To Consolidate or Not

Assembly Bill 33 (AB33) is pending before the California legislature and would consolidate the Department of Corporations and the Department of Financial Institutions into a new Department of Financial Services, including an Office of Financial Consumer Advocacy.

AB 33 would create the Department of Financial Services (“DFS”), including an Office of Financial Consumer Advocacy, transfer the Department of Financial Institutions (“DFI”) to the DFS as the Division of Financial Institutions, transfer the Department of Corporations (DOC) to the DFS as the Division of Corporations, effective 2011, and transfer limited licensing and regulatory authority from the Department of Real Estate to the DFS in the Division of Corporations effective 2012.

While it may not seem like a ground breaking bill, or one that would ruffle feathers, it is a bill that has met with opposition from the Financial Institutions Committee, Business Law Section of the state Bar Association of California. This committee argued that the proposed changes would lead California’s banks and credit unions to move towards national charters, and thereby negatively impacting the health of the state chartered bank system.

The Financial Institutions Committee asserted that preserving dual banking is substantially benefited from an independent Department of Financial Institutions (DFI). The committee reasons that state bank policy makers, legal advisors and examiners are a major benefit to California banks and that suggested changes to Financial Code section 200(b) would greatly diminish their effectiveness. Furthermore, the committee feels that by blending the DOC and some parts of the Department of Real Estate and their various staff would result in a loss of current focus to the detriment of the dual banking system.

Another very real concern is the committee foresees that California state banks don’t have that much exposure as federally regulated institutions to consumer and commercial real estate, making them less subject to market risks. This in turn is attributed to the extremely knowledgeable DFI staff. It is that very knowledge and skill that has seen many of the banks self-reporting as they have an established a solid working relationship with the existing department. Changes to the existing structure would bring about bureaucratic delays and a loss of the existing candor with a possible loss of the successful regulatory stewardship.

Commercial banking in California is under a great deal of stress give the economic climate.
If during staff reassignments and downsizing the expertise to oversee the banks was lost or administratively distracted, then this too could spell disaster. With pending economic recovery for the banks just around the corner, any loss of guidance and expertise could slow this recovery down.

Further concerns deal with the observation that the proposed changes do not streamline the existing structure, but rather add to the bureaucratic layers, thus resulting in more money being spent to change the existing structure which would not improve it. It if isn’t broken, why try to fix it could prove to be a challenging question for the proponents of this bill.

The content contained within this feature is not intended as legal advice and does not constitute an attorney-client relationship. To learn more, contact Los Angeles business attorney and California corporate lawyer, Alan M. Insul by visiting

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