"There ain't no such thing as a free lunch," the science fiction writer Robert Heinlein wrote in his 1966 libertarian classic The Moon is a Harsh Mistress. But when it comes to some segments of the financial services industry, local regulators actually take that notion to the next logical step. Under a variety of antiquated anti-competitive statutes, offering your customer a free lunch – that is, a rebate – is actually illegal, if the offer comes from an insurance or real estate agent.
State laws barring firms from kicking back some of the proceeds from an insurance premium or agent commission to their customers date back to the 19th century. Initially, they were justified on grounds that life insurance companies, in particular, had taken so forcefully to the practice of rebates that they were effectively engaged in an arm's race that threatened the industry's solvency. Given the paucity of tools the regulators of the 1800s had to measure risk-based capital, some basic admonitions against overzealous competition might even have been justified, under the circumstances.
But such laws have managed to persist for more than a century largely thanks to a combination of political inertia and the lobbying prowess of incumbent industry players. Though initially focused on literal cash rebates, the regulations have evolved over the decades to cover just about any extra perk that could be said to "induce" a potential customer to buy, other than the most insignificant of pen and keychain swag. Regulators in Utah recently barred an online broker from giving away software that helps small businesses track payroll and other human resources functions, even though the program was free to clients and non-clients alike.
There are, of course, rare cases outside of local real estate and insurance markets where giving something away for free might be considered a crime. Microsoft famously faced the scrutiny of the Clinton administration's antitrust regulators for its bundling of the Internet Explorer browser with copies of Windows 95. More recently, chip-maker Intel in 2010 settled a Federal Trade Commission complaint that it was offering illegal rebates to maintain its dominant market position. But even leaving aside the merits of either of those cases, both of which likely fail Judge Robert Bork's landmark directive that antitrust law must only be used as a "consumer welfare prescription," it's clear that the markets where anti-rebating statutes are enforced are far from oligopolies. The Independent Insurance Agents & Brokers of America boasts more than 250,000 members. The National Association of Realtors claims more than 1 million.
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Proponents of anti-rebating laws argue that they serve as essential protections, ensuring that all consumers are treated fairly and equitably. But one can't help but notice that such arguments inevitably stem from industry incumbents, who perhaps not coincidentally enjoy the perks of regulatory checks on competition. Actual professional consumer advocates have tended to see such arguments as the balderdash that they are. When a Florida court struck down that state's anti-rebating law in 1984, none other than Ralph Nader wrote:
"By preventing competition, the companies could avoid unpredictable agent behavior in return for legally price-fixing the commission at higher than market levels. It has been a cushy arrangement for both companies and agencies as they otherwise pledge their allegiance to free enterprise and against government regulation."
Such laws used to be common in real estate markets, as well, but most states have abandoned them, particularly as the Internet made direct sales by owners a more feasible option than they previously had been. Nonetheless, ten states – Alabama, Alaska, Iowa, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon and Tennessee – still maintain bans on offering any sort of rebate to a real estate customer, despite long-standing pressure from the federal Department of Justice to abolish such bans. The DOJ's Antitrust Division notes that consumers in states that permit rebating can save as much as $6,200 in commission fees on the sale of a median-priced home.
Unsurprisingly, the repeal of anti-rebating statutes in most state real estate markets has not led to any marked uptick in unfair consumer practices, discriminatory treatment of clients or any of the other catastrophic harms predicted by proponents, other than potentially contributing to the 34 percent drop in average real estate commissions nationwide since 2004. Nor has the repeal of anti-rebating laws in insurance markets led to any notable harm to consumers in Florida or California, which scrapped its statute as part of the otherwise lamentable Proposition 103 initiative in 1988.
It isn't just that anti-rebating laws are archaic and anti-competitive. They ultimately could serve as serious impediments to the ability of mom and pop agencies to find new ways to justify their existence. Younger consumers are more than comfortable conducting almost all business online. Throwing in additional free services, like risk management and help with claims and benefits administration, just might be the human touch needed to keep those face-to-face relationships going.
Anti-rebating laws are the worst sort of crony capitalism; on this, even Ralph Nader and the tea party should be able to agree.
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