Regulation: Another Strike at Unfair or Deceptive Practices

The OCC did it first, but now the FDIC and the Federal Reserve System have done it too. On March 11, the FRB and the FDIC published joint interagency guidance on unfair or deceptive acts or practices by state-chartered banks.

Unfair or deceptive trade practices are made illegal by the Federal Trade Commission Act ("FTC Act"). Until recently, what constitutes unfairness or deception has been defined through enforcement actions brought by the FTC. Now, however, the financial institution regulatory agencies are taking strong steps.

This is not the first time these agencies have spoken out. In 2002, both agencies issued public statements that affirmed their authority to take enforcement actions under the FTC Act. Now they have issued more detailed guidance. The new document is substantially similar to the guidance issued by the OCC - with one important distinction. The FRB/FDIC document is not limited to lending practices.

The Driving Force
Predatory lending is clearly the driving force behind this agency activity. Predatory lending is about as unfair or deceptive as it gets. These aggressive lending practices are bringing increased attention to the entire concepts of unfair or deceptive practices. This leaves the agencies with several choices. One is to sit still and allow Congress to produce legislation to address specific problems. The other is to get there first by taking some sort of preventative action. The agencies have chosen this course.But there is more. There is general concern that any practice, whether related to lending or deposits, may be a problem. Although lending has been getting most of the attention, the concept of unfair trade practices reaches both loans and deposits. And that is what is so significant in what the FDIC and the FRB have done.

Nothing in the document issued by these two agencies on March 11, 2004 limits the definition of unfair or deceptive practices to lending. It includes deposits. This means that the published guidance applies not only to concerns about lending practices, but may be applied to deposit-related concerns such as bounce protection.

The Definitions
This is a bit like "second verse, same as the first." The two agencies have restated the meanings behind unfair and deceptive. It isn't new, but it never hurts to read them through again.

An unfair practice is one which causes substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or competition.

A practice is deceptive if it is likely to mislead a consumer acting reasonably under the circumstances and is likely to affect the consumer's conduct or decision about the product or service.

The italics are ours - to call attention to the most essential elements to consider when evaluating a practice. These are the questions to ask or the tests to put to the situation. The essential issue is whether the information provided to the consumer is straightforward, fair and honest, or whether it is carefully crafted to cause a consumer to select the product or service even if the selection is not in the consumer's best interest. It comes down to honesty and ethics.

The Practices
Whatever practice is under scrutiny will be measured from the perspective of the consumer. The corporations's motive in developing the practice may sometimes be raised as a defense to the problem, but is never the starting point of the analysis.

The test as to whether something misleads is determined by a reasonable consumer. The test as to whether something harms is also measured from the perspective of the consumer. The only industry defense is that the harm is essentially unavoidable when put in the context of product delivery.

To put unfair or deceptive trade practices into context, the FDIC and FRB document lists other laws that may also be violated by the same practice.

There are really two issues here. First, a practice may be technically compliant with Truth in Lending, Truth in Savings, or other laws, but still be deceptive or unfair. For example, the fees disclosed may have met the technical and timing requirements of the regulation but may not have told the whole story. If you want examples of this, read the OCC's case against Providian.

Second, a practice that violates an existing consumer regulation may also fail the unfair or deceptive tests. If so, the agencies may take action under both authorities.

Best Practices
The agencies recommend that banks follow best practices to address areas that have potential for unfairness or deception. The list covers two pages and places heavy emphasis on advertising. The principles on fair and non-deceptive advertising are presented on page 4 of this issue.

ACTION STEPS

Review your advertisements and consider what a reasonable consumer sees and understands in the ads.
Review the compensation systems within the institution to evaluate how sales staff is motivated to present products to consumers.
Review consumer complaints, including those that relate to service, and look for any expressions of consumer concerns that raise questions about the fairness of your practices.
Look at the motives behind your institution's practices. Place these in the context of your organization's culture and market to determine whether there is a push toward the dangerous end of the scale.