Members of the Senate Banking Committee clashed today during a long hearing on insurance regulation reform.

Sen. Richard Shelby, R-Ala., chairman of the committee, asked Alessandro Iuppa, president of the National Association of Insurance Commissioners, Kansas City, Mo., whether regulators in all states really have the ability to regulate complex financial products such as derivatives.

But Sen. Paul Sarbanes, D-Md., the most senior Democrat on the committee, emphasized that at least one reform proposal, an optional federal charter bill that was introduced in April, might override state consumer protection regulations.

The idea of federal law pre-empting state consumer protection regulations “raises some interesting hypothetical possibilities,” Sarbanes said. “These should be examined very carefully, very thoroughly.”

Sarbanes noted efforts by a major federal bank regulator, the Office of the Comptroller of the Currency, to pre-empt state consumer protection laws dealing with topics such as mortgage disclosure standards.

The Supreme Court has agreed to take up several cases dealing with OCC pre-emption of state consumer protection laws during the court’s fall term.

But Sen. John Sununu, R-N.H., defended the consumer protection provisions in S. 2509, the optional federal charter that he has introduced with Sen. Tim Johnson, D-S.D.

S. 2509 would establish a separate consumer office within a federal regulatory agency, subject insurers to antitrust laws, and mandate establishment of regional consumer protection offices, Sununu and Johnson said.

Sununu said the need for reform of insurance regulation is clear.

“The insurance industry remains subject to a patchwork of state regulations that have stifled competition, innovation and growth,” Sununu said.