10 facts and myths about Gramm-Leach-Bliley: the GLB financial-services modernization law hasn't lived up to initial expectations, but it has brought changes, some for the better.

Key points

* GLB has not been a total bust. It has ended court battles among financial services companies.

* The insurance industry was losing those court battles. GLB has helped protect its turf.

* The United States has not been fertile ground for a bancassurance model.

* GLB has not yet improved access to life insurance for moderate-income families.

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Supporters of Gramm-Leach-Bliley expected to create a brave new world in financial services when the bill became law in late 1999. The law tore down Depression-era barriers between insurers, bankers and securities firms, leading its backers to predict big takeovers--mostly banks acquiring insurers--that would replicate in the United States Europe's bancassurance model of all products under one roof.

Those predictions never happened, and even the 1998 Citicorp/Travelers merger that was the catalyst for the law unraveled when the merged company, Citigroup, in 2002 spun off Travelers Property Casualty Corp. Scoffers have asked, "What has GLB done for us other than bring us privacy regulations?"

It's a good question, and here's a look at some surprising answers and misconceptions.

1 GLB has ended the rancor between banks and insurers and has clarified the legal landscape.

For decades, bankers were trying to get into the insurance business, and insurers had been "banging heads" with the banks over this, said Gary Hughes, executive vice president and general counsel for the American Council of Life Insurers. The rancor had amounted to warfare, he said. "All of us were spending a lot of time, energy and money waging those wars," he said. "It's been very pleasant since GLB not to be doing that and to be working now with banks when circumstances require it, and to do so on a much more civil basis than would have been 10 years ago."

2 Insurers got most of what they wanted out of GLB.

The industry finally concluded GLB was in its interest because it was losing what little leverage it had left in the courts. "The banks and their regulators were bringing successful cases that were expanding banks' insurance power without any change in the law," said Hughes. "Ninety percent of what we were trying to get out of GLB was functional regulation, that if banks were going to have generally free access to our business, be it sales or underwriting, we wanted to assure they would be subject to oversight by state insurance regulators. From that standpoint, GLB did precisely what we had hoped it would."

Hughes said the fear was that if banks got into the insurance business through regulatory action, bank regulators would simply say that insurance was banking when done by a bank, and it would be outside the jurisdiction of state insurance regulators.

3 The big surprise has been a lack of cross-industry acquisitions.

"We expected a lot of legal work to be generated, and we were right, but the work was different from what we expected," said Ted Augustinos, a partner in the insurance and reinsurance department at law firm Edwards & Angell. "Everybody thought we'd be working on Citicorp/Travelers deals, and we ended up working on privacy notices." Of course, there also have been bank acquisitions of insurance agencies and joint ventures between banks and agencies.

Consulting firm Ernst & Young never had a view cross-industry consolidation would occur because the two industries' returns on equity were so far apart, said Robert Stein, chairman of global financial services. In those days, banks were achieving 20% returns on equity while insurers struggled at around half that level, he said. There were no back-office operational synergies, and there weren't any places where costs could be taken out to improve investor returns or shareholder value. "So the commentators got confused by how banks would offer a full range of products vs. the question of whether they bad to own it all or just distribute them," he said. Banks now can sell insurance products and mutual funds, "but that doesn't mean they're the best ones to own and manage those other businesses," Stein said.

Stein admitted, however, that even he has been surprised at the near-total lack of bank/insurer transactions and "the almost universal recognition that owning an insurance underwriting business and distribution factory was not something" that banks wanted to do.

4 Before GLB, the principal of "forbidden fruit" may have lured banks into their interest in insurance.

Many people were worried in the 1990s that banks wanted to buy up the insurance industry. But since Wall Street was probably not going to look favorably upon such acquisitions from a bank perspective, the only explanation for the worry was that insurance was the "forbidden fruit" and that banks were determined to gain full authority to enter the insurance business, said Hughes. "Once they got that authority and they actually began parsing out what a deal might look like, because of things like the disparate ROEs, the deals didn't look all that appealing, especially when they saw they could be plugged into the distribution side of the insurance business without actually having to own insurance underwriters," he said. The insurance products banks have succeeded in selling, however, have been annuities. "Life insurance is a much harder nut to crack," noted Hughes.

5 The biggest unrealized promise is that banks haven't reached middle-income Americans with life insurance.

Since most of the major insurers sell to the affluent, the middle class is underinsured, but people like Augustinos continue to see banks as a natural distribution channel to this segment. "Banks can do so very inexpensively and effectively because they already have the relationship and can deliver products that are more like a commodity to the middle and lower end of the market," he said. "I expect that somebody will figure it out at some point."

Toward that goal, the ACLI recently issued a report on how insurers and bankers can work together on the long-festering problem. The report advises insurers to more actively seek the cooperation of bank managers to make referrals a part of a bank office's daily routine and to educate workers about the financial returns insurance sales can provide. Hughes predicted the market will grow slowly and that insurers will "keep plugging away" at the problem because life sales are in the interest of both parties.

6 Bancassurance may not be as strong and pervasive in Europe as is widely perceived.

Why should we expect bancassurance to take root here when its presence in Europe is spotty? The hotbed countries are France, Spain and the Benelux countries, according to Stein, and he warned that what is called life insurance in some countries is heavily investment-oriented. Bancassurance is less prevalent in the United Kingdom, where its strength and effectiveness has weakened in the past three or four years, he said. Newer bancassurance efforts are in eastern Europe. Bancassurance works in areas where a bank is the sole location for financial advice and products. "In some of these countries where sources of product are not as wide as in the U.S., you tend to find the bank naturally falling into a role as a central source for all financial services and products," Stein said.

Bancassurance works in Europe because consumers there have a relationship with their banks that is different from Americans' relationship, said Stein. "They tend to use the bank more for cash management needs and other services, and it's an integral part of their day-today financial fives," he said. "The relationship is a lot stronger and more supportive. That leads to this ability to do cross-selling." In America, there are so many other opportunities and product sources that a bank is not the only place to get financial advice, he said.

Bancassurance "could take off for banks" in America if they could find a "proper combination of simplicity of product and value." A big element of achieving that is finding the right compensation for producers. "It has been a very disappointing element of the market over the past five years," Stein said.

7 GLB allows insurers to get into the banking business, but insurers have done so in only narrowly defined ways.

Actually, insurers could own thrifts before GLB. Some had thrift subsidiaries, but thrifts came with limitations. They were only suitable in certain cases, had to stay small, and couldn't get into commercial banking, said Augustinos. Today, virtually all major insurers have set up bank subsidiaries, but they still use them for limited purposes, and they aren't typically designed to compete with commercial banks.

"My sense is that banks developed by insurers are narrowly focused and tightly linked to other elements of their strategy," said Stein. State Farm's bank, for example, takes advantage of the carrier's major presence in homeowners and automobile insurance, its "rural flavor," and the emotional and psychological business ties it has with its clients, he said. USAA, another company with a loyal clientele, also has a fairly large bank. Principal Financial's bank is largely Internet-based and linked to its 401(k) and pension businesses, Stein said. "So those that went into the bank side used a careful, more narrowly defined way that is part of a broader strategy than just building a banking activity," he said.

8 Many insurers feel saddled with the cost and inconvenience of GLB's privacy regulations, but there are upsides.

"Privacy and information security, while a burden, addressed a very common concern among consumers," said Augustinos. "Whether that concern was valid or not, it was widely held. This statute put people a bit more at ease about what was happening with their information."

Stein said the regulations were a "necessary ingredient" of broader and bigger organizations that need to share information within the company and with third-party partners as part of effectively running their businesses. "To do that, one just needs more consumer protection," he said. "It's a good thing in that it helps consumers get comfortable, sense they are being treated honorably, and feel that their private information won't get shared. It appears institutions have managed the law well, protected privacy when they should, and haven't abused it."

One also could argue the regulations are counterproductive. In some cases, they restrict the ability of institutions to mine their information and use it to more accurately link consumers with products and services they might want, Augustinos said. "It didn't stop general marketing and solicitations, but it restricted the ability to target products and services to people who might actually want them," he said.

A potentially troubling statistic is that few people--equal to a low single-digit percentage--exercise their right to opt out of certain kinds of information sharing, as provided by the law. "Clients I've talked to wish the percentage were higher because it has allowed so-called consumer advocates to argue that the notices aren't effective ... and that maybe more stringent protections should be put into place," said Augustinos.

9 Remember NARAB? It helped bring about uniform producer licensing.

NARAB--the National Association of Registered Agents and Brokers--was the threat the GLB law posed to the National Association of Insurance Commissioners to cause commissioners to reform an unwieldy licensing system. NARAB would have been organized if a majority of states did not agree to a simplified and uniform producer licensing process. Now institutions can fill out a single application form and submit it to each state, said Augustinos. This streamlined process helps companies with businesses in several states, particularly banks with multistate operations that own insurance agencies and large, multistate insurance agencies unaffiliated with banks. "NARAB was the gun to the head," said Augustinos. "Regulators had a fairly short deadline, and they beat it."

10 The real winner's under GLB so far have been insurance agencies.

So which industry has most benefited from GLB? Insurers, banks and securities dealers all share the pain on privacy and information security, and the law does not appear to have had any effect on their financial returns, said Augustinos. But GLB's preemption of state restrictions against bank insurance operations drove up the demand for insurance agencies, and therefore the price paid for agencies increased. While life and annuities products account for most of the business written through banks, banks have opened up a new channel of distribution for the property/casualty business as well. This was a boon for some agents, but others may have suffered from the competition. Some career agents have used the opportunities with banks as an excellent exit strategy, he said.

Mid-market regional banks have been involved in agency acquisitions much more so than the large, money-center banks, said Stein. That's because banks' desire to generate fee income has been very strong, but the big banks did not believe agency acquisitions could generate significant revenue and earnings for them.

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