Where Does Compliance Come From Anyway?

In this issue, we focus all our attention to the regulations and recommendations relating to the sale of non-deposit investment products, affectionately called "NDIP" in banks. The sale of this type of product through banks has created all kinds of controversy. Some don't believe that banks should be doing this at all. The loudest spokesmen of this group tend to be broker/dealers who are not affiliated with a bank and are afraid of the competition. So take their objections with a grain of salt - a really large grain of salt.

Others object based on consumer protection concerns. This group argues that consumers, who believe that banks are a safe place to put money, may be deceived by the sale on investment products that carry risk. True, both the industry and the government have labored since the 1930s to gain the faith and confidence of this group. The FDIC "you can't lose" insurance approach has shaped the public perception of what a bank is. And now we are changing it - dramatically.

So banks are entering a new product line while also forging a new identity, one of a full financial services provider with a wide diversity of products - and risks. The regulatory process is following the industry, not leading it, into this new identity. So we have some very interesting things happening in the "compliance" world.

First, the agencies are experimenting with policy instead of regulations. Although it may be difficult to put your finger on the difference when the examiners are in, the fact is that policy gives you more leeway than regulatory requirements. For example, if there were a regulation, the disclosures would be fixed in content, defined in terms of size or prominence, and delivery required at specified times. As it is, banks can adjust the wording and timing to communicate best in their setting and to their customers.

Second, we have territorial wars, not only between competing industries, but between competing regulators. On one side we have the bank regulators. These agencies generally support the entry of banks into new product markets as long as there are carefully placed procedures and controls to ensure safety and soundness. In other words, the new businesses better not be too risky.

But poised against the banking regulators are the securities dealer regulators. There are several concerns at issue in this face-off. First, who is the lead regulator to be? Will it be banking or securities that ends up on top? With this in mind, the SEC isn't going to willfully cede much authority or responsibility to the bank regulatory agencies. But neither do the bank regulatory agencies want the SEC messing around in their turf. After all, SEC isn't famous for making a priority of safety and soundness.

So far, the bank regulatory agencies have worked together and carefully to provide guidance on how to offer these products. Watching the trickle of policies, regulations and other guidance from the banking agencies is interesting. Generally, the banking agencies follow closely the positions of the SEC. But there are several issues on which the banking agencies have tried to hold the high ground. One very important one is the use of customer deposit information in the sales program. Not only is this information threatening to outside broker/dealers, it also is squarely within the debates on information privacy.

NDIP thus raises a plethora of interesting regulatory dynamics. Who or what will determine the future? Banks will. You will. You will do this by adhering to the principles behind compliance requirements - providing customers with information, helping them to understand and make reasonable, knowledgeable choices before they sign on the dotted line. It's up to you.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 16 & 17, 12/97