Are Financial Institutions Part of the Problem When it Comes to Enabling Financial Exploitation?

The Wall Street Journal has a good article, Officials Seek Clampdown on Elder Fraud, reporting on attempts by federal and state agencies to increase accountability for financial exploitation, especially of older persons, by financial institutions handling the transactions: 

Grappling with growing financial exploitation of the elderly, state officials are pressing for laws that require financial advisers to report suspected “elder fraud” to authorities. But the mandate faces pushback from the financial industry, which says it could result in a massive number of reports that turn out to be false….

 

To help curb the problem, a coalition of state securities regulators in September proposed a model state law that would require financial advisers, including brokers at large investment houses and independent advisers, as well as their supervisors, to report suspected elder financial fraud to both a state securities regulator and an adult protective-services agency.

 

The legislation would mandate prompt reporting by a financial adviser who “reasonably believes that financial exploitation” of an older person “may have occurred, may have been attempted, or is being attempted.” The bill gives brokers and advisers civil immunity from privacy violations for reporting suspected fraud, and allows them to put a temporary hold on suspicious account disbursements. Supporters say advisers and brokers are well-positioned to raise early warnings about exploitation that can leave elderly victims with scant money left for necessities and little time to rebuild savings.

In hearings where I’ve testified about the potential benefits of so-called “mandatory reporting” by financial institutions, representatives of banks offer a host of explanations for why mandatory reporting isn’t necessary.  Sounds like the same arguments I have encountered were repeated for the Wall Street Journal reporters:

Currently, even when financial advisers suspect an aging client is being taken advantage of, many say they are hamstrung by strict rules governing the execution of trades and processing of withdrawals, and worry about violating privacy laws if they report concerns.

 

The current system, “kind of puts advisers and firms in between a sort of legal rock and hard place,” said Steve Kline, director of state government relations for the National Association of Insurance and Financial Advisors, a professional association. The proposed rules aim to provide clarity.

Certainly I understand industry hostility to more regulations.  At the same time, it seems to me that one option would be to offer immunity from tort or contractual liability for “negligent” failure to report suspected financial abuse, for any financial institution that can show it routinely monitors for abuse and that uses a reasonable system for reporting.  A “carrot” rather than a “stick” to encourage reporting. 

Our thanks to University of Illinois Professor Dick Kaplan for sharing this article.