Banks get OK to sell annuities

January 19, 1995|By Lyle Denniston | Lyle Denniston,Washington Bureau of The Sun

WASHINGTON -- The Supreme Court approved broad power yesterday for the government's chief regulator of national banks to approve new lines of business for those institutions, including the sale of variable and fixed annuities.

Banks have about 20 percent of the $100-billion-a-year market for annuities, a market that is growing rapidly. A lower-court decision that would have forced many banks out of that business was overturned unanimously by the new ruling.

The decision, in a case involving NationsBank of North Carolina and a subsidiary, means that many state banks also may offer annuities.

In an aspect of the ruling of major importance to bankers and their potential competitors in the insurance and securities industries, the court said the U.S. Comptroller of the Currency can allow services that go beyond those that federal law explicitly allows national banks to offer.

"The business of banking," the court declared in a ruling written by Justice Ruth Bader Ginsburg, "is not limited to the enumerated powers" the banks can exercise under the comptroller's supervision. The law expressly allows national banks to offer such conventional banking services as taking in deposits, lending money, issuing notes, and discounting debt items.

But, the court said, the law is not confined to those services, and "the comptroller therefore has discretion to authorize activities beyond those."

The court cautioned the comptroller, Eugene A. Ludwig, to use his discretion to authorize new bank services "within reasonable bounds." It said: "Ventures distant from dealing in financial investment instruments -- for example, operating a general travel agency -- may exceed those bounds."

Robert C. Eager, a lawyer for financial institutions, said the decision was "significant because it goes to the very core of the powers of the comptroller to decide what national banks can do." He said the ruling provides support for the comptroller to let banks and their subsidiaries offer "a broader range of activities."

The new ruling, besides determining the scope of business options open to national banks, removed the last legal doubt about those banks' ability to act as brokers for customers who want to invest in annuities.

The American Bankers Association (ABA) called the ruling "a tremendous victory for the banking industry that will translate into more choice and convenience for consumers." It said the ruling clears the way for national banks and many state banks "to offer this increasingly popular investment vehicle."

An annuity is a contract under which a buyer makes one or more premium payments in exchange for a series of return payments for a specific length of time or for life. The return can be fixed at a specified level, or "variable" if the payment is keyed to investment performance.

The court rejected the claim by Variable Annuity Life Insurance Co. that annuities are a kind of insurance and that therefore national banks cannot do business in them.

In 1993, a federal appeals court in New Orleans had ruled that a banking law adopted in 1916 permitted the sale of insurance by national banks only in towns of fewer than 5,000 people. Thus, it concluded, national banks elsewhere cannot offer insurance products.

The appeals court went on to rule that annuities, either fixed or variable, are a form of insurance that national banks in larger communities could not offer to customers.

The Supreme Court overturned the lower court on the insurance point, saying that annuities were a form of investment. "By making an initial payment in exchange for a future income stream, the customer is deferring consumption, setting aside money for retirement, future expenses, or a rainy day.

"For her, an annuity is like putting money in a bank account, a debt instrument, or a mutual fund." Banks, the court added, already offer those kinds of services.

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