Fed allows bank to link services First Union plan involves brokerage

December 29, 1993|By American Banker

WASHINGTON -- The Federal Reserve Board has approved a ground-breaking plan by First Union Corp. to integrate securities sales with more traditional bank offerings.

Under the plan, First Union's discount brokerage subsidiary will be able to give price breaks on stock and bond commissions to retail customers who maintain required minimum balances in deposit accounts.

The Fed's approval represents a loosening of the "anti-tying" rules that have prevented banks from marketing a broader range of financial services to their customers.

First Union, based in Charlotte, N.C., is known as one of the more ambitious retail banks in the country.

"Certainly this provides a benefit by lowering the cost of services to customers," said Melanie Fein, a partner in the Washington law firm of Arnold and Porter. "This is important because increasingly, banks are marketing their products by packaging them together."

The Fed "is taking an open-minded view of this area," Ms. Fein added.

In approving the application by the nation's ninth-largest banking company, the Fed said it plans next month to consider allowing all bank holding companies to provide similar discounts on brokerage services.

Banks have long been allowed to offer securities services through separate subsidiaries, but they have found it difficult to market these services as mainstream bank offerings.

The Glass-Steagall Act requires holding companies to maintain stringent barriers between their securities and commercial banking activities. In addition, the Bank Holding Company Act has anti-tying rules that strictly prohibit banks from requiring customers to purchase one service in order to receive another.

The Fed used its authority under the Bank Holding Company Act, which allows it to grant such exemptions if they serve public interest. But the agency has allowed a tie-in only once before, in 1990, when it allowed banks to offer price reductions on credit cards issued to their established customers.

The issue of bank tying has received considerable attention lately because securities firms have complained that some banks have illegally tied corporate credit enhancements with other services.

But the First Union exemption passed muster with the Fed because it relates to offering discounts on a package of retail products, not to making the provision of one product completely contingent on the purchase of another. It also relates to consumer products, while the allegations of illegality have concerned corporate activity.

In its order approving the application, the Fed said it was satisfied that First Union's tying arrangement would not impede competition.

"Given the competitive nature of the retail brokerage market, it is expected that First Union will be required to offer these brokerage services at competitive prices," the Fed wrote.

Some bankers hope the Fed will consider even broader anti-tying exemptions. For instance, bankers want to be able to link mutual fund sales to other retail products, like offering free checking for customers who buy mutual funds. But anti-tying provisions have limited that activity so far.

"When they have their rule-making in January, it will be important for them to open it to as many different packaged arrangements as they can, including mutual funds," Ms. Fein said.

Along with many members of the banking industry, some Fed officials believe that without broader power in the products and services banks offer, the industry will not survive increasing competition from nonbanks.

Banks have been seeking ways to market their array of products as a package, offering a sort of "financial supermarket." But so far, many industry efforts have been limited by law and concerns by some consumer advocates and policy-makers. They worry that consumers may assume that all products purchased through a bank are insured.

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