Banks could soon get their first look at the dark side of selling mutual funds and other securities products: a rise in customer complaints that go to arbitration.

That warning was issued by compliance consultants at a recent conference for bank mutual fund executives.

"I think we'll see a raft of cases, no matter how much we disclose, what we explain or ask customers to sign," said Mary Cobb, head of a Mary E. Cobb Consulting in Sherman Oaks, Calif.

To be sure, banks are not in any trouble vet. Ms. Cobb emphasized she was not aware of any arbitration claims against banks' in-house broker dealers. or investment programs that outside marketing firms operate in branches.

But rising interest rates or a flagging stock market will trigger claims, she believes.

The Less Rosy Side

Marc Horin, president of National Compliance Consultants, Chicago, agreed. Banks will see the less rosy side of marketing investment products, he said.

The comments came in presentations to 140 bankers and investment products representatives at the Bank Securities Association's compliance and operations conference in Washington.

Arbitration is the commonly used method for settling disputes between investors and brokers or brokerage firms. Rulings by arbitration panels are, with few exceptions, final and binding.

More than money is at stake for banks. Their good standing in the community can be hurt as well, because decisions by arbitration panels are made public.

Banks may want to go another route, and avoid arbitration altogether, Ms. Cobb said. "If your compliance has really gone bad, arbitration may not be your best bet. You may want to consider settling; getting out your checkbook and making the customer whole."

Banks can look to their outside marketing firms for protection against claims customers make in connection with securities sales.

Looking for Deep Pockets

But indemnification agreements are no guarantee, Mr. Horin said. "In some cases the bank entity will be the deep pocket. Attorneys will look for a way to bring the bank in."

The best way to avoid this is by going with a well capitalized marketing firm with a proven track record, said Kenneth Hughes, chief operating officer of California Federal Bank's Cal Fed Investment Services.

His Los Angeles bank uses Invest Financial Corp. of Tampa, Fla., which is owned by financial services giant Kemper Financial Cos.

Banks also have to keep close tabs on their programs, whether the programs are run in-house or by outside marketing firms, the consultants said.

Banks should make sure securities salespeople ask customers about their risk tolerances, especially the amount of principal they're willing to lose, Mr. Horin said. Or else, the typical customer "will go like a lamb to the slaughter."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.