New Guidance for State-Chartered Banks on Unfair Practices
How can a bank determine whether its actions or practices are unfair or deceptive? In response to questions raised by state-chartered banks, the Federal Reserve Board of Governors (FRB) and the Federal Deposit Insurance Corp. (FDIC) recently provided guidance on this issue.
What is unfair or deceptive?
Unfair or deceptive acts or practices in or affecting
commerce are illegal under section 5 of the Federal
Trade Commission (FTC) Act, which applies to all persons engaged
in commerce, including banks. The Fed and the FDIC are authorized
under section 8 of the Federal Deposit Insurance Act to take
appropriate action against state-chartered banks when either
the Fed or the FDIC discovers such acts or practices.
According to the FTC Act, the standards for unfairness and deception are independent of each other, and an act or practice is prohibited if it is either unfair or deceptive.
The FTC Act defines an act or practice as unfair when it causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.
A deceptive representation, omission, or practice is one
that is likely to mislead a consumer acting reasonably under
the circumstances and to affect a consumers conduct
or decision about a product or service.
While recognizing that the vast majority of insured banks adhere to a high level of professional conduct, the Fed and the FDIC urge banks to protect consumers and minimize their own risks by remaining vigilant against possible unfair or deceptive acts or practices.
To help banks better manage the risks associated with unfair or deceptive acts or practices, the guidance outlines steps financial institutions can take to avoid engaging in such activities in the first place. These best practice recommendations cover a broad range of activities, from advertising and disclosure to establishing controls and procedures and training employees.