Stained by scandal for the first time, Citizens Financial Group Inc. should act quickly but prudently to protect its image as a bank built around customer service, analysts say.
Last week, the Providence, R.I., company's brokerage arm was charged by the Massachusetts Securities Division with civil fraud for selling variable annuities in an allegedly "unethical and dishonest" way to senior citizens at a branch on Cape Cod.
Analysts said that Citizens might find the charge painful more than other banks tainted by scandal. The unit of Royal Bank of Scotland PLC has been able to maintain a community banking touch and its mid-tier image even as acquisitions made it into a Top 10 U.S. banking company.
"This is a big black eye," said Claire M. Percarpio, an analyst at Janney Montgomery Scott LLC. "It makes you wonder if this is isolated or if it is something corporatewide."
Brian McNiff, a spokesman for the Massachusetts Securities Division, said it is investigating other Citizens branches and that the problem could be systemic in the company. The complaint alleged that tellers in the South Yarmouth, Mass., branch referred 16 elderly customers to brokers who sold them an aggregate of $1.6 million of variable annuities from early 2003 to this year.
A spokeswoman for Citizens said Friday that it will cooperate fully with all regulatory inquiries but would not comment about measures to deal with the potential damage to its image.
Gerard Cassidy, an analyst at RBC Capital Markets, said Citizens should act quickly.
The company must "move swiftly to correct the problem, reimburse its customers that have been wronged, and plead mea culpa to customers to show that this won't happen again in the future," he said. "Whether you are a large, cold, bureaucratic corporation that is trapped in one of these investigations or a small regional bank, attacking the problem right away is critical."
Moving quickly becomes even more crucial for banks like Citizens, Mr. Cassidy said, that have been built by acquiring a string of community banks and trying to maintain a "bank next door" image. "There is a larger sense of urgency for a bank that sells itself as a mom-and-pop organization," he said. "That small, hometown bank is selling its image aggressively."
Geoffrey Bobroff, an investment analyst at Bobroff Consulting in East Greenwich, R.I., said that, though denying the severity of the damage would not help, banks in Citizens' predicament must be careful what they say and what they commit themselves to. Bad local press like the stories that ran last week in both the Boston Globe and Cape Cod Times can be damaging, he said, but executives should be cautious about making admissions.
"You don't want to roll over and just admit to something," Mr. Bobroff said. "This may invite other investigations and other problems. As we saw in the fund scandals, a bank president or a top executive needs to step out and say that there will be a review of all areas in question and all problems will be corrected."
However, Lawrence Fish, Citizens' CEO, was staying in the background last week and early this week. His office has turned aside requests for an interview.
Ken Kehrer, an insurance analyst at Kenneth Kehrer & Associates in Princeton, N.J., agreed that Citizens should weigh its actions prudently.
"It behooves Citizens to investigate the claim, make up its own mind if brokers were in the wrong or not, and determine if the structure failed here," he said. "The brokerage unit has an obligation to its customers to make its selling practices suitable, but it also has a responsibility to not turn its back on its registered reps if they weren't wrong. They could face more lawsuits if they don't act prudently."
"A bank has to be prudent when it is trying to save its image," he added. "We don't know to what extent this was a surprise to management or if they knew [the charge was] in the wind and if they are already working to figure it out."
In addition to the image problem, Citizens could face an administrative fine and a requirement to cancel the allegedly inappropriate sales, according to Mr. McNiff, the Massachusetts regulator's spokesman.
He said the state has prosecuted one other case involving variable annuity sales practices. In 2002, it filed a complaint against two Colorado brokerage firms, Brokers Choice of America and Senior Benefits Center Network, for improperly selling variable annuities to senior citizens in Massachusetts.
The complaint alleged that brokers from the Colorado firms had used a scheme to frighten elderly people into buying the annuities, which industry experts generally consider inappropriate for elderly customers because of their high fees and tax benefits that are only fully realized over decades,.
The case was settled in December 2002 with the firms paying a $30,000 administrative fine and being barred from selling their products in Massachusetts.
"Citizens is probably going to put some marketing out there [as] the fund companies have done and apologize," Janney's Ms. Percarpio said. "I think the best thing that they can hope for is that there just isn't full customer awareness."
