Question 14.5: What risks do investment products pose for the institutions ...

There are several risks involved in the sale of these products. The value of these products is market driven and customers may blame the bank when they do not reach their earnings goals. Because of their reputation, customers may hold depository institutions to a higher standard than securities brokers. As a result, they may end up involved in costly litigation with customers who are disappointed or who claim that the risks involved were not adequately explained. In addition, they may have compliance problems if they do not properly register their investment products or fail to follow the rules for the sale of these products.

Regulators already require these products to be sold in a separate area from where deposits are taken and banks are required to prominently display that these products are not covered by deposit insurance. In addition, customers must be told that these products are subject to risks including potential loss of principal. Customers must sign a document stating they were informed of these risks. In addition, they must make sure that the names of these products cannot be confused with their regular products. Finally, they must demonstrate that they are regularly monitoring themselves to ensure that their sales personnel are complying with the regulatory requirements and banks are also supposed to be sure that the products they sell meet the needs of each particular customer and situation. Compliance with these regulations should help minimize the risks inherent in these products.