Amid continuing fallout over a scandal that saw Wells Fargo employees opening unauthorized accounts and credit cards to meet sales quotas and incentives, the Consumer Financial Protection Bureau is warning others in the financial world to be leery of similar initiatives.
Banking regulators are currently reviewing sales practices throughout the industry in response to the Wells Fargo revelations.
“The Bureau acknowledges that incentives have been common across many economic sectors, including the market for consumer financial products and services. When properly implemented and monitored, reasonable incentives can benefit all stakeholders and the financial marketplace as a whole,” the bulletin says. The flipside: “Tying bonuses or employment status to unrealistic sales goals or to the terms of transactions may intentionally or unintentionally encourage illegal practices.”
Incentive-related problems, as noted in the bulletin, include:
Unrealistic quotas to sign consumers up for financial services, or quotas that are not properly monitored, may incentivize employees to achieve this result without actual consent or by means of deception.
Consumer harm can include unauthorized fees, improper collections activities, or negative effects on their credit scores.
Sales benchmarks may encourage employees or service providers to market products deceptively to consumers who may not benefit from, or even qualify for, the products.
Paying compensation based on the terms or conditions of transactions (such as interest rate) may encourage employees or service providers to overcharge consumers, to place them in less favorable products than they qualify for, or sell them more credit or services than they requested or needed.
The CFPB bulletin outlines steps institutions can take to detect, prevent, and correct incentive program abuses.
To date, the bureau has resolved 12 different cases involving improper practices to market credit card add-on products or to retain consumers once enrolled in these products. It notes that incentives “frequently enhanced the risk that banks would engage in such improper practices” and, in some cases, a lack of proper controls allowed deceptive marketing practices “to continue unchecked for many years.” Tapes of sales calls showed that employees and service providers deviated from the prepared call scripts in order to market the add-on products more aggressively, and often deceptively, to sign up more consumers.
In all of these matters, “the companies’ compliance monitoring, vendor management, and quality assurance programs failed to prevent, identify, or correct these practices in a timely manner.”
One of the cited cases date back to the CFPB's first public enforcement action, a July 2012 order requiring Capital One Bank to refund approximately $140 million to nearly two million customers and pay a $25 million penalty. It resulted from a CFPB examination that identified “deceptive marketing tactics” used by Capital One's vendors “to pressure or mislead consumers” into paying for add-on products.
The Bureau expects supervised entities that utilize incentives institute effective controls for the risks these programs may pose to consumers. “A robust compliance management system is necessary to detect and prevent violations of Federal consumer financial law,” the bulletin says. “An entity’s CMS should reflect the risk, nature, and significance of the incentive programs to which they apply. The strictest controls will be necessary where incentives concern products or services less likely to benefit consumers or that have a higher potential to lead to consumer harm, reward outcomes that do not necessarily align with consumer interests, or implicate a significant proportion of employee compensation.”
While the CFPB does not mandate any particular CMS structure and recognizes that programs may vary based on the size and complexity of an organization, it does expect a variety of best practices. Among them: board and management oversight; a compliance program that includes policies and procedures, training, monitoring, and corrective action plans; a consumer complaint management program; and independent compliance audits.
Supervised entities should take steps to ensure their CMS is effective with steps that may include, but are not limited to:
Board members and senior management should consider both the outcomes incentive programs seek to achieve and how they may incidentally incentivize outcomes that harm consumers.
Directors and management should authorize compliance personnel to design and implement CMS elements that address both intended and unintended outcomes and provide adequate resources to do so.
“Tone from the top” should empower all employees to report suspected incidents of improper behavior without fear of retaliation, providing easily accessible means to do so.
Policies and procedures for incentives should ensure that employee sales and/or collections quotas, if part of an incentive program, are transparent to employees and reasonably attainable. There should be clear controls for managing the risk inherent in each stage of the product life cycle (marketing, sales, account opening, servicing, and collections), the CFPB says. There should be mechanisms to identify potential conflicts of interest posed for supervisory personnel who are covered by incentives but also responsible for monitoring the quality of customer treatment and customer satisfaction.
There should be “a fair and independent processes for investigating reported issues.” Comprehensive training should address expectations for incentives, standards of ethical behavior, common risky behaviors for employees and service providers, terms and conditions of products and services so they can be effectively described to consumers, and regulatory and business requirements for obtaining and maintaining evidence of consumer consent.
Designing overall compliance monitoring programs that track key metrics (and outliers) that may indicate incentives are leading to improper behavior by employees or service providers can include such metrics as: overall product penetration rates by consumer and household; specific penetration rates for products and services (such as overdraft, add-on products, and online banking); penetration rates by consumer segment; employee turnover; employee satisfaction and complaint rates; spikes and relevant trends in sales (both completed and failed) by specific individuals and by units; financial incentive payouts; and account opening/product enrollment and account closure/product cancellation statistics.
Consumer complaints should be collected and analyzed for indications that incentives are leading to violations of law or causing harm. Independent compliance audits should address incentives and consumer outcomes across all products or services to which they apply, “ensuring audits are conducted independently of both the compliance program and the business functions, and ensuring that all necessary corrective actions are promptly implemented,” the CFPB says.
Businesses are also urged to promptly and properly implement corrective actions to address issues identified by monitoring. Responses should include, as prudent, the termination of employees, service providers, and managers. Termination statistics should be analyzed for trends and root causes.