Written by: Arthur J. Flynn
The population of customers approaching retirement age in the United States is increasing. Bankers, broker-dealers, and asset managers are capitalizing on this rise by offering more and more retirement products for these customers. However, many Americans approaching this age have underfunded retirement portfolios, and those who lack financial experience may feel compelled to take actions that aren’t necessarily suitable for their financial position. Therefore, according to the Financial Industry Regulatory Authority (FINRA), older Americans are considered to be a more vulnerable section of the population when it comes to the risk of financial exploitation. Recently, increased communication and transaction activity between financial institutions and these customers brought more scrutiny by securities regulators.
In February of 2018, FINRA issued Rule 2165: Financial Exploitation of Specified Adults, along with complementary changes to Rule 4512 for Customer Account Information. These rules identified vulnerable customers as those over the age of 65, and those having certain mental impairments. Several states adopted similar rules, and all are aligned within the framework provided by the Senior Safe Act, which was signed into federal law in May of 2018.
These regulations and rules allow financial professionals to place a hold on disbursements for up to 15 days when financial exploitation is suspected, and to allow more freedom regarding customer privacy where vulnerable customers are concerned. However, if financial professionals do invoke these rules, they’re required to immediately initiate an internal review of the facts and circumstances, and are obligated to notify the trusted contact person of their actions and suspicions. Also, any financial professional invoking the protections of the Senior Safe Act must have relevant training in the area.
A Cause for Concern
The COVID-19 pandemic has severely impacted global health concerns and the U.S. economy, causing increased anxiety in society and extreme financial stress for many. Aside from increasing fraud activity directly related to COVID-19, seniors may feel a responsibility to liquidate securities or unwind investments in an unsuitable manner in order to provide for others, remain fiscally stable, or protect their financial wellbeing. In the current economic climate, when customers ask to make these potentially unsuitable transactions, it can be hard as an advisor to decipher whether the action is actually an appropriate response to an extraordinary circumstance (such as those seen during the pandemic), or if the activity is potentially unsafe for the vulnerable customer.
So, what are your firm’s obligations to your vulnerable customers and how can you prepare your advisors to help these customers make the safest decisions based on the laws in place?
Obligations of professionalism and due care are still in place. The expectation that a suitable investment approach will be formulated to pursue your customers’ best interest has recently been clarified, and in the case of vulnerable customers, this includes consumer protection.
You should know your customers and interact with them frequently to become aware of the financial challenges they face. Knowing your customers’ financial profile and situation will help your financial professionals spot a transaction that isn’t quite right.
Guidance and training to promote good practices should be in place and be demonstrable to regulators. Senior Safe Act training should be delivered and recorded for the professionals within your firm. It’s best practice to educate your customers on this act through informational brochures and facilitated awareness sessions.
Your Written Supervisory Procedures (WSP) should also include specific activities to:
- Gather and analyze customer information
- Reach out to trusted contact persons
- Supervise customer interaction
The WSP must provide usable guidance on initiating investigations after holding disbursements, and on reporting to authorities where required.
This stressful economic environment exposes your vulnerable customers to a much greater risk than before, and they’re relying on your firm to protect their financial wellbeing. This is the time to review your WSP, your training program, and your supervisory infrastructure to ensure you can effectively meet their needs.