Insurance Sales Rules

Been There, Done That?
The regulatory agencies have proposed rules to protect consumers from confusion, misinformation and misrepresentations when banks and their affiliates sell insurance. The rules, triggered by FinMod (a.k.a. Gramm-Leach-Bliley) should look familiar. The proposed regulations for insurance sales bear a striking resemblance to the policy statements on mutual funds.

The proposal would require disclosures, both written and oral, to alert consumers to the fact that the product is not a deposit protected by FDIC insurance and that some products could lose value. In this case, however, the disclosures would be required by regulations rather than strongly recommended in a policy statement. In addition, the disclosures would vary slightly based on specific attributes of the product.

Even though these disclosures have a familiar ring, there are differences. There is an additional concept that is embedded in this regulatory proposal. The measurement of the disclosure would be whether the typical customer would be fairly informed and not deceived. In this proposal, the agencies have taken the step of incorporating the concepts of unfair and deceptive trade practices.

The proposed regulation does not attempt to define certain terms, but refers to common understanding (in the case of "insurance") and existing laws (in the case of affiliates and similar terms.)

Clear Distinctions
The first and most important goal of the proposed rule is to establish a clear distinction between the deposit-taking function of the bank and non-deposit products such as insurance. The goal of the rule is to make certain (at least as certain as possible) that the customer understands the difference between insured deposit products and other products.

The distinctions required for investment products are carried over into insurance products. The insurance products would be offered in a location or setting that is separate from the bank's deposit-taking activities.

The goal of clarity includes avoidance of confusion resulting on offering products through affiliates and subsidiaries. The information about the product - and even the naming of the product - should make clear that it is not a bank product. The proposed rule would provide some flexibility The disclosures would be triggered based on the setting, circumstances, and the representations made by the sales person. For example, any representation that the sale is on behalf of the bank, or a motive for the bank to support the sale - such as a commission or fee - would trigger specific disclosures.

Disclosures
The proposed rule would require disclosures to customers, both orally and in writing, that explain the non-deposit nature of the insurance product. These disclosures would vary somewhat depending on the nature of the product. For example, an insurance annuity that has investment risk would trigger the "may lose value" disclosure that is made on investment products.

There are a total of five disclosures:

Not a deposit
Not FDIC-insured
Not insured by any federal government agency
Not guaranteed by the bank
May go down in value.

These disclosures would be based on the nature of the product. The detail level of the statements concerning insurance are an indication that the FDIC is not yet satisfied with customer understanding of investment disclosures. So give careful attention to how this reality is communicated in your sales environments.

Presentation and design. The proposal also asks for comment on how the disclosures should be presented to make them most effective. As with most disclosures, clarity is the test. The agencies are considering whether the rule should include guidance such as type size, white space, and electronic presentations.

The rule would also emphasize clarity. Disclosures should use plain language and be called to the consumer's attention with a plain-language heading.

Prohibitions
No compliance regulation would be complete without some things you can't do and this one is no exception. The proposal contains specific bans on making representations that the consumer must purchase insurance in order to obtain a credit product.

There would also be prohibitions against making any representation that the product is guaranteed or backed by the bank. And, with the experience of the Providian case under the regulatory belt, there would be prohibitions against restricting the consumer from obtaining insurance products from any other entity.

This is a proposed rule, not "guidance" as is the case with non-deposit investment products. Thus, although similar to that guidance, this proposed rule carries consequences that the guidance does not. You can expect examiners to feel that there is less leeway in a rule than in a guideline. So consider this carefully. The comment period closed on October 5, 2000.

ACTION STEPS

Review the proposed rule and comment on it. Pay particular attention to questions the agencies have raised for comment.
Take a hard look at your lobbies - all of them. Think about how a product should be presented and sold in each lobby to minimize or prevent customer confusion about deposit insurance.
Get creative. Think of positive suggestions to make for ways the bank could offer and sell insurance products.
Review your bank's web page. Look for compliance issues such as placement of the FDIC logo, and how non-deposit products are presented. Be sure that the non-deposit products are separate and distinct from the FDIC logo and insured deposit products.