Remarks by
John D. Hawke, Jr.
Comptroller of the Currency
Before a Conference Sponsored by
The Consumer Bankers Association
Robert Morris Associates
San Francisco, California
June 7, 1999


Last November, when I was awaiting the White House announcement of my 
appointment to serve as Comptroller of the Currency, the then Acting 
Comptroller, Julie Williams, made a speech on customer service.  It 
was a speech that I'd long thought needed to be given and had been 
looking forward to giving myself as Comptroller. 
     The thrust of her remarks seemed irrefutable -- at least to me.  
She began by sketching the historical evolution of bank supervision -- 
from the days when it consisted of a simple measurement of a bank's 
internal management and core operations, to today's broader, more 
encompassing approach of assessing risk in all its manifestations -- 
political, social, and economic. 
     And that brought her to the central point.  "Bankers," she said, 
"need to weigh their business decisions -- decisions that might be 
perfectly above-board from a legal or regulatory standpoint -- 
against the reaction those decisions might elicit from the customers 
and communities they are chartered to serve." "They need to be aware," 
she added, "that actions perceived by a customer to be unreasonable 
or unfriendly may trigger a backlash whose costs can easily exceed the 
narrow value of that customer's business." Indeed, she argued that 
perceptions of deterioration in bank customer service had already 
hurt the industry in its efforts to achieve its legislative goals.  
By working to improve customer service, she concluded, banks had an 
opportunity to swing public opinion more to their side.
     Generally, the speeches of bank regulators have a short shelf 
life: you read about them in the trade press for a day or two, and 
that's that. But Julie's speech sparked a spirited debate that 
lasted for weeks. Some people were startled -- even offended -- 
that a regulator would depict customer service as a safety and 
soundness issue.  Others suggested pointedly that regulators keep 
their noses out of the banks' lawful relationship with their customers 
and let the free market do its job.  After all, they said, 
if customers don't like the service they're getting, they're always free 
to take their business somewhere else.
     But most commentators called the speech timely and important.  
Said one banker, "we as an industry would be better off paying 
attention" to the customer service problem than "to deny it or 
make excuses about it." 
     I applaud that kind of candor.  I belief that customer service is a 
subject that clearly falls within the OCC's purview -- for all the reasons 
Julie cited and for a few more. Of course, while it's important to generate 
discussion, it's even better if a speech leads to constructive action.  
The industry's progress -- or lack of it -- in dealing with the customer 
service issue since Julie delivered her speech is what I'd like to talk to you 
about today.  And I'd like to discuss the work of the OCC's customer assistance 
group -- one way we're trying to help bankers to do an even better job of 
meeting their customers' service expectations. 
     First, Julie was absolutely right in affirming that customer service 
is a safety and soundness issue -- that is, unless you hold the view that 
a bank can afford to alienate its customers and damage its reputation without 
weakening itself.  History is replete with cases of whole industries brought 
to the brink of extinction because a customer be damned attitude became 
embedded in the corporate culture.  During the late 1970s and early 1980s, 
for example, the domestic auto industry's indifference to customer satisfaction 
and changing customer preferences cost it a huge piece of the U.S. market -- 
a loss it's still struggling to recoup. 
     Banks could afford to turn a deaf ear to their customers if there were 
no place else for their customers to turn.  But that's clearly not the case.  
Just as American households turned to foreign auto manufacturers 20 years ago, 
consumers of financial services have a wide choice of nonbank suppliers today.  
Competition has never been stronger, and, more than ever, customer service is a 
key competitive battleground.  It concerns me -- as I know it concerns you -- 
that an increasing number of nonbank competitors are making a selling point of 
their nonbank status.  When advertising stresses, "we're NOT a bank," 
and promises a higher level of responsiveness, local decision-making, 
and customer service, it highlights a problem of major proportions for banks. 
     Customers all too frequently have negative predispositions about 
banks, and bank practices too often validate them.  For example, some 
institutions' penchant for piling on fees and penalties reinforces the 
stereotype of the banker as Scrooge.  Customers often don't understand 
why they should have to pay to gain access to their funds, or why 
talking to a teller might warrant a surcharge.  You know that all 
bank services are delivered at a cost, and that you can't last long 
giving away products and services for nothing.  But banks generally 
have not done a good job of explaining this fact of life to 
customers. 
     Industries that regularly win higher scores for customer 
service are likely to become your most significant future competitors.  
The computer software industry, for example, always ranks near the 
top in consumer surveys -- a fact that should worry traditional bankers, 
given the rapid growth of on-line financial transactions.  Merrill, 
Lynch just last week announced a major move into electronic delivery 
of financial services. To suggest that the competitive challenges you 
face from those quarters are unrelated to the safety and soundness 
of the banking system and the value of the bank charter strikes 
me as woefully misinformed. 
     It's also the OCC's responsibility under the law to ensure that 
consumers are protected in their dealings with national banks. 
Unfortunately, there's mounting evidence of an increase in banking 
practices that are at least seamy, if not downright unfair and 
deceptive -- practices that virtually cry out for government scrutiny.  
     Two particularly objectionable practices have recently come 
to our attention. The first involves financial institutions that, 
without letting customers know about it, have stopped reporting 
consumer credit lines, high credit balances, and payment records to 
credit bureaus.  Some lenders, in particular, appear not to be 
reporting their payment experiences with subprime borrowers 
in order to protect against good customers being picked off 
by the competition -- even though these customers may have been 
lured into a high-rate loan as a way of repairing a bad credit history.  
These high-interest borrowers may be rudely surprised when they 
discover that their good credit history as a subprime borrower 
isn't reflected in their credit files when they seek credit in 
the future and that they are unable to obtain better rates 
based on their good credit record.   
     Failure to report may not be explicitly illegal.  But it 
can readily be characterized as unfair; it may well be deceptive, 
and -- in any context -- it's abusive.  OCC staff has been 
discussing this issue with the other banking agencies and 
with the Federal Trade Commission staff, and is working to develop 
a joint supervisory response to this practice. But that may not 
be the end of it: Congress is already homing in on the problem. 
     The second item involves the sale of personal customer 
financial information to telemarketing firms.  What's happening 
is basically this.  A bank will enter into an agreement with an 
unaffiliated telemarketing firm under which the bank provides 
extensive confidential customer information in return for a 
commission on sales made by the marketing firm.  And the information 
goes well beyond mere lists of names.  It also includes addresses, 
telephone numbers, social security numbers, dates of birth, credit card 
numbers, checking account numbers, account balances, credit card 
purchases, last payment dates, occupations, marital status, and 
credit scoring information.
     With this information, a telemarketer can profile bank customers 
and offer so-called  trial memberships most likely to appeal to a 
particular customer.  If a customer indicates an interest in seeing 
materials about the offer or expresses an interest in the trial 
membership, his account at the bank is automatically charged by the 
telemarketer -- without the customer ever divulging his account number, 
much less knowingly authorizing the charge or withdrawal.  
     In many cases, the customer may not realize that he's being 
charged unless he spots and questions an unfamiliar item that 
appears on his monthly statement.  And in many cases, the "trial" 
membership automatically converts into a continuing series of 
monthly charges unless the customer affirmatively "opts out" of 
the program. The disclosures provided to a customer about the need 
to opt out in order to avoid continuing charges often leave much to 
be desired, and the bank's published privacy policies frequently 
fail to make reference to this use of confidential customer information.
     In my judgment, this practice raises a number of serious legal 
concerns, which we and others are currently reviewing.  Judging from 
the calls we receive from state attorney general offices around the 
country, the scope of the concern may be widespread.  
     In addition to the legal issues, however, one must be troubled 
about the implications of this practice for the preservation of 
customer confidence in the confidentiality of the bank-customer 
relationship.  We heard loud complaints from many in the banking 
industry that the now-defunct Know Your Customer regulation would do 
severe damage to customer confidence -- as I believe it would have.  
But there doesn't seem to be the same sensitivity about damaging 
that relationship when there are commissions to be earned from the 
sale of confidential information. 
     Issues surrounding the transfer of customer information already 
have lent momentum to proposals for new federal legislation, and 
the emergence of practices such as I've described will only increase 
the likelihood of new legislation. 
     And that brings up the third reason why customer service is a 
legitimate public policy issue for bank regulators.  What Julie 
warned about in her November speech -- the risk that consumer 
complaints would translate into legislation that the industry may view 
as adverse to its interests -- now seems more real than ever before. 
     One can review the history of consumer protection legislation over 
the past three decades and see one common and compelling theme: 
consumer abuses that are allowed to continue without being addressed 
by the industry are eventually addressed through regulatory legislation.  
And this audience knows as well as any that the cure can be more 
painful than the disease.  Truth in Lending, Fair Credit Billing, 
Fair Credit Reporting, and Truth in Savings were legislative responses 
to clear abuses the industry proved unwilling to address on its own.  
These enactments not only created significant compliance burdens 
for the industry, but vastly expanded the enforcement responsibilities 
of the banking agencies, and added significant complexity to the 
traditional process of safety and soundness examination.
     While it might be unfair to burden an entire industry with 
legislation aimed at curbing the poor conduct of a few institutions, 
the persistent failure of the industry itself to address abusive 
conduct creates a fertile seedbed for legislation.  Perhaps it's too late 
for industry codes of conduct, self-policing arrangements, or even 
statements of best practices to relieve the burdens of regulatory 
legislation already on the books.  But it may still be possible to 
avoid new legislation crafted to remedy today's excesses.  
     What's needed, in my judgment, is for the leaders of the 
industry, including the Consumer Bankers Association and RMA, 
to speak out on these issues.  You must emphasize to Congress 
and the American people that the banking industry stands ready to 
take the steps necessary to clean up its act.  If you are unable or 
unwilling to develop an industry self-regulatory mechanism, or to 
promulgate codes of conduct with incentives for voluntary compliance, 
you can at least assist in that effort by providing guidance on 
the kinds of practices that are and are not acceptable.  In my view, 
the banking industry's response must be prompt and unambiguous in 
order to stem the tide of corrective legislation. 
     This represents a significant challenge.  And while it's not 
our job to draft standards of fair conduct, we can help banks to respond 
more effectively to consumer issues and concerns. In fact, over the 
past year, we have -- quite unexpectedly, I should add -- amassed a 
significant amount of information about bank-customer relationships 
that can be of real value to bank management seeking to upgrade its service.
     In April 1998, the OCC installed a state-of-the-art consumer 
hotline system at our customer assistance center in Houston. 
Although we have not widely advertised or promoted this facility, 
our call volume has grown dramatically. In 1997, before we installed 
the new system, our customer assistance group logged some 16,000 consumer 
complaints.  In 1998, the number rose to more than 68,000.  And, 
if the complaint volume during the first quarter of 1999 holds for 
the entire year, we should be well over 100,000 this year.  
Again, that's without any promotion on our part.  
     Our approach to this operation is not regulatory- or 
compliance-oriented.  We are not seeking out violations of law.  
Most of the complaints we receive are the result of a breakdown 
in communications between a bank and a customer.  We lend our good 
offices to the resolution of disputes.  If the customer's 
complaint lacks merit, we're frank to say so.  In my view, 
this operation has been a great success, for both customers and 
banks. 
     What's most disturbing, however, is the large number of 
complaints we receive about bank practices -- such as those 
I've already mentioned -- that, intentionally or not, violate 
the letter or the spirit of consumer protection laws or that 
clearly strain the boundaries of ethical conduct. 
     I think of our customer assistance center as 
performing two critical functions.  
First, it provides an outlet for consumers, where their complaints 
will receive prompt and efficient attention. Second, it adds 
value to the supervisory process by giving bankers insight into 
their customers' assessment of the service they provide. A number 
of national bank CEOs to whom I've spoken have expressed 
surprise at learning the extent of the service problem, and 
I suspect most CEOs or boards of directors never learn through 
internal processes about bad customer assessments of their service, 
or about questionable practices at the marketing level.  The 
information collected by our Houston unit can inform senior 
management where steps are necessary to improve the quality of the 
service their banks deliver.  It can also point toward internal 
processes and control weaknesses that they should be interested 
in fixing.  
     Of course, when we find that consumer protection laws 
have been violated, our response will be firm.  But shoddy 
and unethical practices, marketing schemes that overreach or 
exploit, and offensive sales techniques may not be currently 
sanctionable under the law.  It's very much in the interests 
of the banking industry and its customers to eliminate such 
conduct. Effective self-policing should be undertaken as a matter of 
enlightened self interest -- not only to improve customer relationships, 
but to demonstrate to Congress that new regulatory legislation aimed at 
curbing abuses by banks is not needed. The industry's future could well 
depend on how it responds to this challenge.