Department Issues Guidelines for New York State Chartered Banks and Trust Companies Engaging in Insurance Sales Activities
September 30, 1996
TO THE CHIEF EXECUTIVE OFFICER OF THE INSTITUTION ADDRESSED:
This advisory letter is issued in order to provide guidance to New York state-chartered banks and trust companies establishing or acquiring corporate subsidiaries to engage in insurance sales activities.
Banks and trust companies may apply to the Banking Board, pursuant to Section 97.5 of the Banking Law, for permission to invest in the capital stock of corporations organized to sell insurance. The Banking Board is empowered, pursuant to Section 14.1 (d) of the Banking Law, to adopt resolutions, by a three-fifths vote of all its members, authorizing such investments. Applications should be prepared in accordance with Part 14.4 of the General Regulations of the Banking Board.
Prospective applicants should bear in mind that Banking Department permission to invest in insurance sales subsidiaries constitutes only one of the regulatory approvals to be obtained. The corporate subsidiaries, themselves, as well as certain of their employees, must be licensed by the New York State Insurance Department and their operations will be subject to a variety of State and federal laws and regulations applicable to companies engaged in the sale of insurance. Many of these may be unfamiliar to applicants who lack prior business experience in the insurance industry.
Therefore, the Banking Department urges all prospective applicants to seek legal counsel and business advice from professionals with expertise in the insurance field who are familiar with insurance laws, rules and regulations applicable to Insurance Department licensees and will be able to provide competent guidance with respect to the formulation of an insurance sales plan of the size and complexity contemplated.
The Banking Department seeks, by this letter to the industry, to identify several issues that banks and trust companies may wish to address in their applications to the Banking Board. They are offered as suggestions only. It is not mandatory that applications address every point raised herein. Neither is this advisory intended as a comprehensive treatment of such factors, since the particular circumstances relating to each institution, the scale of the activities to be conducted by the corporate subsidiary and the range and complexity of insurance products to be offered to the public will, collectively, dictate the scope and breadth of issues addressed in each application. Rather, it is designed to provide a brief overview of certain issues that are likely to be common to many institutions and applications.
1. Scope of Banking Department Review.
Part of the Banking Department's statutorily prescribed mandate is to supervise the banking organizations it regulates in such a manner as to insure the safe and sound conduct of such businesses. Applications by banks and trust companies for permission to invest in corporate subsidiaries that will engage in insurance sales activities will be reviewed by the Banking Department in a manner consistent with the above-stated policy.
In this regard, the Department will look favorably upon applications that present well conceived business plans, including safeguards that protect the financial stability and reputation of the banking organization investing in the insurance sales subsidiary.
Some attention should be given to the process that will be used to evaluate the insurance companies and the insurance products which will be offered by the corporate subsidiary, and the frequency with which such reviews are to occur, since the safety, soundness and claims paying ability of such underwriters and the products offered to the public will affect the subsidiary and, by extension, the bank or trust company parent. Similarly, care should be exercised in establishing the criteria by which the appropriateness of individual insurance products will be assessed before they are offered by the corporate subsidiary to the public.
2. Insurance Department Approval.
Prospective applicants are reminded that, while it is the Banking Department that must grant approval for the bank or trust company to invest in the corporate subsidiary, the subsidiary, itself, is also subject to regulation by the New York State Insurance Department. As a threshold issue, any entity that wishes to engage in insurance sales activities, whether or not it is affiliated with a bank or trust company, must obtain an agents= or brokers= license pursuant to Article 21 of the New York Insurance Law before it may commence such operations.
3. Application of Insurance Laws and Regulations.
A corollary of Insurance Department licensure is that the corporate subsidiary engaging in insurance sales activities will be subject to the provisions of the New York Insurance Law and the regulations adopted pursuant thereto. Prospective applicants are encouraged to take appropriate measures to assure that relevant bank personnel, as well as staff of the corporate subsidiary, are thoroughly familiar with the pertinent aspects of the applicable regulatory scheme including any advertising or other Insurance Department regulations, as may be applicable. Prelicensing education and competency requirements which must be met in order to become licensed by the Insurance Department will also help familiarize those engaging in insurance sales activities with requirements applicable to them.
Applicants are reminded that there are certain provisions contained in the Insurance Law and regulations that apply specifically to situations in which an agent or broker is affiliated with a banking organization. For example, Section 2501 of the Insurance Law prohibits a bank-affiliated agent or broker from negotiating insurance policies with respect to real or personal property which is the subject matter of, or security for, a loan or extension of credit made by the bank with whom such agent or broker is affiliated. The New York State Insurance Department has indicated that it is obliged to enforce all such provisions equally against both state and federally-chartered institutions.
4. Management Oversight.
Active oversight by bank or trust company management will be beneficial to the safe and sound operations of the corporate subsidiary. Management of the day-to-day activities of the insurance operation, on the other hand, will tend to be the responsibility of the corporate subsidiary. In each relationship, the precise delineation of responsibilities between management of the parent and the subsidiary will need to be established. When identifying their respective duties, management of the bank or trust company and of the corporate subsidiary must be sensitive to a number of issues to be addressed regarding the precise nature of the relationship between the two entities, and the manner in which the insurance sales activities are to be conducted. Several such issues are identified below:
Written policies. Management should consider the need to develop written policies governing the implementation and operation of the corporate subsidiary=s insurance sales efforts. Such policies may prove beneficial in establishing clearly the business philosophy to be followed and the goals to be pursued by the insurance sales subsidiary. It also may help to set out the respective duties and responsibilities of the bank or trust company as the parent entity, the insurance sales entity as the corporate subsidiary, and the related personnel at each institution who may be assigned to this new venture.
Such policies also could address the types of internal controls and procedures that are to be established to monitor compliance with applicable laws and regulations, as well as the standards established by the parent and the subsidiary.
Staffing the corporate subsidiary. The bank or trust company and the corporate subsidiary may elect to share personnel. Management should establish professional qualifications requirements and training guidelines for all personnel that will be engaged in insurance sales activities subject to the requirements and prohibitions in the Insurance Law, including any rules prescribing tasks that may be performed only by licensed sales personnel. Where the corporate subsidiary has deemed it advisable to employ any staff who have had prior experience in the insurance industry, appropriate steps should be taken to confirm that such candidates for employment remain in good standing with insurance regulators in the jurisdictions where they are licensed.
Delineation of platform space; signs; advertising. An appropriate distinction between the bank =s activities and the activities of the corporate subsidiary should be made in order to minimize the potential for customer confusion, especially when the corporate subsidiary is conducting insurance sales activities at the branches of the bank or trust company and/or personnel is shared. The objective must be to avoid misunderstanding, confusion or misrepresentation to customers of either entity. This may be accomplished through a variety of means including, but not limited to, the following: clearly delineated platform space, prominent and distinctive signage, separate business cards and name tags, different advertising campaigns and clearly distinguishable promotional literature. The particular measures that can or should be instituted may vary on a case by case basis. In each instance, however, the result must be that the distinction between the corporate subsidiary and its insurance products, on the one hand, and the bank or trust company and its products, on the other, is effectively communicated to the customer.
Compensation for leasing portion of bank premises. In the past, the Banking Law has been interpreted to permit a bank to lease excess office space to independent broker-dealers or insurance companies. The same authority will accommodate a bank leasing space to a corporate subsidiary that engages in the sale of insurance. It is critical, however, that any such arrangement be structured so that the payments made thereunder constitute a form of rent and not commissions. Parenthetically, you may wish to note that Insurance Department licensees, which open offices at locations other than their headquarters, must provide notification of the address and staffing of the satellite offices.
Written disclosures. Management should develop written disclosures to be provided to customers of the corporate subsidiary to the effect that insurance products are not deposits, are not insured by the FDIC, are not endorsed or guaranteed by the bank or trust company and, where applicable, may be subject to investment risk. Management also should address the manner in which such disclosures should be provided to the proposed insured, and the point or points during the solicitation or sales transaction at which such disclosures should be provided.
In addition, management should also consider the need for disclosures, written or otherwise, in advertisements in order to avoid consumer confusion.
Employee referrals. With respect to employees of the bank or trust company who are not also licensed employees of the corporate subsidiary, it may be desirable to state clearly that policy forbids such employees from engaging in insurance sales-related activities, other than in a nominal capacity, such as providing customers with referrals to qualified employees of the corporate subsidiary who could discuss insurance matters in detail or vice versa.
Employee compensation. Another issue that warrants management attention is compensation of staff dedicated to insurance sales activities. Churning of customer accounts by insurance sales personnel in order to generate additional commissions is prohibited by the Insurance Law, and accordingly, policies should be considered to address this issue. As regards commissions, the Insurance Law also prohibits the sharing of commissions by licensed agents and brokers with non-licensees. Compensation terms should be crafted with such strictures in mind.
Tying arrangements. The Bank Holding Company Act generally provides that banks shall not in any manner extend credit, lease or sell property of any kind, or furnish any service, or fix or vary the consideration for any of the foregoing, on the condition or requirement. . . that the customer shall obtain some additional credit, property, or service from such bank [, a bank holding company of such bank or from any other subsidiary of such bank holding company] other than a loan, discount, deposit, or trust [email protected] (12 U.S.C. " 1972). It must be made clear to the customer that the bank's deliberations with respect to a loan application are entirely divorced from the customer's election to accept or reject insurance coverage from the corporate subsidiary. Banks and trust companies should formulate appropriate written disclosures to be furnished to each loan applicant explicitly stating that the two transactions are in no way linked. This statement should be provided to the customer no later than when the first solicitation by, or referral to, the corporate subsidiary occurs. Educational efforts will need to be undertaken so that staff at both the bank and the subsidiary are sensitized to the concerns raised by the anti-tying issue.
The Banking Department stresses that banks and trust companies with insurance sales subsidiaries do not forfeit the right to require, to the extent permitted by law, that the customer obtain insurance in connection with a particular loan or extension of credit. Likewise, except for situations subject to Section 2501 of the Insurance Law, the fact that a customer has a loan application pending with the bank does not bar the corporate subsidiary from providing insurance services to the same customer. The federal prohibition on tying arrangements does mean, however, that the two relationships with the individual, taken together, must not have resulted from tactics that suggest that the granting of credit by the bank or trust company is, or may be, conditioned upon the purchase of insurance from the corporate subsidiary.
Consumer privacy. Management should establish protocols to govern the circumstances under which any contemplated sharing of bank customer information with employees engaged in insurance sales activities shall occur. Consideration also should be given as to whether restrictions or prohibitions are in order with respect to disseminating information of an especially personal nature.
Consumer complaints. Finally, management should evaluate how consumer complaints are to be processed and resolved at the corporate subsidiary. There may be complaints that concern staff and/or transactions at both the subsidiary and the bank or trust company, or which are directed to one entity, but which pertain to the other. As a result, it may be advisable to establish some formal mechanism by which such matters may be brought to the attention of customer relations personnel at both institutions.
In addition, management should maintain a consumer complaint file, including a copy of the consumer complaint as well as an indication of the response of the bank or trust company, for review by examiners.
Should you have any questions concerning this advisory letter, or the application process, please do not hesitate to direct your inquiries to the Banking Department as follows:
Mr. Manuel Kursky
Deputy Superintendent of Banks
Domestic Commercial Banks Division
New York State Banking Department
Two Rector Street, 23rd Floor
New York, New York 10006
Telephone: (212) 618-6496
Facsimile: (212) 618-6528
E-mail address: [email protected]
The Banking Department hopes that the preceding discussion will be of assistance to prospective applicants in developing their insurance sales strategies.
Very truly yours,
NEIL D. LEVIN
Superintendent of Banks