A recent disclosure Citigroup Inc. sent to many checking account customers looks like a model of the form: prominent and succinct. But it may have been a bit too succinct.
Most of Citi's [C] consumer checking account statements last month included a warning that, beginning April 1, the banking company would reserve the right to delay customers' access to their funds for seven days.
What the disclosure did not mention is that this is a routine — and long-standing — condition for that type of account.
"Citibank Freaks Out Customers With Weird 7-Day Rule On Withdrawals, But It's Not As Devious As It Looks," is how the blog Consumerist.com, owned by Consumers Union, characterized the widespread customer reaction to the disclosure.
"Citi's mistake was not the prominence of the message but the clarity of the language," said Campbell Edlund, the president of the consulting firm EMI Strategic Marketing Inc. "It's a good branding decision these days not only to be compliant but also to think about how to translate complex financial products and regulations into language that's comprehensible by the end user. … That's the mistake that was made here: not translating this into language that was easy to understand."
The wording was especially unfortunate for Citi, whose "trials and tribulations over the past year are the subject of dinner conversation these days," Edlund said. "Customers may tend to look at Citi communications with something of a jaundiced eye, so that's something they might need to grapple with. Perhaps their compliance team wrote this, instead of marketers."
The consumer confusion stemmed from Citi's decision to return many checking accounts to their original interest-eligible status after the company quit a federal insurance program at the end of last year.
In order to reclassify the accounts, Citi also had to inform its customers of the decades-old — and, in recent years, little-noticed — policy.
"Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts," read the disclosure. "While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change."
The disclosure did not mention that banks are required to reserve this right for certain checking accounts under a federal regulation that dates from around 1915.
But the way Citi displayed the disclosure — in a separate, outlined text box at the top of a statement page — not only ensured more consumers would notice it but also led some to think the policy was new.
Natalie Riper, a Citi spokeswoman, would not discuss the company's method of disclosing the change.
But other industry veterans called Citi's prominent display of the disclosure understandable in the current regulatory environment.
"Because there is so much emphasis on disclosure now, I think the better practice is to highlight any significant change," said Roberta G. Torian, a counsel at Reed Smith LLP and a veteran of Advanta Corp., PNC Financial Services Group Inc. [PNC] and Mellon Bank. "Highlighting it that way is consistent with what banks are being asked to do whenever they change their terms."
For example, under the credit card law whose most important provisions took effect last week, issuers had to revamp their cardholder statements to clearly illustrate how much in interest and fees a cardholder has paid during the current year, and to show the monthly payment required to pay off a balance within three years.
Citi's new checking account disclosure was triggered by its Dec. 31 exit from the Transaction Account Guarantee program that provides additional Federal Deposit Insurance Corp. coverage to checking account holders.
Most negotiable order of withdrawal, or NOW, accounts were not eligible for TAG insurance, so last year Citi converted many individual NOW accounts to demand deposit account status.
NOW accounts are eligible to earn interest or to qualify for other promotional offers, whereas demand deposit accounts are not. Citi classifies most checking accounts for individuals as NOW accounts and reserves demand deposit account status mostly for business customers.
Torian, the Reed Smith banking lawyer, called that setup fairly unusual.
"In my experience, … I would say most accounts are not NOW accounts, most are checking" for individual consumers, she said.
A statement from Citi that Riper provided said: "When Citibank moved to unlimited FDIC coverage in 2009, we had to reclassify many checking accounts to allow for immediate withdrawals in order to ensure all customers qualified for the additional coverage. When we moved back to standard FDIC coverage with most major banks in 2010, Citibank decided to reclassify those accounts back to make them eligible again for promotional incentives. To do so, Federal Reserve Regulation D requires these accounts, called NOW accounts, to reserve the right to require a 7-day notice of withdrawal. We recently communicated this technical requirement to our customers. However, we have never exercised this right and have no plans to do so in the future."
Some industry observers also blamed some of the confusion on the relatively obscure federal requirement itself.
"Citi made an attempt to comply with the Reg D requirements, and that particular disclosure is, frankly, not readily understandable in today's world," said Joseph T. Lynyak 3rd, a partner at the law firm Venable LLP who works out of Los Angeles.
"It is arcane, and it is understandable why there might be consumer confusion, which argues that maybe it's a time to review these account rules, which may need to be updated."
The Federal Reserve would not discuss the matter.
Other large banking companies have also disclosed the Reg D requirement to checking customers, though none has yet attracted the same level of public attention.
This is in part due to the fact that Citi's largest competitors did not switch the status of their accounts last year.
JPMorgan Chase & Co., [JPM] for example, includes a similar disclosure in its online "Account Rules and Regulations" as of January 2009.
"For all savings accounts, interest-bearing checking accounts and holding subaccounts, we reserve the right to require seven (7) days prior written notice of withdrawal," JPMorgan Chase says in a paragraph at the bottom of page 9 (of 32) of its online documents. (Citi also included a much less prominent disclosure on page 23 of its 47-page online list of account terms.)
Tom Kelly, a spokesman for JPMorgan Chase, said "there's been no change" in the classification of the New York banking company's checking accounts.
Anne Pace, a spokeswoman for Bank of America Corp., likewise said by e-mail that it "did not change customer" account types.
Regulation D requires that a bank include in its account agreement a notice that it reserves the right to require seven days' notice of withdrawals.
However, the regulation does not specify the way in which an institution should inform customers of such a policy in cases where accounts are reclassified.