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FDIC Consumer News - Spring 2001

Important Update: Changes in FDIC Deposit Insurance Coverage

The FDIC deposit insurance rules have undergone a series of changes starting in the fall of 2008. As a result, certain previously published information related to FDIC insurance coverage may not reflect the current rules. For details about the changes, visit Changes in FDIC Deposit Insurance Coverage. For more information about FDIC insurance, go to www.fdic.gov/deposit/deposits/index.html or call toll-free 1-877-ASK-FDIC (1-877-275-3342). For the hearing-impaired, the number is 1-800-925-4618.

 

One-Stop Shopping for Financial Services: A Window of Opportunity for the Informed Consumer

Banks and savings institutions are increasingly becoming financial supermarkets offering investments and insurance products in addition to insured deposits. Here's how to understand the risks, including knowing what's FDIC-insured and what isn't.

Many of you probably can remember your first checking or savings account, most likely at an FDIC-insured bank or savings institution in your neighborhood. You knew the FDIC would protect you from losses if the institution failed. Today's banking institutions still provide safe, federally insured deposits. But developments in recent years, including a 1999 "financial modernization" law (the Gramm-Leach-Bliley Act), have made it easier for FDIC-insured institutions to offer stocks, bonds, mutual funds, annuities, life insurance and other products not traditionally sold by banks. These products can be attractive alternatives to bank deposits because they often provide a higher rate of return. But unlike deposits, these other products are not FDIC-insured and, in some cases, could lose value.

Image of a man painting "FDIC Insured, Checking Accounts, Passbook Savings, CDs,And... Try These Products (Not FDIC-Insured, Stocks and bonds, Mutual Funds, Annuities, Life Insurance" on a bank window

This array of financial products available from banking institutions offers great convenience to consumers. It means you can take care of most (if not all) of your financial needs—from banking to investing to buying insurance—under one roof. You have the ability, for example, to put your retirement savings into mutual funds and insured bank deposits offered by one provider. Or, you can get your auto loan and your auto insurance from the same organization.

But along with a wider range of savings and investment options comes an increased need for consumers to be knowledgeable about these new banking products and the different risks associated with them. "The old rule-of-thumb was, 'if it comes from an FDIC-insured institution, it must be completely safe because it's covered by FDIC insurance,' but that doesn't necessarily hold true," says Kate Spears, an FDIC consumer affairs specialist in Washington. "These new products can offer the potential for higher returns than traditional deposits, but consumers need to understand these products, especially the risks, before they make a purchase."

One important aspect of understanding the risks is to know which products offered by banking institutions are covered by FDIC insurance and which are not.

"It's easy to understand how some consumers could become confused about which products are FDIC-insured, especially when the new investment products are sold at the same offices where customers can open deposit accounts," says Kathleen Nagle, also of the FDIC's consumer affairs division in Washington. Two examples:

  • A stockbroker at your bank or savings institution can sell securities and mutual funds that are protected against certain losses, but not by the FDIC and not in the same way the FDIC insures deposits. The Securities Investor Protection Corporation (SIPC), a non-profit corporation (not a government agency) funded by brokerage firms, provides limited coverage if, for example, a member brokerage firm goes out of business. The SIPC doesn't insure you against financial losses caused by market declines. (To learn more, go to the SIPC Web site.)

  • Your bank or savings institution can sell annuities, which are investments with income guaranteed to start some time in the future. Annuities may appear to be "insured" because they guarantee a minimum payment for life, but these products are not FDIC-insured.

As part of the FDIC's ongoing efforts to educate consumers about what is and is not FDIC-insured, and to help you better understand the wide array of investment, savings and insurance choices available from banks and saving institutions, we offer the following guide.

Insured or Not?

Federal law is specific about what is a deposit covered by FDIC insurance. In general, think of a deposit as money you put into a checking or savings account at a banking institution that can be used by the institution to make loans to other customers. Examples of FDIC-insured deposits include:

  • Checking accounts, Negotiable Order of Withdrawal or NOW accounts (checking accounts that earn interest), and Money Market Deposit Accounts or MMDAs (savings accounts that allow a limited number of checks to be written each month).

  • Savings accounts that you can add to or withdraw from at any time.

  • Certificates of deposit (CDs), which generally require you to keep funds in the account for a set period, perhaps from three months to five years. Money can be taken out beforehand if you pay an early withdrawal penalty.

Questions to Ask Before Buying an Investment

So, what's NOT insured by the FDIC that consumers often mistakenly believe may be federally insured if a banking institution is involved?

  • The contents of safe deposit boxes. Even though the word deposit appears in the name, under federal law a safe deposit box is not a deposit account—it's strictly a well-secured storage space rented by an institution to a customer. If you are concerned about the safety or replacement of items you put into a safe deposit box, ask your insurance agent whether your homeowner's or renter's insurance policy covers your safe deposit box against damage or theft.

  • Losses due to theft or fraud at the institution. However, these situations often are covered by special insurance policies that banking institutions buy from private insurance companies.

  • Errors made in your accounts. In these situations, there may be remedies for consumers under state contract law, the Uniform Commercial Code, and some federal regulations, depending on the type of transaction.

  • Insurance and annuity products, such as life, auto and homeowner's insurance. Not only are these products not backed by the FDIC, but some insurance products may even lose value.

  • Stocks, bonds and mutual funds.

  • Investments backed by the U.S. government, such as Treasury securities and Savings Bonds.

How to Tell the Difference

First, remember that FDIC insurance protects only deposits. Products such as mutual funds, annuities, stocks, bonds and U.S. Treasury securities are not deposits and therefore are not protected by the FDIC. Mutual funds, stocks and bonds are subject to investment risks, including the possible loss of principal, even if you bought them from your FDIC-insured institution. Treasury securities and Savings Bonds, while not insured by the FDIC, are backed by the full faith and credit of the U.S. government.

Two products that are easy to confuse because they have similar names are Money Market Deposit Accounts and money market mutual funds (often called money market funds). MMDAs, as we described previously and as the name indicates, are deposits and, as a result, are covered by FDIC insurance. Money market mutual funds, on the other hand, are funds that invest primarily in short-term corporate bonds or government securities and are not deposit accounts insured by the FDIC.

To minimize potential confusion about which products are FDIC-insured, banks and savings institutions are required by

$100,000 FDIC Insurance—What's Included
federal banking regulators to clearly differentiate insured deposits from investments, both in their sales practices and their advertisements. For example, to the extent possible, investment sales should not take place in a bank's teller area. Institutions also must ensure that sales personnel are properly qualified and trained, and that they recommend investments that are suitable for each customer. In addition, when offering or advertising an investment product to a customer, FDIC-insured institutions must indicate that the investment:

  • Is not FDIC-insured;

  • Is not guaranteed by the bank or savings institution; and

  • Is subject to investment risk, including the possible loss of principal.

Before an investment sale is completed, a customer also must sign a statement saying that he or she understands that a particular investment carries risks and is not backed by the FDIC. "Investments often are an important part of a person's overall financial plan," says Amy Aulthouse Mitchell, a securities specialist with the FDIC in Washington. "We simply want customers to understand, before committing to an investment, that they would be moving beyond the protection of a deposit and into a product that may lose value."

Mitchell also notes that the bank regulatory agencies recently adopted similar consumer protections governing insurance sales. The new rules, which will become effective on October 1, 2001, require banking institutions to notify customers that insurance products and annuities are not FDIC-insured and, where appropriate, are subject to investment risk.

The rules also prohibit institutions from "tying" loan decisions to insurance sales. For example, a bank can't condition its approval of your auto loan on whether you buy car insurance from that bank or one of its affiliates. "In essence, the consumer is free to purchase the insurance from any source, and the bank must explain that to the consumer," says Keith Ligon, a supervision policy chief for the FDIC in Washington.

Final Thoughts

Times have indeed changed for you as a consumer. Banking institutions are now able to offer more choices to their customers, including financial products that are not FDIC-insured deposits. This freedom to choose among a variety of products can be very convenient and make it easier to manage your financial affairs. However, this freedom comes with the responsibility to be an informed consumer. We hope our story provides information and suggestions that will help you choose and use financial products wisely.

For More Help or Information Regarding the Array of Products Available

One thing that hasn't changed in all these years is the role of the FDIC in protecting America's consumers. FDIC insurance provides a guarantee that your insured deposits will be safe in the event your bank or savings institution fails.

The FDIC also is here to help you with your banking questions or problems. Our services include a toll-free consumer assistance phone line and an Internet site where you can get resource materials and send questions to the FDIC online. Among the FDIC publications describing what is or is not insured by the FDIC is "Your Investments," which is available online or in single copies from the FDIC's Public Information Center. The FDIC offers assistance to individual consumers in a variety of ways because we share a common goal—to protect your money.


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Last Updated 4/16/2004 communications@fdic.gov