US regulators signalled yesterday they will be increasing their scrutiny of banks that provide investment advice and related services to wealthy customers.
Gary Silverman
in New York
The question of how banks serve the wealthy has become increasingly controversial, raising fears that banks may be taking excessive reputational risks in catering to the rich.
A Congressional committee is investigating whether Citigroup's Salomon Smith Barney unit allocated sought-after shares in initial public offerings to wealthy executives of telecommunications groups, such as WorldCom and Global Crossing, in hopes of winning investment banking work.
The Office of the Comptroller of the Currency (OCC), a branch of the Treasury Department that oversees banks, said it was providing its examiners "with expanded examination procedures" for what it called "personal fiduciary services".
In its handbook for examiners, the OCC says: "Personal fiduciary services are part of a growing and competitive market frequently referred to as 'private wealth management', 'private client services' or 'private banking'.
"However these services are described, they usually entail providing a broad range of financial services to affluent persons, their families and their businesses," according to the publication.
The handbook says examiners should be mindful that banks need solid reputations to engage in such work and that "negative publicity, whether deserved or not, can damage a bank's ability to compete".
The publication makes it clear that regulators believe boards of directors and senior managers should play an active role in ensuring reputational risks are avoided.
"Personal fiduciary services must be managed by or under the direction of the bank's board of directors," it says.
"The board and senior management are responsible for ensuring that the fiduciary risk management system includes sound internal controls and an adequate and effective audit programme," the publication says.
According to the handbook, banks should set up a "due diligence process for reviewing each prospective account" handled by its personal fiduciary services operation.
Before accepting an account, the OCC handbook adds, banks should ensure they are avoiding conflicts of interest that would impair their ability to "act exclusively in the best interest of the client".
