Through much of the latter part of 1993, federal banking agencies-- notably the Comptroller's Office-sharpened their focus on banks' sales of nontraditional, uninsured retail investment products such as mutual funds and annuities.
Earlier this year, the North American Securities Administrators Association and the American Association of Retired Persons released a study charging wide consumer confusion concerning what is and isn't insured by FDIC. (See accompanying article.)
When the latter study was released, ABA Executive Vice-President Donald Ogilvie said that ABA shared the concerns raised.
"Making certain consumers understand what they're buying is precisely what prompted ABA and five other national banking trade associations to prepare our own set of guidelines in this area," Ogilvie stated. On Feb. 1, the associations unveiled the document, Retail Investment Sales: Guidelines for Banks. (Besides ABA, the groups include The Bankers Roundtable; the Consumer Bankers Association; the Independent Bankers Association of America; the National Bankers Association; and the Savings & Community Bankers of America.)
The guidelines go much further than simply addressing the fact that mutual funds are not insured. Taken as a whole, they are an action plan for banks that want to make sure all aspects of their effort to expand into these new services treat customers fairly.
It begins with oversight
The guidelines set out a program that starts at the top, with oversight by the bank's board and top management.
The board's role consists of evaluating all risks to the bank of offering--or not offering--uninsured investment products; approving all written policies and procedures relating to the effort; and delegating direct oversight of the program to management. Boards may retain or delegate contracting with third-party vendors of investment related services.
Key oversight tasks outlined in the guidelines include:
1. Investment product selection-- Determining which types of uninsured products the bank will offer and how they will be provided. Whatever types are selected should be provided in sufficient variety to give customers a choice; for example, the guidelines state, a mutual fund program should include a selection of funds with different types of investment objectives.
2. Allocating responsibility--It should be clear who is responsible for what, whether a program is a joint effort with a third party or wholly inhouse.
* A supervisor or supervisors should be appointed to oversee opening of new accounts; tracking and investigating complaints; and reviewing all external communications.
* A process should be in place for reviewing the compliance performance of each "designated sales representative," a term used throughout the document.
3. Customer information--Bank policy should address what, within the confines of applicable law and regulation, will be considered appropriate use of bank customer information in the marketing and sales effort.
These three points constitute a minimum oversight program under the bank groups' guidelines.
Depending on the structure of the bank's program, it may also be necessary to address the disclosure and other responsibilities of third-party vendors and the need for special precautions when a mutual fund is affiliated with the bank---such as when it provides investment advice to the fund's managers. The guidelines cover these issues.
The guidelines also address the key points to be considered when setting up a compliance program for uninsured products. The guidelines also suggest that banks consider adopting arbitration agreements with customers when the accounts are opened. …