The Gramm-Leach-Bliley Act of 1999 set the stage for improved delivery of financial products, enhancing the competitiveness of U.S. companies in global markets. Consumers will reap the benefits of this more efficient regulatory structure, encouraging further innovation in financial services products and the means by which they are delivered.
There is good news and bad news for financial holding companies under the law. The good news is that fee income from cross-selling opportunities may rise as a result of streamlined product delivery through multiple channels. The bad news is that liability risk increases where delivery is streamlined not only through multiple channels but also through multichannel employees.
Under the law, financial holding companies may now deliver a variety of financial services through affiliates, but each affiliated delivery channel must function in accordance with specific laws. These affiliated "multiple delivery channels" may include an extensive menu of products and services such as insurance, broker-dealer services, mortgages, mutual funds, investment advice, and new finance-related business.
In order to provide seamless delivery to clients and to produce fee income, many institutions are turning to employees trained to deliver products through many or all of the affiliated distribution channels. This new multichannel employee may be a dual, triple, or even quadruple employee, licensed to provide brokerage, insurance, and investment advisory services, in addition to traditional banking products. To do so, the multichannel employee will be required not only to have a thorough understanding of the laws governing these several distribution channels but also to know how the laws affect his or her client relationships.
A risk management audit of multichannel employees involves an analysis of all the distribution risks inherent in brokerage-insurance-advisory and banking product distribution through one employee.
The primary multichannel employee risk management tool is training. Without a comprehensive training program, institutions face the risk that employees not familiar with a variety of differing regulations may be putting the institution at risk for sales practices and other violations that can prompt lawsuits or regulatory sanction and create reputation risk.
It is not enough to verify that the employee offering the institution's latest banking product, along with its new asset allocation account or insurance product, is a dual bank-brokerage or bank-insurance agent employee. If the employee does not know when to put on his or her banking or brokerage or insurance hat, the verification is incomplete. Only a targeted training program covering product knowledge and regulatory education can help mitigate inherent delivery risks.
A critical part of a multichannel employee audit program is to focus directly on what the multichannel employee has been asked to do. Once it is known what specific tasks each employee has been asked to accomplish, a skills assessment is needed to ensure that the employee has the product knowledge and distribution channel understanding to carry out his or her responsibilities.
The starting point is the job description. Outlining the employees' duties in brokerage, insurance, advisory, and banking will assist the employee in following the supervisory procedures established for each distribution channel.
Compensation is another major area of concern with multichannel employees. Examine such issues as broker compensation and referrals. Be aware of the risk that your compensation system, if aimed at selling particular products, may be seen by regulators as promoting fraud.
Further, different delivery channels have different compensation restrictions. Brokers may not receive compensation from sales of unregistered products, and there are restrictions on receipt of referral payments to brokers. The multichannel employee must not only know the proper hat to wear when offering a product but also be aware of how the compensation systems apply to each delivery channel.
Finally, in devising a risk management program for multichannel employees, the Securities and Exchange Commission's regulatory concerns must be taken into account. The law gives the agency primary oversight of broker-dealer and investment advisory activities.
For 2000 the SEC has targeted various areas, including performance advertising of mutual funds. A special review is now taking place to ensure that advertising is not overly aggressive within institutions. The agency is specifically looking at mutual funds that deviate from the mean in their group and looking for disclosure about the factors that generated the announced performance numbers.
For employees offering mutual funds, the SEC is also focused on conflicts of interest. Advisers have been targeted by the agency with new ethics rules that expand the scope of quarterly trading reporting requirements to "access" persons at the adviser. The rules also require that trading reports be subject to formalized compliance scrutiny. For broker-dealers, the top broker-dealer deficiencies applicable to multichannel employees include inadequate supervision, sales of unsuitable securities, and other sales practice violations.
The law has enabled streamlining of multichannel delivery that will be seamless to the customer if done through multichannel employees. From a risk management standpoint, however, multichannel employee delivery increases risk. To manage this risk, establishing a specific risk management approach is highly recommended.
Ms. Striegel is director of product development at SEI Investments' mutual funds services division.