While studies by two federal agencies recently found that bank customers generally know as much about investing as people who bought mutual funds elsewhere, consumer groups continue to find fault with banks' investments sales practices. Speaking on behalf of the Consumer Federation of America, Mary Griffin, insurance counsel for Consumers Union, called on Congress last month to enact laws to protect consumers who buy investment products from banks. The following is excerpted from her testimony before the House Banking subcommittee on capital markets, securities, and government sponsored enterprises:
Over the last few years, numerous studies have indicated that there is a serious problem in the way banks are marketing nondeposit investment products. Consumers are victimized by deceptive bank practices leading them to believe that uninsured mutual funds, annuities, junk bonds, and other investments are insured.
In a survey released in 1994 by the American Association of Retired Persons and the North American Securities Administrators Association, they found that the "vast majority of American bank consumers are unaware of the risks and fees involved in the uninsured investment products, such as mutual funds and annuities, that are now increasingly available at U.S. banks and other financial institutions."
Numerous studies indicate that banks are aggressively marketing these products using deceptive and misleading statements and gimmicks to lead consumers into believing that the products are insured. The ... survey found that fewer than one in five bank customers know that mutual funds (18%) and annuities (14%) are not FDIC-insured. And over half of the consumers who have actually purchased mutual funds (52%) or annuities (55%) at their banks think that their investment is insured by FDIC.
The consequences of consumers being misled about investment products can be devastating. As a woman from Holiday, Fla., who lost $20,500 of a $56,000 investment she purchased from a bank wrote:
"I was not told I was buying common stock. They mis-represented the investment. I bought the investment in the bank building thinking that it was federally insured. Banks insure their depositors to the amount of $100,000. I thought it was covered by the government."
Evidence also indicates that banks are selling these products to consumers for whom they are not suitable and that salespeople either go against the stated investment goals of the customer or fail to ascertain the level of investment risk the customer needs or is comfortable with. The .. study found that over a third of consumers who bought a mutual fund (36%) or an annuity (38%) at a bank stated that no one had spoken with them about the appropriateness of their investment.
In our March 1994 issue of Consumer Reports, we reported on the results of an undercover investigation we conducted of 40 bank salespeople from different parts of the country. Only 16 of the 40 contacted even bothered to ask questions that would have indicated what products were suitable for the investigator. The report goes on to indicate the potential inappropriateness of some of the recommendations made by the 24 salespeople who did not ask about risk.
The failure to recommend suitable products can lead to the loss of much- needed income for consumers. As a consumer from Tampa wrote:
"Along with members of my family, I stated that I wanted security and income. I was of the understanding that I was investing in a government mortgage fund, that this fund was guaranteed, that because it had a variable rate, as the interest rate went up, so would my income. I now find out that this is a bond fund and that my $130,000 investment has lost 11% in less than a year and my income is steadily decreasing. Which is just the opposite of what I was told."
Consumers are used to dealing with banks as insured depository institutions. As banks have diversified, consumers have not caught up with the various roles played by banks and those operating on their premises. The FDIC shield and logo are well-known and pervasive symbols of the protection provided by the federal treasury and taxpayers for bank deposits. The FDIC backing given to banks represents a huge competitive advantage over other financial institutions. It should not be used to mislead and confuse investment consumers.
But there are several ways that consumers can be confused over the types of products being sold by banks. If products are sold from the deposit window or bank lobby where deposit transactions also take place, customers may believe that the products they purchase there are insured. The commingling of insured and uninsured activities in bank lobbies greatly increases the potential for customer confusion.
Similar names and logos create the impression that it is the bank that stands behind the product. For example, consumers may not distinguish between business cards with the well-known green First Union logo even though the cards may identify one employee as from the brokerage unit and another employee as from the bank. The same is true of the familiar red and blue NationsBank logo.
A former bank manager testified before Congress in 1994 about the misleading strategies her bank adopted to confuse consumers about the riskiness and insured status of the uninsured products being sold. She stated:
"When the new bank took over, they changed the name of the funds to be the same as the bank's name. This was done solely to create the illusion that these funds were connected to the bank. I know that customers believed that these funds were part of the bank and guaranteed by the bank. And that is what the bank wanted customers to believe."