In a follow-on to its recent $100 million settlement regarding alleged unauthorized account openings, the Consumer Financial Protection Bureau (CFPB) released a new Compliance Bulletin (Bulletin) on Nov. 28 addressing sales and related incentive practices.1 The Bulletin summarizes CFPB expectations regarding detecting and mitigating the risk of consumer harm when offering “production incentives.” Such incentives, which are common practice among financial institutions, include payments based on sales or referrals of new products to current customers (cross-selling), sales of products to new customers, sales at higher prices where pricing discretion exists, quotas for customer calls completed and collections benchmarks. The CFPB acknowledges that production incentives “can benefit all stakeholders and the financial marketplace as a whole.” However, the Bulletin focuses on consumer risks involved and the elements of effective compliance management systems (CMS) to address those risks. Regulated institutions should anticipate a continuing wave of examination activity focused on these issues from both the CFPB and other federal regulatory agencies.
Risks to Consumers From Production Incentives
The CFPB asserts that production incentives can create “an unrealistic culture of high-pressure targets.” When production incentives are improperly implemented or monitored, risks include:
- enrolling customers in services without their knowledge or consent and in turn charging improper fees, enforcing improper collection activities and/or adversely affecting consumer credit scores
- deceptive product marketing
- overcharging customers, selling customers less favorable products, or selling customers more credit than they need
- encouraging customers to purchase products that do not fit their interests and objectives
CFPB Expectations When Offering Production Incentives
Drawing on its prior enforcement experience, including a series of credit card add-on cases, the CFPB stresses the importance of an effective CMS for a risk-based approach to potential harms from production incentives. According to the CFPB, “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.”
An effective CMS should include the following major components:
Board of directors and management oversight. Directors and officers should ensure that production incentive programs enhance employee commitment to customer service. They must think critically about how incentives might encourage misconduct and harm customers. Additionally, they should promote a culture that encourages all employees to report suspected instances of misconduct.
Policies and procedures. Sales and collection quotas should be transparent and reasonably attainable. Conflict of interest controls must be in place for employees who are both covered by production incentives and responsible for monitoring customer treatment. Effective processes for investigating suspected employee misconduct are also important.
Training. An institution’s training programs should establish clear ethical standards given its production incentives offered. Additionally, employees must be educated about an institution’s products and services to offer appropriate recommendations to customers.
Monitoring. Compliance monitoring programs should be built with metrics that detect whether incentive programs are being abused. Such metrics include product penetration rates for individual products and services (e.g., add-ons, online banking), spikes and trends in sales and account opening/enrollment and account closure/cancellation statistics for individual bank units and employees.
Corrective action. When problems are identified, appropriate action should be taken, including root cause analysis and termination of employees, service providers and managers when warranted. Prompt changes to incentives should be made if monitoring reveals weaknesses. Incentive issues should be escalated to the board and management, particularly when consumers are harmed.
Consumer complaint management program. Institutions must collect and analyze consumer complaints for violations of law and harm to consumers.
Independent compliance audit. Institutions should schedule regular independent audits to evaluate incentive and compensation programs. Reported deficiencies should be resolved through prompt corrective action.
Although the CFPB has long highlighted the importance of an effective CMS, the CFPB’s recent enforcement actions and broadly worded Bulletin should caution regulated institutions to reassess their policies, procedures and internal controls for managing a wide range of consumer interactions.