England.

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