IX-2 Retail Insurance Sales

Introduction

The following supervisory information and examination procedures apply to retail sales, solicitation, advertising, or offers of any insurance product or annuity¹ to a consumer² by a FDIC-supervised insured depository institution³ or any person engaged in such activities at an office of the institution or on behalf of the institution. These materials do not apply to sales of insurance or annuities that occur as part of an institution’s trust or fiduciary activities.

Insurance products are not FDIC-insured and may involve investment risk. Consequently, examiners must assess the quality of an institution’s compliance management system (CMS) as it pertains to the retail sale of insurance and annuities. Examiners must consider whether the CMS appropriately manages the risks involved in these activities, including whether the CMS produces compliance with Part 343 of the FDIC’s regulations (Consumer Protection in Sales of Insurance) and adherence to the Interagency Policy Statement on Retail Sales of Nondeposit Investment Products (the Interagency Policy Statement)⁴ when variable annuities are sold.

Regulatory and Policy Requirements

The primary risks addressed by Part 343 and the Interagency Policy Statement are that consumers will:

• misunderstand the safety of insurance products sold by institutions, i.e., assume incorrectly that they are backed by the FDIC or another federal agency, or
• be coerced into believing they must purchase an insurance product or annuity in order to obtain a loan.

FDIC Part 343

Pursuant to the Gramm-Leach-Bliley Act (GLBA), the federal banking agencies have adopted regulations concerning consumer protection in the sale of insurance by institutions and thrifts. The regulations, which include the FDIC’s Part 343, address matters that are the responsibility of the banking agencies to oversee and not the responsibility of state insurance departments.⁵

Part 343 applies to the institution as well as other parties that offer insurance or annuities on institution premises or on the institution’s behalf. Under Part 343, a party offers these products on behalf of the institution when:

• it represents that it is doing so; or
• it pays the institution commissions for receiving customer referrals; or
• documents that evidence the sales transaction refer to the institution.

Interagency Policy Statement

The Interagency Policy Statement contains requirements that overlap with Part 343, particularly with respect to disclosures and the circumstances under which sales and recommendations may be made. To the extent that Part 343 addresses an area, it governs. However, because variable annuities have an investment component, institutions that offer them must also adhere to the program requirements explained in the Interagency Policy Statement. In particular, an institution that offers annuities should establish policies and procedures for its sales program and offer variable annuities only when suitable for customers. A detailed explanation of the requirements of the Interagency Policy Statement is contained in the Investment Sales Procedures.

Examination Procedures

During the compliance examination of an institution that offers insurance products, examiners must consider these activities when assessing the quality of the institution’s compliance management system (CMS). The specific guidance and procedures contained in this chapter should be used within the framework of the general compliance examination procedures and, specifically, during the pre-examination planning and review and analysis stages of the compliance examination.

Examiners must determine whether the CMS appropriately manages the risks involved in retail insurance sales activities, including adherence to FDIC Part 343, and the Interagency Policy Statement if variable annuities are sold. In doing so, examiners should consider all documentation related to retail insurance sales, including, but not limited to, agreements with third parties, sales activity volume and financial reports, standard disclosures and acknowledgment forms, records which document the qualifications of sales personnel, and proprietary product management reports.

Based on the examiner’s conclusions about the institution’s CMS, a determination should be made about the extent of transaction testing or file review necessary to complete the compliance examination. The severity of the CMS weaknesses and operational risk should dictate the intensity of transaction testing. The expanded analysis should be carefully tailored to weaknesses identified in the CMS as it relates to specific retail insurance sales activities, focusing on those areas of the institution’s program that present the greatest degree of risk to the institution or to consumers.

At the conclusion of the examination, examiners should document their conclusions about the institution’s retail insurance sales activities in the examination work papers and Report of Examination, as appropriate. Institutions that fail to comply with applicable laws and regulations, or fail to establish and observe appropriate policies and procedures consistent with Part 343 or with the Interagency Policy Statement when applicable, should be subject to criticism in the Report of Examination and appropriate corrective action.

Pre-examination Planning

During the initial contact with the institution and through the Compliance Information and Document Request (CIDR):

• identify any insurance or annuities sales activities the institution conducts directly or through other entities on its behalf; and
• obtain copies of relevant policies and procedures, third party agreements, disclosures and acknowledgment forms, advertising copy, records and reports.

In addition, state insurance officials should be contacted to obtain copies of any complaint records involving the institution. Information sharing agreements are in place with most states, and a list of contacts is posted on the National Association of Insurance Commissioners (NAIC) website:   http://www.naic.org/state_web_map.htm.  

Review and Analysis

Examiners should use the guidance below to evaluate the institution’s CMS as it pertains to retail insurance sales activities to determine whether risks are adequately managed. After completing the review of the institution’s CMS, examiners should document their conclusions about the retail insurance sales program area through written responses to the Decision Factors described in the Decision Factors section of this chapter. The written response should be retained in the examination workpapers. A Job Aid is provided at the end of these procedures which may be helpful in conducting the review.

Board and Management Oversight Evaluation

Consider whether the institution’s board of directors has adopted written policies and procedures for the institution’s insurance sales program. If not, are they needed? Are the policies and procedures reviewed and updated as necessary?

Does the board of directors and management receive and review sufficient information to provide appropriate direction and control of insurance sales?

For retail insurance sales conducted through a networking arrangement with a third-party vendor, also consider whether:

• The institution conducted an appropriate review of the third party’s qualifications, experience, regulatory history, financial condition, and references prior to entering into the arrangement;
• The arrangement is controlled by a written agreement that is approved by the institution’s board of directors and contains the following elements:
  • Description of each party’s duties and responsibilities;
  • Description of the permissible activities by the third party on institution premises;
  • Controls for the use of institution space, personnel, and equipment;
  • Detailed compensation arrangements for all institution and third party personnel;
  • Requirement that sales representatives are appropriately trained, licensed, and qualified;
  • Requirement that the third party comply with all applicable laws and regulations;
  • Authorization for the institution to monitor the activities of the third party and its sales representatives and to periodically review compliance with the agreement;
  • Authorization for the institution and its banking regulatory agency to have access to such records of the third party as are necessary or appropriate to evaluate compliance;
  • Indemnification for the institution for potential liability caused by the third party’s sales activities; and
  • Written employment contracts satisfactory to the institution for personnel employed by both the institution and the third party; and
  • Institution management periodically monitors the third party’s compliance with the agreement.

Compliance Program Evaluation

Policies, Procedures and Internal Controls

Consider whether the retail insurance sales program’s policies and procedures include a description of the following elements:

• Types of products sold;
• Supervision of personnel involved in sales; and
• Compliance procedures to ensure sales activities are conducted in accordance with Part 343.

Review the policies and procedures, and through interviews and observation consider the practices of the institution in the following areas:

Sales Setting

Is the area in which insurance is sold physically distinct from the area in which retail deposits are taken?

• Employees do not make insurance recommendations, or take orders for insurance products, even if unsolicited, while located in the routine deposit-taking area. (This includes reviewing any prepared scripts on handling deposit customers, or customers whose certificates of deposit are maturing.)

Referrals

Employees who are not authorized and qualified to sell insurance only make referrals, and do not make insurance recommendations or take orders for insurance products. (This includes reviewing any prepared scripts on referring deposit customers, or customers whose certificates of deposit are maturing.)

• Management and staff (including tellers and receptionists) adhere to part 343 and the institution’s insurance sales policy when making customer referrals.

Compensation

Compensation to institution employees for customer referrals is a one-time nominal fee of a fixed dollar amount for each referral, and that the compensation is paid regardless of whether the referral results in a transaction.

Sales Practices

Insurance sales practices, including advertising, would not lead consumers to believe that:

• extensions of credit are tied to the sale of insurance or annuities;
• insurance or annuities are backed by the federal government; or
• products that carry investment risk do not do so.

The institution prohibits insurance sales practices that discriminate against victims of domestic violence or providers of services to such victims.

Disclosures, Advertisements, and Acknowledgements

Standard disclosures and advertising contain at least the following minimum content required by Part 343:

• NOT A DEPOSIT
• NOT FDIC-INSURED
• NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
• NOT GUARANTEED BY THE INSTITUTION
• MAY GO DOWN IN VALUE

Where insurance is offered in connection with a credit application, standard disclosures explain that credit cannot be conditioned on the purchase of insurance from the institution or the consumer’s agreement not to purchase insurance elsewhere.

Disclosures are provided consistently with the manner and timing requirements of Part 343.

Disclosures are understandable and meaningful, as required by Part 343.

The institution obtains the customer acknowledgement of receipt of disclosures as required by Part 343.

Personnel Qualifications

Insurance sales employees and management are qualified (appropriate licensing, training, and/or experience) to conduct their authorized duties.

The institution's insurance sales training materials appropriately cover the requirements for referral and sales activities, including any appropriate and inappropriate customer referral activities.

Monitoring

Does the institution conduct monitoring of its retail insurance sales program and that of any third party? Does the monitoring include sales practices, the referral process, the manner and timing of disclosures, and customer acknowledgement of receiving disclosures?

Does the institution review customer complaints to identify compliance issues?

Audit Function Evaluation

Consider whether the institution’s audit program includes its retail insurance sales program, including third party activities, and assess the audit program’s effectiveness.

Decision Factors

After completing the assessment of the compliance management system, examiners should document their conclusions as to whether risks in the retail insurance sales program area are adequately managed by the institution, as well as their responses to each of the following Decision Factors:

1. Do the board of directors and management provide effective oversight of the retail insurance sales program?
2. Are policies, procedures, information systems, training, and licensing adequate for such sales activities?
3. Does the institution adequately monitor customer referral and insurance sales activities?
4. Does the audit function include the insurance sales program, and is it adequate?

Based on the conclusions and responses to the above questions, examiners should determine the extent of transaction testing or file review necessary to complete the compliance examination. If such review is deemed appropriate, examiners should pull a sample of accounts and/or files and use the Expanded Analysis procedures below.

Expanded Analysis

The examination procedures in this section should be used when examiners identify material weaknesses in the institution’s compliance management system that require further review to complete their assessment and to determine the institution’s compliance with part 343. The entire set of expanded procedures should not be applied automatically. Examiners should use only those expanded procedures that address specific areas of significant risk, weakness, or supervisory concern.

Disclosures, Notices, Acknowledgements, and Advertisements

Sample customer account files to review disclosures and written acknowledgments, including those incorporated into credit applications.

Review all advertising and promotional materials, including the text of prepared scripts (telemarketing and platform).

Personnel Qualifications

Sample sales representative personnel files to determine whether they have the appropriate licenses and training, and to review their regulatory histories.

Sales Setting

Determine that the retail insurance sales setting is physically distinct from the retail deposit area (visit additional sales locations when practical).

In those instances where there is limited space in the institution, determine that signage and other techniques are used to clearly distinguish the retail insurance sales setting from the retail deposit area to avoid the potential for customer confusion.

Compensation

Review management reports, sales reports, and a sample of employee insurance sales compensation records to verify that customer referral fees are paid as a one-time nominal fee of a fixed dollar amount for each referral, and that the referral fee is paid regardless of whether the referral results in a transaction.

Monitoring

Sample customer account files and evaluate the effectiveness of the institution’s monitoring at identifying and eliminating documentation deficiencies.

Review customer complaints and consider whether the institution addressed them adequately and used them to detect potential compliance breakdowns.

Sales Practices

Review sales records to ensure that only licensed personnel sell insurance.

Documenting Examination Findings

Findings should be documented in the workpapers and incorporated in the report of examination as appropriate. In addition, record the information in FOCUS under the tabbed section labeled “NDP Sales” whether the institution sells insurance (yes/no).
 

References

12 CFR 343: Consumer Protection in Sales of Insurance

Interagency Statement on Retail Sales of Nondeposit Investment Products

FIL 61-95: Nondeposit Investment Activities

FIL 84-2001: Questions and Answers on Consumer Protections for Bank Sales of Insurance

Job Aids