The United States are set to deregulate the financial services industry.

But the likely passage of the Financial Services Modernization Bill, supported by the Clinton administration, is unlikely to have a dramatic effect, says one local insurance executive, since the process the Bill is intended to liberalise is already in full swing.

Since the Great Depression of the 1930s, American companies have been allowed to provide banking, insurance or securities services, but not a combination.

The strict demarcation between the three areas of the financial services industry was installed to prevent the global financial system facing a meltdown similar to what happened following the Crash of 1929.

Now the US legislative authorities are moving to permit companies to cross commercial borders in the financial services industry.

"It seems likely that the legislation will accelerate the consolidation that has been taking place in the financial services industry in the US,'' said Robert Mulderig, chairman of Bermuda-based Mutual Risk Management Ltd.

He added: "Having said that, creative people have already found their way around the restrictions which are being repealed, so the probable outcome will not be as dramatic as it might seem''.

Mr. Mulderig said that many in the financial services sector considered the changes "long overdue, because the restrictions have had their day and developments have stripped them of much of their usefulness.'' He added that he expected to see a "moderate'' increase in merger and acquisition activity, but not a dramatic increase.

His views were echoed yesterday by ratings agency Standard & Poor's (S&P).

The agency said that passage of the Bill "inevitably will speed up the pace of consolidation within the financial services industry and will have an impact on banks, broker/dealers, and insurance companies' financial strength as mergers and acquisitions take place.'' These combinations will result in rating changes to reflect the associations with stronger or weaker entities, S&P said. "For example, a holding company that possesses a variety of financial services entities will be rated on the basis of the combined strength of its subsidiaries, taking into consideration its ability to survive the failure of any one or more of its subsidiaries and continue paying its debts,'' the global ratings service said.

Overall, S&P expects these newly combined entities to benefit from broader line of business diversification which could improve holding company and operating subsidiary ratings in some instances.

"The combination of banks and insurers can, in theory, create more efficient and effective distribution systems by combining banks' customer data bases and existing branch networks with an insurance agency system,'' S&P reported, adding that "the precedents for such combinations in Europe have produced only limited benefits.'' The European experience with what it calls "bancassurance'' has led companies such as Britain's National Westminster Bank plc into sticky economic waters of late.

S&P said it does not envisage that any of its current ratings on banks, broker/dealers, or insurers will change as a result of the passage of this legislation.

The portion of the legislation addressing holding company structures, particularly those permitting holding companies to own insurance underwriting affiliates and those governing which non-bank subsidiaries could be held directly by an operating bank and which by the holding company, will however affect how S&P views the rating relationships between subsidiaries of US financial services holding companies.

The creation of financial services holding companies in which banks or insurers may no longer be the principal subsidiaries has implications for holding company ratings. Where the banks are the principal operating entities, and the principal providers of cash flow, the holding companies are routinely rated a notch below the bank ratings.

BUSINESS BUC