A DELIBERATELY INDUCED CONFUSION Banks promise higher "interest", but on mutual fund units that are not guaranteed, not on bank deposits

"Read the prospectus carefully" is a piece of advice that applies not only to drugs, but to financial products as well. A practice reported by some readers, as well as by analyst Valentin Cismaru, is the pushing by the banks of investments in mutual funds, through a biased discourse, which emphasizes "superior returns" and their similarity with the bank deposits, over the risks and the fact that the investments are not guaranteed.

One of our readers experienced one such situation, and they told our editorial office that, upon going to open a deposit with a bank, the clerk proposed to them to buy mutual fund units, claiming that "they offer a far higher interest rate than deposits do", as the money will managed by the investment management company of the bank and it would be placed, for the most part, in deposits as well.

What the bank clerk "forgot" to mention was the fact that the investment in mutual fund units isn't guaranteed, like bank deposits are, instead suggesting that those mutual fund units have the same legal status as bank deposits.

The sale of mutual fund shares through banks is not illegal, but it is subject to very strict and complex regulations. But in practice, the sales techniques used can distract the customers' attention from these rules: the importance of the risk can be minimized to such an extent that customers are left thinking that they've basically deposited their money with the bank.

In the online segment, sending unsolicited offers is illegal. But what happens when you go to the bank to open a bank deposit and instead you are proposed to invest in a mutual fund?

The Financial Oversight Authority, which supervises the capital market, is hiding behind the stack of rules and thinks that as long as the clerks whispers something about risks while blaring out the advantages, everything is OK.

Valentin Cismaru noted, at the end of April: "There is a practice among Romanian banks to sell investment funds to depositors under the pretense that they are offering them instruments that have higher returns than deposits, which own deposits as well together with «something else»".

Mr. Cismaru said: "Plenty of (less knowledgeable) investors in open investment funds managed by the asset management companies owned by banks have the belief that they have placed their money in «bank deposits that own bonds» or that they own «bank deposits», through a different type of contract, that offers them higher interests".

The Financial Oversight Authority sent us a response discussing the rules that govern the advertising of mutual funds through banks: "The advertising materials must be clearly identifiable as such, accurate, clear and not mislead investors. Also, no advertising material that contains an invitation to buy shares in an Entity for Collective Investment in Securities should contain messages that contradict or diminish the relevance of the information comprised in the prospectus and of the key information destined to the investors".

The ASF also says: "As long as the promotion gets done in compliance with the legal provisions previously mentioned, and the proposal comes after the characteristics of the deposit have been explained, we see no problem with the situation that has been presented".

According to the ASF, "it is however a problem is people are promised the making of an « interest » (gain/return) and they are not told that it is not a fixed or variable interest rate and the fact that the redemption value can be lower than the subscription value, aspects which are in fact printed on the cover of the prospectus (according to art. 105 paragraph. (3) of Regulation no. 9/2014)".

The prospectus for the issuing of mutual fund units warns potential investors, through a standard phrase, printed on the cover of the prospectus, that investments in open mutual funds are not bank deposits, and banks, as shareholders of an Investment Management Company, offer no guarantee to investors that they would recoup the amounts invested. The prospectus also informs about the fact that the funds involve not only their specific advantages, but also the risk of failing to achieve their objectives, including that of the investors sustaining losses, as the revenues resulting from the investments are usually directly correlated to the extent of the risk.

The ASF has not yet responded to our question on who is in charge of checking whether all the legal provisions and regulations concerning advertising are complied with and whether it has ever audited bank branches for compliance with these regulations.

Marius Dunca, the president of the National Authority for the Protection of Consumers (ANPC), told us: "If depositors are not given all the information, that is considered an unfair commercial practice, because it prevents financial services consumers to make an informed decision". He also said that this practice involves fines ranging from 5,000 to 50,000 lei and the restriction on further resorting to such practices.

Marius Dunca told us that the authority he is leading can apply contravention sanctions to punish such sanctions, but in the absence of documentary evidence, it is very hard to prove the use of such a practice.

According to lawyer Gheorghe Piperea, the situation straddles the middle ground is of the competence of consumer protection and that of the protection of capital market investors.

Alin Iacob, the president of the Association of Romanian Users of Financial Services, estimates that promoting investments in mutual fund units by bank employees is legal, but not moral. He tells us that the situation reported by our reader is not an exception, because in the past, there has been speculation on this matter, about a certain bank that practices the sale of mutual fund units at its counters.

According to Alin Iacob, the normal thing to do would be for the bank branches that want to promote these instruments to have a separate office that would target only the consumers of financial services that want to invest in mutual funds.