Guidelines for Insurance Sales by Banks

Department of Banking, Insurance, Securities & Health Care Administration

REVISED JULY 2, 2001

PLEASE NOTE: Only section 3.C on proper disclosures of banks sales of insurance

is being revised at this time to reflect the provisions of the new federal rules on

consumer disclosures in bank sales of insurance. There will be further revisions to

Bulletin 117 later this year to reflect other changes under the federal Gramm-

Leach-Bliley Financial Modernization Act of 1999.

Vermont Insurance Division Bulletin 117

Guidelines for Insurance Sales by Banks

Section 92 of the National Bank Act permits national banks located and doing business in

any place with a population of not more than 5,000 inhabitants to act as the agent for any

fire, life or other insurance company authorized by the authorities of the State to do

business there. In Barnett Bank v. Nelson, 116 S.Ct. 1103 (1996), the United States

Supreme Court unanimously determined that, despite state laws forbidding banks or their

affiliates from engaging in insurance sales, national banks could act as agents in the sale

of insurance under the authority of Section 92.

As a result, § 4811 of Title 8, Vermont Statutes Annotated, which limits the ability of

banks to sell insurance, is preempted by Section 92 for any national bank with a main

office or branch and a bona fide agency in a place with not more than 5,000 inhabitants.

(See letter of Julie Williams, Chief Counsel, Comptroller of the Currency, to First Union

Corporation, November 4, 1996.) Vermont banking law contains the so called "wild

card," "parity plus" or "expanded powers" section, 8 V.S.A. § 606(a). This law was

enacted to place Vermont state-chartered banks on an equal footing with national banks

by providing state-chartered banks with the powers conferred on national banks by

federal law. Section 606 permits any Vermont state-chartered bank to act as an agent in

the sale of insurance to the same extent national banks are so permitted

lus" or "expanded powers" section, 8 V.S.A. § 606(a). This law was

enacted to place Vermont state-chartered banks on an equal footing with national banks

by providing state-chartered banks with the powers conferred on national banks by

federal law. Section 606 permits any Vermont state-chartered bank to act as an agent in

the sale of insurance to the same extent national banks are so permitted.

The Commissioner's position is that all banks acting as agents in the sale of insurance in

Vermont must comply with all applicable insurance laws, including those on licensure.

Other applicable insurance laws include the requirement to act only on behalf of

Vermont-authorized insurance companies (8 V.S.A. §§ 3301, 3361) offering Vermont-

approved insurance products (8 V.S.A. § 3541), the prohibition against rebating (8

V.S.A. § 4724(8)), and the prohibition against coercion of debtors (8 V.S.A. § 4725)

(also addressed in federal banking law as the prohibition against "tying"). Banks acting as

insurance agents are also expected to take all reasonable steps to avoid consumer

confusion. This document sets forth the Commissioner's position about the applicability

of insurance laws on bank and bank-affiliated insurance activities permitted as a result of

the Barnett decision, and what banks are expected to do to avoid consumer confusion.

These Guidelines apply only to the authority to sell insurance resulting from the Barnett

decision, and therefore do not apply to the sale of credit insurance by banks under 8

V.S.A. § 4811. The ability of banks to sell annuities originates in other federal authority,

and so continues to be subject to Banking Bulletin No 18. Therefore, these Guidelines do

not address annuities sales by banks

These Guidelines apply only to the authority to sell insurance resulting from the Barnett

decision, and therefore do not apply to the sale of credit insurance by banks under 8

V.S.A. § 4811. The ability of banks to sell annuities originates in other federal authority,

and so continues to be subject to Banking Bulletin No 18. Therefore, these Guidelines do

not address annuities sales by banks.

Banks that are eligible to engage in the sale of insurance as described above that either

have their main office or a full service branch (an automated teller machine is not

considered a full service branch under these guidelines) in a "place" with a population of

not more than 5,000 inhabitants may engage in the business of insurance as an agent or

through a bona fide insurance agency located in that "place." To date, the Comptroller

has not issued an opinion interpreting the word "place" as used in the relevant section of

the National Bank Act. If such an opinion is issued by the Comptroller, the

Commissioner will reconsider these guidelines as they pertain to the meaning of the word

"place" at that time. Until such reconsideration, the Commissioner will view "the

particular county and city, town or village" where a bank's full service banking

operations are carried on, (see for example 12 U.S.C. § 22 Second), as the "place" which

must have a population of not more than 5,000 inhabitants. The Commissioner will

determine the population of a "place" by using the most recent U.S. decennial census. An

agency located in a place of not more than 5,000 that conducts its business in the manner

described by Julie Williams, Chief Counsel, Comptroller of the Currency, to First Union

Corporation, November 4, 1996, will be considered a bona fide insurance agency under

these Guidelines. According to Ms. Williams' opinion:

The agency located in the "place of 5,000" must. . . be bona fide

l census. An

agency located in a place of not more than 5,000 that conducts its business in the manner

described by Julie Williams, Chief Counsel, Comptroller of the Currency, to First Union

Corporation, November 4, 1996, will be considered a bona fide insurance agency under

these Guidelines. According to Ms. Williams' opinion:

The agency located in the "place of 5,000" must. . . be bona fide. [An agency will be

considered bona fide if its] agents will be managed through the agency and the "place of

5,000" will be the agency's business location for licensing purposes. [The] agency will be

responsible for collecting commissions from insurance carriers and paying commissions

to its licensed sales staff. The agency [will be generally] responsible for processing

insurance applications, delivery of insurance policies, and collection of premiums, where

consistent with procedures of the relevant insurance carriers. In addition, business records

of the agency, including copies of customer application and policy information, and

licensing, customer complaint, and other compliance records, will be available at the

"place of 5,000." Business records may be maintained and available at the agency in

electronic form, with the original hardcopy kept in off-site storage.

The bank agency and its agents may seek the same market range and use the same

marketing tools and facilities as generally available for a licensed insurance agency, not

tomer complaint, and other compliance records, will be available at the

"place of 5,000." Business records may be maintained and available at the agency in

electronic form, with the original hardcopy kept in off-site storage.

The bank agency and its agents may seek the same market range and use the same

marketing tools and facilities as generally available for a licensed insurance agency, not

affiliated with a bank, that is based in the "place of 5,000." (footnote omitted) This will

generally allow the following:

o Meetings with customers and solicitations and sales of insurance by agents

of the bank agency may take place at locations inside the "place of 5,000"

as well as at locations outside that "place," provided the agents are

managed and paid through the bank agency located in the "place of 5,000"

and use that location as their place of business for licensing purposes. If an

insurance company has adopted other procedures for its nonbank agents,

however, the bank agency may follow the same procedures as other

insurance agents selling the company's policies.

o Mailings to advertise and sell insurance may originate from inside or

outside of "the place of 5,000," and brochures, leaflets and other literature

alerting potential customers to the bank's insurance activities may be

distributed from locations both inside and outside of the "place of 5,000,"

including other branches of the same bank. Personnel of bank branches

outside of the "place of 5,000" also may make referrals to the bank's

insurance agency. Likewise, telephone and cybermarketing may be used

and the calls and messages need not originate within the "place of 5,000."

o The bank may contract with third parties to assist the agency's sales

activities. For example, third parties might provide advertising support,

direct mail marketing services, telemarketing services, payments

processing, or other types of "back office" support.

Williams' letter, pages 33 and 34 and footnote 160.

1. Licensing

alls and messages need not originate within the "place of 5,000."

o The bank may contract with third parties to assist the agency's sales

activities. For example, third parties might provide advertising support,

direct mail marketing services, telemarketing services, payments

processing, or other types of "back office" support.

Williams' letter, pages 33 and 34 and footnote 160.

1. Licensing.

Any individual or entity soliciting applications for insurance or negotiating policies of

insurance in Vermont must be licensed as an insurance agent (including required nonresident licenses, where appropriate). Bank employees or other individual bank

representatives soliciting or negotiating policies of insurance must be licensed as

insurance agents. Insurance agent licensing is governed largely by 8 V.S.A. chapter 131.

Vermont law defines an insurance agent as an individual appointed by an insurer who

solicits or negotiates a policy of insurance for an insurer. A separate appointment is

required from each insurance company an individual insurance agent represents. Vermont

law also requires any person, partnership, association or corporation to be licensed as an

insurance agent if it acts as or holds itself out to be an insurance agent.

Individuals within an insurance agency engaged in purely clerical tasks are not required

to be licensed. A clerical task, a task associated with record keeping or file management,

does not require the insurance expertise of an agent. Similarly, a bank employee

performing only clerical tasks related to the bank's insurance agency function would not

be required to be licensed. However, only properly licensed individuals, possessing the

aged in purely clerical tasks are not required

to be licensed. A clerical task, a task associated with record keeping or file management,

does not require the insurance expertise of an agent. Similarly, a bank employee

performing only clerical tasks related to the bank's insurance agency function would not

be required to be licensed. However, only properly licensed individuals, possessing the

expertise and knowledge of an insurance agent, should be giving advice about insurance

or selling insurance.

A bank, like any other entity, must be licensed if it contracts with an insurance sales

entity and shares in commissions paid by insurance companies for the sale of insurance

products. Licensure is required if a bank enters into such a third-party relationship and is

compensated based on the volume of insurance applications or insurance sales. Receiving

upstreamed dividends from an insurance sales subsidiary of a bank by the parent bank

will not be considered commission sharing, and will not, without more, require the bank

to be licensed as an insurance agent.

Licensure will be required of banks, insurance agencies, or any other non-insurer entities

which employ or otherwise contract with individual insurance agents. The Department

currently anticipates that this requirement will become effective for all agencies as of

April 1, 1998. Entity licensees will not be required to obtain appointments from insurers,

provided all insurance is placed with insurers by licensed individuals with appropriate

appointments. This requirement will be in addition to the requirement to license

individuals acting as agents. The Insurance Division will publish a bulletin further

describing this requirement.

Questions about how to apply for an insurance agent's license should be directed to the

Agent Licensing Supervisor, at (802) 828-3303.

2. Use of authorized companies and authorized products

propriate

appointments. This requirement will be in addition to the requirement to license

individuals acting as agents. The Insurance Division will publish a bulletin further

describing this requirement.

Questions about how to apply for an insurance agent's license should be directed to the

Agent Licensing Supervisor, at (802) 828-3303.

2. Use of authorized companies and authorized products.

Vermont law requires an insurance company to be licensed or otherwise authorized by

the Commissioner to do insurance business before it can sell insurance in Vermont. The

companies that are currently licensed or authorized are listed in the Annual Report of the

Insurance Commissioner. The report can be obtained from the company licensing section

of the Insurance Division at (802) 828-2470.

All insurance products must be reviewed and approved by the Insurance Division before

they can be sold or issued for delivery in Vermont. Any insurance company wishing to

sell or issue insurance policies in Vermont should be able to show that it has obtained all

appropriate approvals from the Insurance Division. Banks may only sell insurance

products that have been approved for sale by the Commissioner and that are offered by

licensed insurance companies.

3. Sales practices.

The sale of insurance is subject to the provisions contained in 8 V.S.A., chapters 129 and

131, among others. Banks should develop and implement policies and procedures to

ensure that insurance product sales activities are conducted in compliance with Vermont

insurance statutes and regulations, just as they do to ensure that banking activities are

conducted in compliance with federal and state banking statutes and regulations. The

Commissioner urges particular attention to the requirements of 8 V.S.A., chapter 129,

velop and implement policies and procedures to

ensure that insurance product sales activities are conducted in compliance with Vermont

insurance statutes and regulations, just as they do to ensure that banking activities are

conducted in compliance with federal and state banking statutes and regulations. The

Commissioner urges particular attention to the requirements of 8 V.S.A., chapter 129,

Insurance Trade Practices; and Regulation 79-2, Fair Claims Practices. A bank is

responsible to provide its agents and employees with proper instruction and supervision.

The Commissioner recommends the development and use of appropriate procedures for

review of a bank's insurance sales program. Bank personnel involved in selling insurance

products must adhere to fair and reasonable sales practices. The Commissioner

recommends that banks adopt effective management and internal audit compliance

reviews concerning such practices. Any compliance procedures should also provide for a

system to monitor customer complaints and their resolution. To discharge the bank's

supervisory responsibilities, the Commissioner recommends that a bank's compliance

procedures should also call for verification that third-party sales are being conducted in a

manner consistent with the governing agreement with the bank, where applicable.

(A) Tying and packaging. Banks are prohibited from requiring the purchase of insurance

from the bank itself or any affiliated insurance agency, as a condition for the bank to

establish a deposit account, to extend credit, lease or sell property of any kind, fix or vary

the consideration for any such extension of credit, lease, sale or service, or for any other

service offered by the bank or its affiliates.

A bank may offer to sell an insurance product in combination with a banking product or a

combination of banking products only if there is no reduction in cost to the customer for

the products as a result of the addition of the insurance

kind, fix or vary

the consideration for any such extension of credit, lease, sale or service, or for any other

service offered by the bank or its affiliates.

A bank may offer to sell an insurance product in combination with a banking product or a

combination of banking products only if there is no reduction in cost to the customer for

the products as a result of the addition of the insurance. Although a bank may bundle

certain traditional bank products and present a package to a customer at a reduced rate,

the addition of an insurance product to the bank package may not have a cost which is

any different than the cost would be for the bank package and the insurance product

separately. No person shall require or imply that the purchase of an insurance product

from a bank by a customer or prospective customer of the bank is required as a condition

of, or is in any way related to, the lending of money or extension of credit, the

establishment or maintenance of a trust account, the establishment or maintenance of a

deposit account, or the provision of services related to any such activities, or for any

other service offered by the bank or its affiliates.

If insurance is required as a condition of obtaining a loan, the credit and insurance

transactions shall be completed independently and through separate documents. A loan

for premiums on required insurance shall not be included in the primary credit without

the written consent of the customer.

(B) Anti-rebating. Vermont law prohibits the use of rebates by an insurance agent. A

rebate is anything of value given, directly or indirectly, by an insurance agent as

inducement to purchase an insurance policy. For example, a rebate occurs when an agent

attempts to make a sale by agreeing to lower its commission on the sale in order to lower

the purchase price of the insurance. An agent must charge the purchaser the price which

has been filed with the Department by the insurance company the agent is representing.

(C) Proper disclosures

n insurance agent as

inducement to purchase an insurance policy. For example, a rebate occurs when an agent

attempts to make a sale by agreeing to lower its commission on the sale in order to lower

the purchase price of the insurance. An agent must charge the purchaser the price which

has been filed with the Department by the insurance company the agent is representing.

(C) Proper disclosures. Any solicitation or sale of an insurance product by a bank

shall occur in a manner that assures that the insurance is clearly differentiated from

deposit products insured by the Federal Deposit Insurance Corporation (FDIC) and

from products which are obligations of the bank. To accomplish this, the bank shall

provide written disclosure in 10 point type or larger before the sale of an insurance

product and written or oral disclosure with solicitations of insurance products.

Appropriate disclosure is also required when a bank affiliate, subsidiary or agency

uses the bank's name with its solicitation or refers to its relationship to the bank

such that it appears to a customer that the bank may have a beneficial interest in the

sale by the bank affiliate, subsidiary or agency. All such disclosures shall, at a

minimum, clearly specify that:

(a) Insurance disclosures. In connection with the initial purchase of an insurance

product or annuity by a consumer from you, you must disclose to the consumer,

except to the extent the disclosure would not be accurate, that:

(1) The insurance product or annuity is not a deposit or other obligation of, or

guaranteed by, the bank or an affiliate of the bank;

(2) The insurance product or annuity is not insured by the Federal Deposit

Insurance Corporation (FDIC) or any other agency of the United States, the bank,

or (if applicable) an affiliate of the bank; and

(3) In the case of an insurance product or annuity that involves an investment risk,

there is investment risk associated with the product, including the possible loss of

value.

f the bank;

(2) The insurance product or annuity is not insured by the Federal Deposit

Insurance Corporation (FDIC) or any other agency of the United States, the bank,

or (if applicable) an affiliate of the bank; and

(3) In the case of an insurance product or annuity that involves an investment risk,

there is investment risk associated with the product, including the possible loss of

value.

(b) Credit disclosure. In the case of an application for credit in connection with

which an insurance product or annuity is solicited, offered, or sold, you must

disclose that the bank may not condition an extension of credit on either:

(1) The consumer's purchase of an insurance product or annuity from the bank or

any of its affiliates; or

(2) The consumer's agreement not to obtain, or a prohibition on the consumer from

obtaining, an insurance product or annuity from an unaffiliated entity.

The disclosure shall be made orally during any sales presentation, when advice

concerning insurance products is provided, and both orally and in writing prior to

or at the time insurance is sold. The minimum disclosures should also be clearly

conveyed in telemarketing contacts.

Brochures, signs, or other written material containing information about both

FDIC-insured deposits and insurance products should clearly segregate information

about insurance products from the information about deposits. Disclosure shall be

incorporated into all advertisements and other promotional materials. Abbreviated

disclosures in the manner permitted by the Joint Interpretation of the Interagency

Statement on Retail Sales of Nondeposit Investment Products will be acceptable for

osits and insurance products should clearly segregate information

about insurance products from the information about deposits. Disclosure shall be

incorporated into all advertisements and other promotional materials. Abbreviated

disclosures in the manner permitted by the Joint Interpretation of the Interagency

Statement on Retail Sales of Nondeposit Investment Products will be acceptable for

the insurance products which are the subject of these Guidelines, although these

Guidelines do not cover identical products.

The disclosure shall be presented in a clear and concise manner.

FOR THE FORM AND CONTENT OF THE WRITTEN DISCLOSURE AND

RELATED MATTERS, SEE: INSURANCE DIVISION BULLETIN 132, ISSUED

CONCURRENTLY WITH THIS REVISION OF BULLETIN 117, AND THE

FORMS ATTACHED TO BULLETIN 132.

Banks may provide any additional disclosures that further clarify the risks involved

with insurance, provided that overall disclosure remains short and readily

understandable to the consumer.

Confirmations and account statements for insurance products shall contain the

disclosure if the confirmations or account statements contain the name, trade name

or the logo of the bank or an affiliate. Abbreviated disclosures in the manner

permitted by the Joint Interpretation of the Interagency Statement on Retail Sales

of Nondeposit Investment Products will be acceptable for confirmations and account

statements for the insurance products which are the subject of these Guidelines.

Confirmations and account statements provided by third parties unaffiliated with

the bank need not make the disclosure on confirmations and account statements

that may incidentally, with a valid business purpose, contain the name, trade name

or logo of the bank

cts will be acceptable for confirmations and account

statements for the insurance products which are the subject of these Guidelines.

Confirmations and account statements provided by third parties unaffiliated with

the bank need not make the disclosure on confirmations and account statements

that may incidentally, with a valid business purpose, contain the name, trade name

or logo of the bank. If a customer's periodic deposit account statement includes

account information concerning the customer's insurance products, the information

concerning insurance products should be clearly separate from the information

concerning the deposit account and should be introduced with the disclosure and

the identity of the entity conducting the nondeposit transaction.

(D) Physical layout. Selling or recommending insurance products on the premises of a

bank may give the impression that the products are FDIC-insured or are obligations of the

bank. To minimize customer confusion with deposit products, sales or recommendations

of insurance products on the premises of a bank should be conducted in a physical

location distinct from the area where retail deposits are taken. Signs or other means

should be used to distinguish the insurance sales area from the retail deposit-taking area

of the bank. However, in the limited situation where physical considerations prevent sales

of insurance products from being conducted in a distinct area, the institution has a

heightened responsibility to ensure appropriate measures are in place to minimize

customer confusion.

In no case shall tellers or other employees, while located in the routine deposit-taking

area, such as the teller window, make general or specific recommendations regarding

insurance products, or evaluate a customer's eligibility for such products, even if initiated

by the customer. Tellers and employees who are not authorized to sell insurance products

may refer customers to individuals who are licensed insurance agents.

her employees, while located in the routine deposit-taking

area, such as the teller window, make general or specific recommendations regarding

insurance products, or evaluate a customer's eligibility for such products, even if initiated

by the customer. Tellers and employees who are not authorized to sell insurance products

may refer customers to individuals who are licensed insurance agents.

(E) Dual employees. An officer or employee of a bank may be an officer or employee of

an affiliated agency. An employee of a bank may perform both insurance and financial

functions.

(F) Financial Privacy. Use of customer financial information by a bank is restricted by

Vermont and federal law. The Financial Privacy Act (8 V.S.A. §§1021-1025) and the

Federal Fair Credit Reporting Act (15 U.S.C. §1681 et seq.) are applicable to use of

customer financial information for the purpose of selling insurance. Issues regarding

financial privacy will be addressed in a separate document by the Banking Division of the

Department.

June 13, 1997

July 2, 2001