Many Banks Failing to Disclose Investor Risk

More than a quarter of financial institutions that sell mutual funds, annuities and other uninsured investment products are failing to make the most basic disclosures about risk to their customers, according to a much-anticipated new survey released Monday by the Federal Deposit Insurance Corp.

The yearlong “mystery shopper” survey--billed as the most extensive such study ever undertaken--shows that banks and savings institutions are doing a worse job over the telephone than in face-to-face meetings with customers.

Bank representatives failed to disclose that the products are not federally insured in 28% of the face-to-face meetings with surveyors posing as investors, according to the survey. The percentage soared to 55% when the discussions were held on the phone, the FDIC said, although it acknowledged that the finding may be inflated.

“This is just more evidence that banks aren’t complying with disclosure requirements,” said Mary Griffin of Consumers Union in Washington.

The issue is a major one for investors because banks have grabbed 14% of the national market for mutual funds and now manage more than $420 billion, according to the industry newspaper American Banker.

Banks also are expanding their sales of annuities and other nondeposit products, and they hope to be selling insurance out of branches coast to coast before long. Some experts believe that banks will eventually surpass brokerage houses in volume of such uninsured investments.

Chatsworth-based Great Western Financial Corp., the No. 1 savings and loan in mutual fund sales, with nearly $3 billion under management, is the target of a cluster of state and federal lawsuits brought by investors who say they were duped into money-losing investments by GW employees who misled them about how risky the products were and whether they were FDIC-insured.

While denying wrongdoing, Great Western has adopted new policies to improve disclosure and has fired several employees for violating its internal policies. However, the issue remains a public relations and legal headache for the nation’s second-largest thrift institution. Elderly plaintiffs in the lawsuit picketed GW’s annual meeting last month for the second year in a row.

FDIC Chairman Ricki Helfer on Monday announced a series of planned steps by her agency, including reexamining voluntary guidelines adopted in early 1994 that outlined the kinds of disclosure that should be made and set out “the institution’s obligation to assure that an investment recommendation meets the customer’s needs.” The FDIC will also beef up training to improve its examiners’ ability to spot problems, she said.

Helfer said she wanted to improve compliance “without adding unnecessary regulation.”

But Griffin said tough regulations may be exactly what are needed, given that the FDIC survey confirms the results of earlier private studies showing problems with disclosure by banks.

“How many chances do you give them?” she asked.

The $900,000 study was conducted for the FDIC by Market Trends, of Bellevue, Wash., which used professional interviewers to contact 1,194 banks and savings institutions. The evaluators made 7,800 “contacts’ with bank personnel--half in person and half by telephone.

In 30% of the face-to-face cases, they failed to point out that the funds or other investments are not guaranteed by the bank, and in 9% of the meetings they did not mention that the customer faced possible loss of principal.

In 4% of the in-person contacts when the subject of insurance was mentioned, the employee wrongly stated that the investment was FDIC-insured.

During telephone contacts, salespeople failed to mention the risk of loss 39% of the time and failed to say the products were not guaranteed by the bank 63% of the time.

The disparity between the phone and in-person results may be partly because some banks use the phone only to arrange face-to-face meetings with sales personnel, FDIC spokesman Robert M. Garsson said.

In cases where there is no sale, just an appointment arranged, the disclosure requirements do not apply, Garsson said. However, while the bank employee acted properly, the call was logged as a failure to disclose.

The Consumer Bankers Assn., a trade group that represents banks and thrifts holding 80% of U.S. deposits, issued a statement Monday noting that “virtually 100%” of banks require customers to sign disclosure forms before a mutual fund sale is completed.

“The oral disclosure is very important, but it is only one of many safeguards to ensure customer understanding of risks,” CBA President Joe Belew said in the statement.