DEFINITION of Financial Services Modernization Act of 1999

The Financial Services Modernization Act of 1999 is a law that serves to partially deregulate the financial industry. The law allows companies working in the financial sector to integrate their operations, invest in each other’s businesses and consolidate. This includes businesses such as insurance companies, brokerage firms, investment dealers and commercial banks.

BREAKING DOWN Financial Services Modernization Act of 1999

This legislation is also known as the Gramm-Leach-Bililey Act, the law was enacted in 1999 and removed some of the last restrictions of the Glass-Steagall Act of 1933. When the financial industry began to struggle during economic downturns, supporters of deregulation argued that if allowed to collaborate, companies could establish divisions that would be profitable when their main operations suffered slowdowns. This would help financial services firms avoid major losses and closures.

Prior to the enactment of the law, banks could use alternate methods to get into the insurance market. Certain states created their own laws that granted state-chartered banks the ability to sell insurance. An interpretation of federal law also gave national banks permission to sell insurance on a national level if it was done from offices in towns with populations under 5,000. The availability of these so-called side routes did not encourage many banks to take advantage of these options.

Capabilities Granted to Banks

The Financial Services Modernization of 1999 allowed banks, insurers and securities firms to start offering each other’s products as well as affiliate with each other. In other words, banks could create divisions to sell insurance policies to their customers and insurers could establish banking divisions. New corporate structures would need to be created within financial institutions to accommodate these operations. For example, banks could form financial holding companies that would include divisions to conduct nonbanking business. Banks could also create subsidiaries that conduct banking activities.

The leeway the law granted to form subsidiaries to provide additional types of services included some limitations. The subsidiaries must remain within size constraints relative to their parent banks or in absolute terms. At the time of the enactment of the law, the assets of subsidiaries were limited to the lesser of 45% of the consolidated assets of the parent bank or $50 billion.

The law included other changes for the financial industry such as requiring clear disclosures on their privacy policies. Financial institutions were mandated to inform their customers what nonpublic information about them would be shared with third parties and affiliates. Customers would be given a chance to opt out of allowing such information to be shared with outside parties.