Old laws will hinder 21st century e-commerce

How often do we hear that the government should act more like business? An
Internet-era irony is that the government is actually acting as a model for business, not
the other way around.

Many agencies are grappling with how to provide services electronically to the public.
But laws and regulations are creating barriers to Internet delivery of financial services
from the private sector—barriers that only Congress can lift. As electronic commerce
gains a foothold, financial services transactions that were previously delivered locally
may now be obtained directly and instantly from national service providers.

Take mortgage loans or casualty and life insurance terms. Purchases of all these
financial services products are being transformed by the Internet. The ability of
potential purchasers to obtain a variety of quotes, and therefore greater competition from
providers of such products, is a spectacular advance for consumers.

But federal and state laws, conceived in a different era, pose significant problems for
the new commerce and block the consumer benefits. The real question is whether Congress
has the intelligence and courage to encourage and permit the transformation. Or will it
lapse into passing laws that are preservation acts intended to continue outmoded 19th and
20th century practices that hamper the possibilities of Web commerce?

Take insurance. Several companies have Web sites where consumers can obtain quotes for
all types of insurance, including auto, home, and life, as well as for related products
such as annuities. Individual Web site providers have hundreds of thousands of consumers a
month stopping at insurance sites, which have quotes from the leading insurers in each
product market.

But that’s where it ends because, if the consumer lives in Texas, state law
requires insurance companies to maintain a brick-and-mortar presence in the state—a
tough requirement for a Web company. Perhaps the consumer lives in Florida or Hawaii,
where nonresidents are not permitted to solicit insurance sales without a local agent.

The home-state requirements are being applied to Web site providers, even though they
do not actually sell the insurance but merely provide the venue through which the company
selling insurance and the consumer come together.

Consumers from New Jersey can buy insurance elsewhere, but cannot use a credit card to
pay the premiums.

Perhaps New Jersey should talk to the IRS, which has negotiated a favorable deal with
credit card companies so you can pay your taxes on your credit card when you file
electronically—and get miles for your airline frequent-flyer account in the process.

At least in insurance, Congress is considering a modernization. But HR 10, the banking
and insurance reform bill, does not recognize the impact of the Internet on delivery of
services. It would reinforce the crazy quilt of state laws, rather than allow greater
uniformity, and reinforce the balkanization of the Net.

It would be better for Congress to pass provisions that recognize the difference
between running a Web site that assists people and actually selling insurance—or to
do nothing. For example, if a Web company receives a payment from the insurance company
for operating the site or for closure of a sale by the insurance company that started from
the site, this should not be treated as a sale of insurance.

Mortgages present a similar concern. Again, a number of states require a physical
presence or other protectionist measure as a prerequisite to making consumer loans. The
provisions also present a fractured set of laws for Web sites matching buyers and sellers.
HR 10 needs to be reviewed for these purposes as well.

The banking and the commerce committees in both the House and Senate should consider
the Internet when they legislate in the financial services area.

As federal agencies do a better job of providing electronic portals to citizens, the
proximity of agencies to their congressional overseers may provide an advantage lacking in
the private sector in cleaning up laws and regulations.

When someone says the government should act more like business, remind them that for
Net service delivery, agencies are ahead of the private sector.

Stephen M. Ryan is a partner in the Washington law firm of Brand, Lowell &
Ryan. He has long experience in federal information technology issues. E-mail him at smr@blrlaw.com.

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