Will Financial Exploitation Laws Save Our Seniors?
Updated: Feb 28, 2020
Over the past 15 months, authorities have promulgated efforts to stop America’s aging population from falling prey to scams and other forms of financial exploitation. The financial industry regulatory authority (FINRA) issued two rule changes to its members requiring reasonable efforts to be made to secure a trusted contact or advisor contact information of a client who is age 65 or older or who is 18 or older and is reasonably believed to be incapable of is unable to protect his or her own interests. The Senior Safe Act, signed into law by President Trump on May 24, 2018, is designed to sharply curb financial elder abuse in the United States. The premise of the Act is to educate financial service employees—whether at a banking institution or an advisory firm—to spot signs of elder exploitation and act accordingly by reporting suspicious transaction(s) to the proper authorities irrespective of banking/investing privacy laws.
Yes, elder financial exploitation is a problem in this country, and yes, these efforts are well-intentioned. Whether they will be effective is another question. Fraud in general is a difficult topic to study, and its complexity is compounded by introducing vulnerable victims such as seniors into the equation. Add to that the infrastructural challenges that come with our current reporting system, and you have a social problem where solutions are based on guesstimates instead of empirical analysis. Below is a further discussion of these new laws.
The term “financial elder abuse” is elusive
First and foremost, there is no official definition of what constitutes financial exploitation. Some definitions require the victim to be unaware of the offense. Thus, stealing money out of a wallet would constitute abuse but informing the elder that you need money to pay the electric bill would not. Some believe the definition has been satisfied even if the elder gives consent. On this definition, writing a check to help a needy family member would fail to qualify. Still others believe intent is a material element. This view sees a difference between a family member purposefully aiming to benefit from the elder’s property and unexpectedly benefiting or doing so without premeditation. An example of the latter is driving the elder’s car to take him/her to the doctor, and then, on the way back to the elder’s residence, stopping by the post office to pick up a personal package. There is general consensus on a conceptual level of what financial abuse is, but there is a lack of much-needed clarity of what it entails for policy formation and even incidence reporting applications.
The trusted contact
The FINRA rules require members to reasonably obtain the contact information of a senior’s trusted contact. The contact can be any natural person 18 years of age or older. The contact’s information need not be received or volunteered from the senior. This departs from much existing regulation such as money laundering where the member obtains the desired information directly from the client. Potential issues surrounding the FINRA rules include:
-Inherent limitation in scope. Not all financial advisors are securities licensed. Many advisors have nothing to do with investments but do other things such as handle banking and FDIC transactions, insurance products, or estate planning needs. Even if confined to the investment world, registered investment advisors are not necessarily members of FINRA and are regulated by a different entity altogether. Thus, FINRA rules as a whole don’t apply to them. Granted, the Securities Exchange Commission—the parent of FINRA, after a fashion—can promulgate its own regulation, but it doesn’t necessarily parallel-regulate with FINRA.
- Lagging logistics. The FINRA rules permits an advisor to pause fund disbursement for up to 15 business days while attempting to reach out to the client’s contact listed on the account and/or ascertain whether the client is being targeted with fraud or exploitation. Fifteen days, however, is insufficient in the event of an actual offense. Perhaps the contact can’t be contacted within one month or there is a new investment opportunity, but it is so complex and confusing that it takes longer than this amount of time to sort out. Personally, I have witnessed legitimate investment opportunities that required much time—longer than 15 business days—to completely vet. Keep in mind that the financial advisor has more than one client and is therefore only able to attend to a specific matter for a brief period of time within the work week. Between playing phone tag with relevant parties to reading-up on the latest laws and information related to an unfamiliar investment to requesting guidance from the internal compliance department, the advisor has much to do beyond handling a single questionable sell request.
-Broken advisor-client trust. The financial advisor is able to exercise discretion both in cases where the client is not an elder but is believed to be incapable of protecting his/her own interests. This includes those who are approaching elderly status as well as younger people with mental or physical limitations. The advisor is also free to use reasonable means to acquire said contact’s information even if it means going behind the client’s back. Even if the advisor is forthright in intention, this won’t necessarily be perceived as such by the client. It could easily come across as betrayal, and that’s not good for any healthy relationship. Advisors are already viewed in a negative light when it comes to competition; Often, an advisor will drag feet when the realization hits that a client is leaving. Good faith efforts to comply with the FINRA rules might be misinterpreted by the client as reduced opportunity for the advisor to financially benefit regardless of commission or fee.
Compliance means training staff to spot signs of financial elder abuse. This implies knowing what to look for. Unfortunately, much of the literature that exists is based on qualitative findings that amounts to simple average calculations or identifying trends by studying aggregated news releases. This is not to say that qualitative research has no place, but if you are deriving policy measures based on scientific fact, the best you are going to do without empirical investigation is association—that whenever you see A, you will probably also see B. This of course doesn’t mean that A causes B—you need quantitative methods for that. My recent research investigates the claims of financial elder abuse over the past decade and finds that many of the qualitative findings aren’t supported by quantitative results. Moreover, there is a systemic problem in our reporting mechanisms upon which we base our theories and form our responses. Thus, the particular issues related to the Senior Safe Act are as follows.
-Only third-party protection (at best). Reporting mechanisms such as the National Incident-Based Reporting System (NIBRS) of the FBI divides culprits into groups. These can be summarized as follows: family members; known but not family; and strangers. In financial services, “known but not family” often translates to advisors, and “family” could also include those in power of client accounts such as conservators, trustees, or the aforementioned contact person. The Act won’t protect against the possibility that the trusted contact is the perpetrator. Also, family members or close friends may have access to the elder’s accounts, specifically the passwords, or know the answers to security questions. That just leaves strangers, who perpetrate a much lower share of financial elder abuse compared to family and trusted advisors.
-Only protects assets under management. Money managers can only protect the money that is under their supervision and control. Perhaps the bulk of a client’s investable and semi-liquid capital lies outside brokerage accounts or individual retirement accounts (IRAs). If the elder is being bilked for everything, this Act will only safeguard a percentage of the wealth. That’s not nothing, but it is a far cry from the promises proclaimed by the legislation’s co-authors. Even if the bank and investment firm staff are well-trained to spot elder abuse, does that mean Human Resources personnel, who are often the point of contact for a participant’s employer-sponsored retirement plan, are as well (which the Act doesn’t cover)? Probably not. Additionally, what happens if the elder is convinced to take out a line of credit against the home to invest the money in a pyramid scheme. Will the bank officer necessarily catch on before it’s too late?
-Only stops certain crimes. Will this prevent a senior from manually liquidating his or her investment portfolio to hand over the money to a smooth-talking swindler? Probably. Will it stop a hacker from procuring the senior’s login credentials and illegally converting the funds or stealing the elder’s identity and financially benefiting from the theft? Doubtful.
*Note: This article raises another issue with the Safe Act that I mentioned with the FINRA rules: the fact that the staff can place a temporary hold on a transaction; Under this legislation, it can be held for up to 30 days. Still, the same problems persist regardless of whether the hold is for 15 business days or 30 calendar days.
There will probably never be a panacea for elder exploitation, but this doesn’t mean that we shouldn’t strive to find a cure. We must protect our seniors, not only because we are duty bound to vouchsafe the welfare and protection of our fellow Americans—particularly those most vulnerable, but also because seniors hold he majority of the wealth, will leave the lasting legacies, and will gift the most to charities and other non-profits. This protection takes the form of policies, rules & regulations, and standards to which we can collectively identify, neutralize, and prevent elder abuse. However, these methods of action must be founded on sound, empirical research, which is, for the time being, sorely absent.