Financial services are essential to a nation’s economy. Financial institutions and financial markets facilitate economic growth by channeling the surplus funds of savers to investors. Financial intermediaries perform this function by (1) issuing claims against themselves, such as deposits (banks and thrifts), commercial paper (finance companies), contracts (insurers), and shares (mutual funds), and (2) loaning or otherwise investing the funds received. Securities markets perform the same function in a different manner by providing a convenient means for savers and investors to meet directly (or through brokers) to trade financial claims among themselves. Financial institutions and securities markets are closely interrelated.

The process of matching savers with investors is fundamental to economic development. In the absence of financial institutions, savers can only invest what they themselves have saved. In the absence of money, individuals and firms possessing bright ideas or good products are unlikely to go very far. Furthermore, savers have little incentive to save if they lack access to readily available and tradeable assets in which they can invest their money. Thus, poorly developed financial institutions and markets discourage both savings and investment, which are essential to economic growth.

It is therefore no wonder that governments (federal, state, and foreign) possess a vital interest in the development and maintenance of strong financial institutions and financial markets. Consequently, various government policies and regulations have evolved as well as institutions to implement such policies and regulations with respect to various segments of the financial services community. However, recent years have witnessed strong pressures for change in these policies and regulations to parallel the changing nature of the financial institutions, products, and markets.

As a result of acquisitions and mergers across traditional lines and the similarity of several products offered by banks and other thrift institutions, securities firms, and insurance companies, similar products and services are regulated by different agencies with differing regulatory philosophies and techniques. (For example, see the above discussion of SEC regulation of life insurance company investment-oriented products.) Multiple regulation has hindered product development and increased costs because of jurisdictional overlap, regulatory squabbling, and inconsistent regulatory approaches. Furthermore, competitive advantages and disadvantages are created due to varying regulation rather than product merit. In turn, efforts by various groups to influence regulation to enhance their competitive position and/or impair the competitive ability of others promise to be a significant force in shaping the future contours of the regulation of financial services, including life insurance.

Contests between competing segments of the financial services industry are exemplified by long-term ongoing combat between banking and insurance interests. This competition has generated an enormous amount of legislative and regulatory activity at both the state and federal levels, involving both banking and insurance regulators. In addition, there has been extensive litigation, much of which has focused on the authority of federal bank regulators to preempt state insurance law.

It is beyond the scope of this writing to predict the outcome of the banking-insurance dispute in particular and, more generally, the nature of regulation of the insurance business in the future. However, it appears safe to assume that the extent to which the economic, technological, and political forces foster or deter further convergence of financial services will also substantially affect not only the nature of regulation but the locus of regulation at the state and/or federal level. The ultimate locus of regulation will reflect, to a significant extent, the effectiveness of current regulatory structures in responding to changing circumstances and needs.

In determining the nature and locus of regulation, public policy makers need to address two basic sets of issues.

First, should continued convergence of financial services be permitted or encouraged in view of such public policy objectives as financial solidity of the institutions involved; fairness to the customers in the variety, quality and prices of products and services offered; and the impact on competition?

Second, does the regulation under consideration (current or proposed) meet the standards of (1) effectiveness in achieving regulatory goals, (2) efficiency, (3) minimal intrusiveness on managements’ ability to function, and (4) accountability to the public that the regulation is intended to serve?