Final Rules on Insurance Sales

One significant difference between the mutual funds policy statements and this regulation is that this is a regulation, not merely a "strong recommendation." As such, compliance with the details is the watchword, whereas banks were able to comply with the spirit of the policy statement while having some leeway with the specifics. Because of this difference, now is a good time to take another look at your mutual funds sales and evaluate that compliance effort.

Coverage
Any institution that directly sells insurance, provides space for the sale of insurance, or has any kind of referral process for the sale of insurance is subject to these new rules. Any sales that take place in bank facilities are covered. Also, any referrals that take place in the bank are covered. To the extent that a subsidiary is involved in the sale, solicitation, or advertisement of insurance, the rules also apply to the subsidiary.

The rules apply broadly to anyone who sells, refers, or promotes insurance products in connection with the bank. This may include staff located in the bank, and promotional materials using the bank's name.

Anti-tying and Coercion
The rules specifically prohibit certain tying practices. It is illegal to make a consumer believe that in order to obtain credit they must purchase an insurance or annuity product from the bank.

The rules also go a step further in these prohibitions. Echoing the practices identified in the Providian case, the rules prohibit the institution from barring the consumer from obtaining an insurance or annuity product from a competing institution. In other words, the sales game must be open to all comers and the consumer must be free to shop.

Deceptive practices
Other parts of the rule contain related prohibitions. In the spirit of preventing unfair or deceptive trade practices, the rules make it illegal to misrepresent the status of the product relative to FDIC insurance. The rule specifically prohibits any representation that the product is backed by the federal government or insured by the FDIC.

This prohibition reflects the existing concern that consumers do not understand the limitations of FDIC insurance. Not only does the FDIC have concerns that consumers not be misled in thinking insurance and annuity products are covered by deposit insurance; the insurance and annuity sales that compete with banks are concerned that customer mis-perceptions about deposit insurance could give banks an unfair advantage.

As a result of these concerns, the rule requires delivery of warnings to customers prior to making a purchase. The warnings are familiar: Not FDIC-insured, Not a bank product; May lose value.

Domestic violence
Because this rule involves the sale of insurance, there is a special protection for individuals who might otherwise find it difficult to obtain insurance. The rule prohibits the refusal to sell or pricing of products based on a perception that the purchaser is a victim of domestic violence.

Disclosures
The actual disclosures that would be required are not particularly new. They are an adaptation of the disclosures already familiar in the context of mutual funds sales. The disclosures continue the tradition of communicating the three elements that customers should know: the product is not a deposit with the bank, it is not insured by FDIC insurance, and it can, in some circumstances, lose value. If the product is tied in any way to a credit product, such as offered simultaneously or offered to insure the credit, additional disclosures must explain that the credit product is not conditioned upon the consumer's purchase of insurance and that the consumer may purchase insurance from any other entity. Disclosures must be given both orally and in writing, except in circumstances where this is not feasible. For example, if the sale is made over the Internet, the disclosures must be given in writing but need not be given orally. The same exception applies to sales make through the mail.

Timing for giving disclosures is flexible. The only timing rule is that disclosures must be given before the sale is made. However, if the transaction is by phone or mail, the written disclosures must be sent within three days of taking the application or within three days of making the sale. Whatever method is used to disclose, the institution must obtain a written acknowledgment from the consumer.

The rule also requires that disclosures be "readily understandable." This means that they must be "conspicuous, simple, direct, readily understandable, and designed to call attention to the nature and significance of the information provided." Clearly, these are subjective standards. Should any dispute arise, the measurement of the institution's compliance is likely to include an assessment of the institution's intent.

The other test for disclosures is whether they are "meaningful." Measurements of meaningful will include items such as the design of the disclosures, including typeface and type size, headings, and use of white space. This is an opportunity to get creative.

Location
As with real estate, location is everything. These regulations would require a separate setting for the sale of insurance products. The standards for this are essentially the same as for the sale of investments. The location must be separate from the deposit-taking function. It is encouraged to make use of signage and creative design to emphasize the non-deposit nature of the product. Describe this to your marketing types as one situation where creativity supports compliance.

Advertising
Disclosures must be included in advertisements. However, abbreviated disclosures are appropriate. Any material that advertises a specific insurance or investment product must contain the basic warnings. Only advertisements that do no more than list the services available through the bank are exempt from notice requirements.

ACTION STEPS

Review these new requirements and compare them to the mutual funds policy statements.
Now look at your investment sales setting and procedures. Determine whether it is sufficient to comply with the insurance regulations.
Review these standards and use them to evaluate your institution's marketing materials for non-deposit products. Consider what, if any, changes you need to make.
Discuss the technology being used by your webmaster. Find out whether you can provide adequate disclosures on the website.
Test your non-deposit product sales staff to be sure they are giving and explaining disclosures.
Review these requirements with your marketing staff. Encourage them to be creative about getting the message across.