I. INTRODUCTION
The Office of the Comptroller of the Currency (OCC) has issued an Advisory Letter which provides guidance to national banks regarding issues raised by insurance and annuities sales. The ability of national banks to engage in sales of insurance and annuities has been reaffirmed by recent U.S. Supreme Court decisions. The Supreme Court’s 1996 decision in Barnett Bank of Marion County N.A. v. Nelson, Florida Insurance Commissioner provided important clarification of the authority of national banks to sell insurance. The Court’s 1995 decision in NationsBank v. Variable Annuity Life Insurance Co. sustained the OCC’s determination that national banks are authorized to sell annuities.
The OCC advisory (1) reviews the federal statutory anti-tying rules applicable to banks; (2) discusses how state laws apply to national banks; (3) highlights issues raised by insurance and annuities sales that national banks should evaluate and address when they structure their sales programs and oversee their sales activities; and (4) summarizes the OCC’s basic approach to oversight of national banks’ sales of insurance and annuities. The guidance provided by the OCC Advisory Letter supplements existing guidelines for the sale of nondeposit investment products, which include annuities. (See, NBA Compliance Handbook, Vol II, Nondeposit Products tab, "Retail Sales of Nondeposit Investment Products: Interagency Statement.”) In addition, the provisions of 12 C.F.R. Part 2, apply to sales of credit life insurance and 12 C.F.R. § 7.3001 applies when banks share space and employees with other businesses.
II. FEDERAL PROHIBITIONS ON TYING
Tying the availability of credit from the bank to the purchase of insurance or annuities offered by the bank or a bank affiliate is illegal. Under 12 U.S.C. § 1972, a bank is prohibited (subject to certain exceptions) from requiring a customer to obtain credit, property, or services as a prerequisite to obtaining other credit, property, or services. This standard applies whether the customer is retail or institutional, or the transaction is on bank premises or off. The OCC has extended these protections to cover national bank operating subsidiaries.
National banks are expected to have adequate policies and procedures in place to prevent anti-tying violations. The OCC has previously suggested measures that can help national banks ensure compliance with the tying prohibitions, including:
The tying prohibitions do not prevent bank sales personnel from informing a customer that insurance is required in order to obtain a loan or that loan approval is contingent on the customer obtaining acceptable insurance. In such circumstances, sales personnel may indicate that insurance is available from the bank and may provide instructions on how the customer can obtain additional information.
However, the bank should take steps necessary to make clear to the customer that the bank’s decisions with respect to a loan application are independent of the customer’s decision of where to obtain insurance. When a customer is first informed that insurance is available from the bank, the customer also should be clearly and unambiguously informed that he or she need not purchase insurance from the bank, its subsidiary, an affiliate, or any particular unaffiliated third party, that insurance is available through brokers or agents other than the bank, and that the customer’s choice of insurance provider will not affect the bank’s credit decision or credit terms in any way.
Banks are reminded that the same concerns exist in situations where a type of insurance that is unrelated to or not required in connection with a pending loan application is offered to a loan applicant as part of the loan application process. Banks are cautioned to dispel any impression that the unrelated products are being mentioned because of a potential connection to the bank’s credit decision, and if such offers are permitted, that they are adequately monitored by the bank’s compliance systems.
III. APPLICABILITY OF STATE LAWS
In general, the OCC anticipates that a state law that applies generally to regulate insurance agents and agencies will apply to national banks, provided the law does not effectively prevent national banks from conducting activities authorized under federal law, and provided that, if the law interferes with those authorized activities, the interference is insignificant. When state laws result in special burdens on the ability of national banks to exercise the powers granted to them under federal law, however, the possibility of federal preemption of state law arises.
The OCC Advisory Letter cites the recent Barnett decision which clarified that traditional judicial standards of federal preemption govern whether federal statutory authority authorizing national banks to sell insurance in an agency capacity, preempt state laws (or rules) that interfere with the bank’s exercise of that authority. However, the Court noted that states are not deprived of the power to regulate national banks, where doing so does not prevent or significantly interfere with the national bank’s exercise of its powers. Thus, if a state law only interferes with a national bank’s exercise of its powers in an insignificant way, the state law would not be preempted and would be applicable.
In practice, state laws that apply generally to regulate insurance agents and agencies that do not discriminate against or have a disparate impact on banks would not be preempted because, ordinarily, they would not prevent national banks from exercising their federally authorized powers and the extent to which they might actually interfere with or impair the ability of a national bank to exercise those powers would be insignificant.
Because of the variety of state laws that could raise this concern, the OCC would need to do a factual analysis of the impact of each particular law on the operations of national banks, as well as a complete legal analysis, in order to reach conclusions about preemption. If asked by national banks or state insurance regulatory authorities, the OCC expects that it would opine on state law preemption questions on a case by case basis. Examples of non-discriminatory state law requirements which would be applicable to national banks, provided the particular law is not preempted, are the following:
IV. MANAGEMENT OVERSIGHT
Bank management is responsible for ensuring that the bank’s insurance and annuity sales are conducted in a safe and sound manner and in accordance with applicable law. Sound management practices include active oversight by senior management, competent personnel, and internal controls that effectively identify, monitor, and control significant aspects of the seller’s insurance and annuity sales operations.
The practices and policies which the bank adopts will be dependent upon the activities it undertakes and the manner in which it offers products. The complexity of the products offered and the volume of insurance and annuities sales may require some banks to establish more elaborate internal controls or management processes than banks with relatively simple insurance and annuities sales activities. The bank’s approach should be tailored to its goals and resources and should be well understood by bank personnel engaged in insurance and annuity sales. Banks also are encouraged to seek advice from professionals with expertise in the insurance and annuities field who can provide guidance with respect to legal, regulatory, and business considerations presented by the bank’s insurance and annuities sales activities.
V. GENERAL CONSIDERATIONS
The Advisory Letter discusses a number of issues that need to be addressed by bank management in administering its program of insurance and annuities sales.
A. Evaluation and Selection of Products
The safety, soundness, and claims paying ability of the companies that originate the insurance and annuity products sold by a bank are considerations for bank customers and may also present risks for the reputation of the bank’s other products and services, as well as the potential for future claims against the bank. The company originating the products sold by the bank should be in good standing and maintain the necessary licenses required to operate its insurance business. The bank’s selection of the products it offers should be founded on the quality and customer benefits of the products available from those companies, not on the company’s commission structure. In addition, the bank should help to ensure the quality of the insurance products and annuities that it sells, and protect itself from future complaints, by evaluating at the outset and periodically thereafter:
B. Qualifications and Training
Knowledgeable, experienced, and qualified personnel help to ensure that the bank’s sales program is carried out in a manner that provides customers with competitive products, sound advice, and accurate information. Familiarity with the bank’s policies and procedures also ensures better compliance with the bank’s internal guidelines and facilitates management oversight. Timely and regularly scheduled training can keep personnel aware of the latest innovations in financial products, changes in bank policies, and developments in applicable laws or regulations. Measures the bank should use to achieve these goals include:
C. Inappropriate Recommendations or Sales
Customers interested in purchasing insurance products or annuities may have particular needs based on their financial status, current insurance coverage, or other circumstances. Customers inexperienced in dealing with financial products, particularly those involving an investment risk component, may also require more detailed information about the products offered. Bank management should evaluate, for the types of insurance and annuity products it offers, the extent to which it is necessary to inquire into the appropriateness of the product for a particular customer in order to assist the customer in making informed product selections, and the nature of the inquiry that is desirable (or that may be required by other regulatory requirements). In addition, regardless of the product involved, management should clearly communicate to its sales personnel that it is unacceptable to recommend and sell new or replacement insurance or annuity policies to customers on the basis of commissions to the seller rather than the benefits of the policy.
D. Employee Compensation
Commission-based compensation is a common method of selling insurance and annuities and may help to increase customer awareness of the availability of the insurance products and annuities offered by the bank. However, whenever an employee is compensated for a sale or referral, management needs to be sensitive to the concern that the employee might be motivated by the prospect of financial reward for the sale or referral rather than the best interests of the customer. As noted above, sales should not be driven by commissions and management should clearly communicate to its sales personnel that it is unacceptable to engage in high pressure sales tactics, sell duplicative or unnecessary insurance, or recommend and sell new or replacement insurance policies to customers on the basis of commissions to the seller rather that the benefits of the policy.
E. Complaints and Compliance
The bank should establish an orderly process for assessing and addressing customer complaints and resolving compliance issues. This process might include maintaining records concerning the number, nature, and disposition of customer complaints received by the bank, subsidiary, or affiliated or unaffiliated third party. Management should also ensure that there is an effective process through which management receives information about complaints or other concerns in connection with the bank’s insurance and annuity sales so that management may implement corrective measures. The bank’s systems must be sufficient to monitor compliance with the bank’s own policies, applicable federal and state laws, and OCC guidelines.
National banks also should comply with state laws that require copies of any customer complaints to be forwarded to the appropriate state insurance regulatory authority, or that require that when an insurance sale is consummated, the customer be advised that he or she may forward any complaints to that state insurance authority.
F. Advertising
Advertising communications must not suggest or convey any inaccurate information, and should be designed with care to avoid misunderstanding, confusion, or misrepresentation to the bank’s customers. Accordingly, bank management should ensure that:
G. Customer Privacy
In the course of providing banking and other services, banks will acquire various types of financial and personal information about their customers. Management should take appropriate internal measures to safeguard the security of customer information as well as developing internal policies on the use of customer information.
Banks’ policies on use of customer information should also recognize that different types of information can present different degrees of sensitivity from a customer perspective. Information of an especially personal nature, such as information regarding the health or physical well-being of a customer, may be viewed as particularly sensitive and thus warrant safeguards or restrictions under the bank’s policies.
Use of certain customer information in connection with the sale of insurance products, such as that bearing on a customer’s credit standing, as well as disclosure of this information to third parties, including bank affiliates, can present various legal issues and may be restricted by law. Banks should consider especially whether any provisions of the Fair Credit Reporting Act are applicable before using or disclosing customer information. That Act allows banks to share with third parties information about their transactions with a customer. Recent amendments to that Act also allow parties related by common ownership or affiliated by corporate control to share other information that is not a consumer report provided the customer in question is given an opportunity to object. In addition, among other things, the Act permits banks and affiliates to obtain limited information from a consumer report for use in connection with firm offers to provide consumer related insurance products to potential customers.
H. Third-Party Arrangements
If a national bank, directly or indirectly, including through a subsidiary, sells insurance products or annuities through a third party, the performance and reputation of the third party reflect on the bank and might even give rise to liabilities that the bank must bear. Agreements with a third party to sell insurance and annuities on bank premises should:
VI. INSURANCE SALES
The following issues apply in situations where the Interagency Statement on Retail Sales of Nondeposit Investment Product Sales does not apply:
A. Sales of Insurance in Connection with Extending a Loan
The bank should take steps necessary to make clear to its customer that the bank’s decisions with respect to the loan application are independent of the customer’s decision of where to obtain insurance. For example, to avoid the impression that a linkage exists between the bank’s credit decision and the customer’s choice of insurance seller, the customer should also be clearly and unambiguously informed that he or she need not purchase insurance from the bank, its subsidiary, an affiliate, or any particular unaffiliated third party, that the insurance is available through brokers or agents other than the bank, and that the customer’s choice of insurance provider will not affect the bank’s credit decision or credit terms in any way. These disclosures should be provided when the bank first informs a customer that insurance required in connection with a loan is available from the bank, a subsidiary, affiliate, or unaffiliated third party selling insurance on bank premises. The banks should also consider:
B. Setting and Circumstances of Insurance Sales Activities and Specific Disclosures
The way in which insurance products are sold within a bank can help customers distinguish between deposits that are insured or are obligations of the bank and uninsured products offered by the bank or another entity.
Banks should define clearly and limit the roles of bank employees when they operate in a traditional physical setting, generally a “teller window,” that is closely associated with and predominantly services insured deposit account transactions. To the extent practicable, a bank’s sales of insurance should take place in a location that is distinct from such a traditional teller window setting. The involvement of tellers and individuals not qualified to sell insurance products also should be limited to directing customers to qualified personnel who can provide information. When physical considerations, such as the size or design of a particular bank facility, prevent sales from being conducted in a location distinct from the common teller area, the bank should make every effort to minimize customer confusion.
In addition, during any customer contact, including communication by telephone or other electronic means, banks should disclose to customers that an insurance product is not FDIC insured, is not a deposit or obligation of the bank, is not guaranteed by the bank, and (if applicable) is subject to investment risk, including possible loss of principal, unless the bank affirmatively determines, for specific products, that customers would not reasonably benefit from, or might in fact be confused by, these disclosures. Management should address the manner in which the disclosures are provided to a proposed insured, and the point or points during the solicitation or sales transaction at which written or oral disclosures should be furnished to customers. Other aids to customers distinguishing between products include:
VII. ANNUITIES AND INVESTMENT PRODUCT SALES
The standards for sales and recommendations of nondeposit “investment products,” which include fixed and variable annuities are more fully set forth in the Interagency Statement on Retail Sales of Nondeposit Investment Products. (See, NBA Compliance Handbook, Vol II, Nondeposit Products tab, "Retail Sales of Nondeposit Investment Products: Interagency Statement.”)