The thrift charter is still alive and well -- the unitary thrift holding company structure still has the most flexibility of all banking charters and is most likely to serve the needs of insurance underwriters. Once again, though, the chance to form one may soon expire.
Legislation: Progress Or Change?
It is well known by now that a unitary thrift holding company is the single method by which an insurance underwriter can engage in banking under current law. Financial modernization legislation, perpetually on the horizon, offers the hope of affiliations with banks. That hope is long delayed, however, and a thrift charter offers the prospect of an immediate entry into banking with the prospect of later converting the thrift into a commercial bank if legislation is enacted. Even then, the advantages of the thrift charter may better serve the insurance company's plans.
The major advantage of the unitary thrift holding company is the ability to affiliate at the holding company level with any other company, not just banks or companies engaged in financial activities. Financial modernization legislation will prevent all companies who are not grandfathered from obtaining this advantage.
In the most current financial modernization bill (HR 10, re-introduced by House Banking Chairman Leach on January 6, 1999, as the Financial Services Act of 1999), the power of unitary thrift holding companies to enter into commercial affiliations is grandfathered for all thrift holding companies applied for by October 7, 1998. This date is past, of course, but almost all applications filed by insurance companies to own thrifts this year were filed subsequent to the grandfather date in the then current version of the bill. Applicants generally decided to act on their business interests based on current law, especially in light of the substantial uncertainty that HR 10 would be passed. Continuing this trend, Guardian Insurance Group, New York Life, Mass Mutual Life, Conseco, the Polish National Alliance, and Nordstrom have all filed for thrift charters since October 7, 1998. While there are no guarantees, each time the bill has been considered, faced with substantial new applicants, Congress has decided to move the grandfather date forward rather than punish those applicants.
While uncertainty about grandfathering has remained steady since the House Banking Committee bill passed last fall, uncertainty about the continued viability of existing unitary thrift holding companies has steadily decreased. Bankers had hopes initially of eliminating the thrift charter altogether, but recent versions of the bill preserve the charter largely unchanged, including thrifts' ability to open interstate branches more easily than banks. Chairman Leach's re-introduced bill eliminates one uncertainty by explicitly permitting thrifts to convert to banks. The most significant adverse change remaining is that future acquisitions of thrifts are limited to thrift or financial holding companies - new commercial owners of existing thrift holding companies are not allowed.
In the meantime, as the bill has been amended, the flexibility of the financial holding company model has decreased. A provision in early versions of the bill permitting financial holding companies to have a limited basket of nonfinancial activities was eliminated - leaving grandfathered unitary thrift holding companies as the only vehicle through which nonfinancial companies could engage in "banking."Not everything favors thrifts. To balance their advantages, thrifts lack the commercial lending authority of banks and the primary federal regulator of thrifts is not well recognized internationally. Some other advantages of thrifts are either evaporating or are being undermined. For example, Chairman Leach has added a provision in HR 10 designed to undermine the broader preemption of state law that currently exists for thrifts. The Comptroller's recent grant of authority to banks to sell insurance in Louisiana cities, which trivializes geographic limits on bank sales of insurance, also lessens the advantage thrifts once had because they were not subject to such geographic limits.
Nevertheless, the fundamental fact is that a thrift charter is the only banking charter available for insurance companies until a financial modernization bill is enacted. Acquiring a thrift now also may be the only way for companies with any substantial non-financial activities to engage in banking after such a bill is enacted.
Some concern has been expressed about the conditions OTS has been imposing on the grant of new thrift charters. When put in context, however, these conditions do not detract substantially from the value of a thrift charter.
"Independent" Directors: A Tolerable Burden ?
First, the OTS has adopted a rule that 40 % of the directors of all new thrifts should be "outside directors." In addition, the OTS expects the Audit, Investment and Trust committees of the board to be composed at least 50% of outside directors.
The historic justification for outside directors has been to oversee a company's management and thereby increase the responsiveness of the company to the interests of its shareholders. The OTS rule stands that rationale on its head, requiring the election of directors who are "independent" of the shareholder who selects them.
There is substantial uncertainty about the precise contours of OTS's new rule. For example, it isn't clear whether the committee composition rule also imposes a requirement to have such committees - for small thrifts these functions ordinarily could be performed by the board as a whole. Similarly, who OTS will treat as an "outside" director is still fluid: Outside directors of the holding company qualify to be outside directors of the thrift, but perhaps not if every one of the thrift's outside directors is a holding company director; OTS also treats former employees as insiders but whether OTS will distinguish between someone newly retired and someone who quit twenty years ago is untested.
The outside director rule was adopted without notice and comment- so the rule may be subject to challenge under the Administrative Procedures Act. Applicants have argued that the rule is imprecise in its scope, increases the difficulty of finding qualified and loyal directors, and imposes an ongoing financial and administrative burden that outweighs any benefit that could be anticipated from the rule. Nevertheless, so far applicants have chosen not to litigate the issue. Some applicants may hope that the OTS will ameliorate these burdens in light of an applicant's particular circumstances. Others may simply believe a thrift charter is worth the added burden and expect that any directors elected by a single shareholder, whether inside or outside, will be adequately responsive to the interests of the sole shareholder because those directors understand they otherwise won't be re-elected.
There have been preliminary indications that OTS will eventually adopt its outside director rule formally through notice
and comment. Such publication would be a valuable opportunity for the industry to try once again to persuade the OTS that such
measures are unwarranted. Such publication also would provide more clarity on the scope of the rule, and avoid additions to the secret lore of the OTS application process.
Privacy Guidelines: No Surprises
A second significant regulatory change, the adoption by OTS of new Privacy Guidelines, also does not undermine a thrift charter's value. The OTS guidelines note that the Fair Credit Reporting Act requires thrifts to disclose any intention the thrift has of sharing customer information with affiliates and give customers the opportunity to "opt out." OTS recommends that thrifts offer customers the same choice for non-affiliated parties. If the guidelines are followed, thrifts will give more protection and choice to their customers than they are required to give under any federal statute. Nevertheless, the guidelines are in the mainstream of current industry initiatives on financial privacy.
The American Bankers Association (ABA), Consumer Bankers Association (CBA) and the Bankers Roundtable (BRT) have developed a joint statement of bank industry privacy principles. These trade associations encourage their members to preserve the confidentiality of customer information and to inform and give choices to customers. For example, the bank privacy principles say that financial institutions should not reveal specific information about customer accounts to unaffiliated third parties for their independent use unless the customer has been informed about the possibility of such disclosure through a prior communication and is given the opportunity to "opt out" - this is the same standard urged by OTS. Most major financial institutions have decided it is in their best interest to assure their customers that the customer's financial information will be treated confidentially. Most banks and other financial institutions have adopted policies articulating principles of confidentiality and customer choice.
See www.aba.com/aba/PR_PrivacyPolicies.htm. The OTS has jumped on this bandwagon but has not required thrifts to lead the band.
Thus, despite a continuing evolution as the OTS adapts to the renewed popularity of the thrift charter, few changes are being made that would undermine its flexibility and usefulness for insurance companies as a vehicle for entry into banking.