Financial Services Deregulated.

After prolonged debate, intensive arm-twisting and down-to-the-wire compromises, Congress approved landmark legislation in late 1999 to overhaul the financial-services industry. President Clinton signed the Financial Services Modernization Act on Nov. 12.

It replaces the 1933 Glass-Steagall Act, which prohibited banks from underwriting stocks and bonds, and the 1956 Bank Holding Company Act, which imposed more restrictions on banking activities. Under the new law, banks can affiliate more easily with insurers and securities firms.

The law continues state regulation of insurance activities, establishes an objective mechanism to resolve disputes between banking and insurance regulators and allows mutual insurance companies in states that don't allow mutual holding companies to redomesticate.

Some critics argue that the new law fails to protect consumers' privacy and community-lending standards for the disadvantaged. But supporters predict that this major change in U.S. banking law will spark competition among financial-services companies, giving consumers a wider choice of products. The Clinton administration estimated that consumers could save as much as $18 billion a year as bigger but leaner financial conglomerates emerge.

Many on Capitol Hill and in the nation's financial centers think this legislation was long overdue. Since the 1970s, Congress had failed to enact similar measures. Lawmakers came close in 1998 with H.R. 10, but the bill ultimately failed to gain a consensus.

Over the years, the industry looked for ways to get around the legal barriers to these business combinations, but these efforts were costly and limited. In 1998, Citicorp and Travelers Group merged into Citigroup, the nation's largest financial-services company, but without reform legislation, Citigroup eventually would have been forced to sell some of its insurance operations.

Industry leaders argued that reform was necessary for U.S. financial-services companies to meet ever-increasing competition from European and Japanese counterparts that didn't face the same legal barriers in their countries.

In October, one of the biggest obstacles to reform crumbled when the Federal Reserve and the U.S.Treasury reached a truce in their regulatory turf war. They agreed to keep insurance activities within affiliates of bank holding companies, thus ensuring that oversight of these activities would remain with state insurance regulators.

This eased insurers' concerns that banks, which had been encroaching on insurance activity over the years, would be able to create insurance products that weren't subject to the same regulations and consumer protections as insurance companies.

Enactment of the reform legislation is expected to trigger a spate of acquisitions in the banking and insurance industries. Insurers also were predicting that banks and insurance companies soon would be forming partnerships or other affiliations to produce hybrid products and services. Analysts have pointed to insurers such as Allstate, Mercury General, Safeco, Progressive, American General, Conseco, Jefferson Pilot, Lincoln National and ReliaStar as possible targets or acquirers in a new financial era. Banks that could be scouting insurance partners include First Union, Bank of America, Key Bank, Wells Fargo and Chase Manhattan.

To Rodger S. Lawson, president of the Alliance of American Insurers, the legislation is just another step in the ongoing process of cross-selling between banks and insurers that has been developing for years.

"While many think [this legislation] is revolutionary--and in the breadth of its scope it is--I consider it evolutionary," he said.