Does your company utilize incentive compensation programs for marketing, sales, servicing, or collection employees for consumer financial products and services? Make sure you're taking into account the Consumer Financial Protection Bureau (CFPB) Compliance Bulletin ("Bulletin"), titled "Detecting and Preventing Consumer Harm from Production Incentives." The CFPB's guidance for consumer financial services companies and their service providers can help avoid potentially costly violations of federal consumer financial law, private litigation, reputational harm, and complaints from customers.
Incentive compensation programs are common, so why are they the subject of a Bulletin?
The CFPB believes that offering production incentives, including sales commissions and other inducements, to employees or service providers may pose a risk to consumers. The Bulletin compiles guidance on incentive compensation, which, according to the CFPB, is "worthy of more careful attention by institutional leadership, compliance officers, and regulators alike."
Does the CFPB state that all incentive compensation programs are against the law?
No. The Bulletin states that "when properly implemented and monitored, reasonable incentives can benefit all stakeholders and the financial marketplace as a whole." The Bulletin also recognizes the potential benefits of such programs, including enhancing recruitment and retention of employees, improved customer service, and introducing consumers to services that are beneficial to their financial interests.
What are the potential risks to consumers?
According to the Bulletin, whether an incentive compensation program poses a risk to consumers—and the nature of that risk—depends on the facts and circumstances. The Bulletin makes clear, however, that if incentive compensation programs are not "carefully and properly implemented and monitored, they may create incentives for employees or service providers to pursue overly aggressive marketing, sales, servicing, or collections tactics."
The Bulletin provides five specific examples of possible problems:
- Sales goals may encourage employees, either directly or indirectly, to open accounts or enroll consumers in services without their knowledge or consent. Depending on the type of account, this may further result in, for example:
- Improperly incurred fees;
- Improper collections activities; and/or
- Negative effects on consumer credit scores.
- Sales benchmarks may encourage employees or service providers to market a product deceptively to consumers who may not benefit from or even qualify for it.
- 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 to sell them more credit or services than they had requested or needed.
- Paying more compensation for certain types of transactions than for others that were or could have been offered to meet consumer needs could lead employees or service providers to steer consumers to transactions not in their interests.
- Unrealistic quotas for signing up consumers for financial services may incentivize employees to achieve this result without actual consent or by means of deception.
What do companies need to know about the CFPB's expectations?
Unsurprisingly, the Bulletin is not very proscriptive and reinforces best practices and findings the CFPB has reported from supervisory examination. However, it does provide several steps companies can take to limit incentives from leading to alleged violations of law as part of an effective compliance management system. Specifically:
- Such programs should be subject to oversight by the board of directors and management.
- Written policies and procedures should govern the programs.
- Employees and managers should be trained on company policies and procedures and applicable laws.
- Employees should be carefully monitored for potential violations of company policies and procedures and applicable laws, and corrective action should be swiftly taken—regardless of the employees' achievement of production goals.
- Consumer complaints should be analyzed to ensure such incentives are not inadvertently causing poor customer service or consumer treatment.
The Bulletin also provides the CFPB's take on best practices. For example, incentive compensation programs should be transparent to employees and reasonably attainable. Companies should guard against conflicts of interest and use a fair and independent process to investigate possible improper behavior. Finally, we further suggest companies consider incorporating compensation incentives for good customer service and adherence to company policies and procedures and applicable laws.