Under section 5 of the Federal Trade Commission act, a business is not allowed to purposely attempt to deceive or act unfairly in relation to commerce. It applies to any and all companies that are involved in commerce, including retail banks. Where any deceptive and / or unfair practices or acts are discovered, the Federal Trade Commission (FTC) has the authority through section 8 of the act to take the appropriate level of action.
The legal standards that relate to deception and unfairness are actually both independent of one another. Depending on the exact specifics of the case a business practice may be deceptive, unfair, or even both. The legal standards for each of these are listed below.
A practice or act is considered to be deceptive where:
- It uses a misleading omission, practice, or representation that is material.
- The interpretation by a consumer of the omission, practice, or representation is reasonable given the circumstances.
- An omission, practice, or representation is likely to or completely misleads a consumer.
A practice or act is considered to be unfair where:
- There is no outweighed benefit to competition or a consumer.
- It cannot be avoided by a consumer in a reasonable manner.
- It is likely to cause or completely cause serious injury to a consumer.
Relationship With Other Ratings & Laws
Whilst some specific practices or acts may not only violate section 5, but also other state and federal laws, some may only violate the Federal Trade Commission Act while still complying with all other regulations and consumer protection laws. This means that where a violation is identified, investigators should look at whether any other regu;atory or statutory violations have been made.
When any illegal practices are found to be in place from conducting a review of compliance, the investigators ought to think about whether these things negatively impact upon the Community Reinvestment Act rating of the company in relation to the requirements of 12 CFR 228.28 (c).
Evaluating Compliance Risk
Violations of section 5 of the Federal Trade Commission Act pose great risk on the grounds of compliance, reputation, and legal standing for banks. This highlights the requirement of investigators to consider compliance in conjunction with examination, supervisory activities, and complaint investigations. Compliance with section 5 should always be considered when either conducting a risk assessment, looking into an examination, or for when conducting an investigation into a complaint from a consumer.
Determining if a certain practice or act is deceptive or unfair depends solely on an in depth review of the circumstances and the facts surrounding them. Whilst individual complaints or violations may at first seem to be isolated occurrences, when they are looked at within the context of other information, such as previous complaints and / or violations, this might pose potential concern.
Additionally, ruling against these practices is not only applicable for services and products sold by a company but for all the different parts involved in the development, creation, and eventual roll out of the product / service into the marketplace. They are also applicable to collections and the servicing of products. This means that extra attention ought to be paid to modified or completely novel products or systems and the third party arrangements that are in place with these.
Procedures & Objectives Of Examinations
In order to be able to adequately determine if a bank’s internal controls, policies, and procedures are compliant with section 5 of the Federal Trade Commission Act, they must first all be identified and then reviewed. This is especially true of the bank’s promotional and advertising materials, collections and servicing, compliance management system, disclosures, and the monitoring and management of its employees and any third parties that are involved in the running of the business. These areas require review as they involve the services and products that have been earmarked as areas of potential concern.
Investigators need to utilize these procedures along with best practices and guidance in order to determine if a deceptive or unfair practice or act has happened. Specifically, investigators should:
- Question staff and management on the bank’s practices and acts.
- Review findings relation to the company’s previous or current involvement in violations of section 5.
- Review any investigation reports that have already been carried out.
- Discuss concerns with management.
- Review advertising materials, consumer complaints, and contracts with third parties.
- Review internal controls, procedures, and policies.
Programs For Compliance Management
The compliance management program of any bank should aim to avoid practices and acts that are deemed deceptive or unfair and quickly correct these where appropriate. Depending on the size, product offering, and complexity of the bank, the degree of specificity to address any issues will vary greatly. With a small scale bank that only has a limited product offering and a few branches, it is likely that it does not require a highly specific and documented program for compliance like a nationwide bank does.
When evaluating compliance management programs, it needs to be determined if the bank’s procedures and policies include any guidance that looks at preventing deceptive or unfair practices or acts. Similarly, it needs to be ascertained if the bank performs consistent reviews of its own practices with respects to federal decisions, policies, and regulations on deceptive or unfair practices or acts. It is also important to determine if the bank provides training to its employees on the finer details of the Federal Trade Commission Act. Finally, it is equally important to find out if any of the bank’s management team are involved in the development of services and products and if they are also involved in the decisions made to change the terms of existing service and products.
Promotional & Advertising Material
With how complex some of the products that are now being offered by banks have become, such as credit cards and personal loans, the promotional and advertising materials that are used to promote them should be balanced, clear, and concise so that even the financially vulnerable are able to fully understand the messaging.