Bruce Vento

Questions in writing from Congressman Bruce F. Vento

from the 2/25/97 hearing

on H.R. 268 and Financial Services Modernization

For Mr. Mierzwinski:

1. Given the concerns you raise on page 3 of your testimony, would you advocate disallowing banks from selling mutual funds or other uninsured products? What would be the negative and positive effects of that for consumers?

2. Why doesn't or why won't market competitiveness protect consumers from predatory pricing, lack of services, etc...

Subcommittee on Financial Institutions and Consumer Credit

1666 Connecticut Avenue, Suite 310 Washington, DC 20009-1039⚫ (202) 462-6262

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My name is Mary Griffin, and I am Insurance Counsel for the Washington, D.C. office of Consumers Union,' publisher of Consumer Reports magazine. We appreciate the opportunity to testify on financial modernization, a topic of great importance to consumers finding their way in the new and expanding financial services marketplace. We thank the Subcommittee for holding this hearing to discuss consumer protection issues in the context of the "Depository Institution Affiliation and Thrift Charter Conversion Act" (H.R. 268).

In our testimony, we will focus on why consumer protection laws need to be modernized as an essential component of any financial modernization package. Consumer safeguards are needed for bank retail sales activity of non-banking products to address the problems consumers face when purchasing these products from banks.

With regard to the questions about the cross-ownership of financial and commercial firms and whether operating subsidiaries should be permitted to engage in underwriting activities, we do not support the mixing of banking and commerce because it poses risks to the national economy and consumers. We believe that permitting underwriting activities in separately capitalized affiliates, rather than operating subsidiaries, helps reduce the risks to federallyinsured deposits. We have attached letters to our testimony that provide more information about our positions on these issues.

RETAIL SALES ACTIVITY BY BANKS --
CONSUMERS BEWARE

Financial modernization is a laudable goal if it promotes competition, provides a regulatory structure that ensures safety and soundness and ensures consumers the needed protections as they attempt to understand and navigate in a new and diversified marketplace. While we understand the desire of the various industries to expand their financial services activities and the need to modernize banking laws, such expansion will not benefit consumers unless protections are in place to address the current and likely abuses in the market. Consumers want to benefit from the diversification in the marketplace but, most importantly, they want to make sure such expansion does not leave them worse off.

Contrary to what many believe, banks have already made a substantial mark in the financial services marketplace. According to the Association of Banks-in-Insurance, bank insurance premiums in 1995 totaled an estimated $16.3 billion. Bank annuity sales accounted

1 Consumers Union is a nonprofit educational membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about goods, services, health, and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with approximately 4.5 million paid circulation, regularly, carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no

for one-third of all annuity sales in that year. And, an estimated $20 billion of mutual funds were sold out of banks last year.

Current bank fees lead to consumer skepticism about the great benefits that will inure to them if banks are permitted to expand their non-banking activities. Consumers have already experienced problems with banks selling insurance, mutual funds, stocks, annuities and other non-banking products. While banks argue that they need to expand further because of greater competition from alternative products and services, consumers see banks profiting from their fees at record rates. So, many wonder, will banks just be squeezing out more from consumer pocketbooks without corresponding benefits to consumers?

Consumers have reason to worry. Purchasing the wrong product can cost them their life savings. For example, Ms. Rosenthal of California invested $60,000 from a certificate of deposit into a bond fund sold by her bank. She was misled into believing that the "government securities" she purchased were also insured. She found out they were not when she lost $8,000. How could she have been so confused? Salespeople in the bank were told never to use the term "mutual fund," but rather more bank-like terms such as "program" or "account." They used a script with question-and-answers such as: Q. "Is it FDIC-insured?" A. "That's important to know! ..... I take it you wish to know if this investment program is safe, right?..." A simple "no" would be sufficient but the response gives the impression that the investment has the same government protection as other bank products. The bank claimed that these practices were not in line with the bank's official policy but that does not matter for Ms. Rosenthal and the others who were misled.2

Study after study reveals that many banks are not informing consumers that non-banking products such as insurance and securities are not insured by the FDIC or that such products are subject to risk.

A survey conducted for AARP and the North American Securities Administrators Association (NASAA) in 1994 found that fewer than one in five bank customers understood that products such as mutual funds and annuities are uninsured and over onethird who purchased mutual funds had not spoken with anyone at the bank about the appropriateness of the investment.

The March 1994 issue of Consumer Reports reported the results of an undercover investigation of 40 bank salespeople from different parts of the country. Only 16 of the 40 salespersons contacted even bothered to ask questions that would have indicated what products were suitable for the investigator.

A May 1996 study initiated by the FDIC found that more than one-fourth of the banks surveyed failed to tell on-site customers that products are not insured and 55 percent failed to inform telephone customers.

2 "A Lesson in Understanding Bank Sales Pitches," Los Angeles Times, April 30, 1994, at D4.

Despite the claims that bank sales promote competition which, in turn, drives prices down, the reverse has occurred with credit insurance, the second most sold insurance product for banks. While banks are proud of their credit insurance sales, and boast that such insurance, particularly among minorities, is the only insurance coverage owned by the consumer, the product continues to be a rip-off for most consumers. According to a recent survey released by Consumer Federation of America and U.S. Public Interest Research Group (U.S. PIRG), the national loss ratio for credit life insurance was 43% for 1993-95. That means that only 43 cents out of every premium dollar goes to pay claims. The rest goes to profits and administrative expenses, including high commissions paid to banks for their sales. Despite the minimum loss ratio target of 60% established by the National Association of Insurance Commissioners, that standard was met in only six states. Banks have a long way to go to prove their "competitiveness" in the insurance marketplace if they continue to sell these types of products.

A recent report on 60 Minutes also showed how banks do not have the customers' best interest in mind when selling or purchasing insurance on their behalf. A couple who financed a car through Trustmark bank, who later dropped their insurance, discovered that the bank had purchased exorbitantly priced insurance on their behalf, insurance that protects the bank's interest. Unfortunately, the couple was not informed and did not know that the insurance was made a part of their financing. When they thought that the payments were finished, they still owed almost $9,500 on the loan because of this insurance.'

Banks also use their position as lenders to coerce consumers into purchasing products they don't need or want. For example, a consumer in Colorado attempted to refinance his automobile from a lease to a purchase through his bank. Although he expressly indicated from the start that he did not want or need the insurance, when he showed up at the bank for closing both credit life and disability insurance had been added in the financing. He was told that closing could be delayed for days if he insisted on the elimination of the credit insurance.

CONSUMER PROTECTIONS ARE NEEDED

TO ADDRESS DECEPTIVE SALES AND MARKETING PRACTICES

We strongly support a "functional regulation" approach by which, for example, bank sales would be subject to the securities laws that govern nonbank brokers. While the intent of H.R. 268 is to provide for "functional regulation," the bill falls far short in providing the important consumer protections that any functional regulation approach would bring. Additionally, federal minimum standards specifically related to sales of non-banking products by banks are urgently needed.

The Gaps in Investor Protection Rules Must be Closed: Banks are currently exempt from the definition of broker-dealer in the federal securities laws. Consequently, the investor protection rules issued by the Securities and Exchange Commission ("SEC"), including the ability to recover directly from the seller for violations of the rules through an arbitration process, do not apply. For example, unlike nonbank brokers, a bank has no duty to assess

'CBS 60 Minutes, January 12, 1997.