On November 28, 2016, the Consumer Financial Protection Bureau issued a bulletin providing guidance on the use of production incentives (such as sales quotas and targets) at financial institutions.  See https://s3.amazonaws.com/files.consumerfinance.gov/f/documents /201611_cfpb_Production_Incentives_Bulletin.pdf.  This follows the guidance on sales practices issued on October 11, 2016 by the New York Department of Financial Services.  See http://www.dfs.ny.gov/legal/ industry/il161011.pdf.  And, earlier in the year, the Office of the Comptroller of the Currency and the Financial Industry Regulatory Authority both issued statements about examining sales practices at financial institutions.  See http://www.finra.org/ industry/review-cross-selling-programs; https://www.occ.gov/topics/consumer-protection/index-consumer-protection.html

Since the guidance is not mandatory, financial institutions have the ability to proactively address production incentives and sales practices, which have not received the same attention as traditional compensation incentives until now.  Because production incentives can affect promotions, terminations, and salary levels, they should be internally reviewed and monitored like compensation incentives.       

Production Incentives affect compensation, promotion, or retention and can create risk.

Production incentives are not themselves improper, as the CFPB recognizes:  "When properly implemented and monitored, reasonable incentives can benefit all stakeholders and the financial marketplace as a whole."  See https://s3.amazonaws.com/files.consumerfinance. gov/f/documents/201611_cfpb_Production_Incentives_Bulletin.pdf.  Thus, a financial institution need not abandon quotas or targets.   

But, production targets can be subject to misuse, as the CFPB notes:  "Despite their potential benefits, incentive programs can pose risks to consumers, especially when they create an unrealistic culture of high-pressure targets.  See https://s3.amazonaws.com/files. consumerfinance.gov/f/documents/201611_cfpb_Production_Incentives_Bulletin.pdf.  For example, as detailed in the H.J. Meyers case, management set and enforced unrealistic quotas that brokers were required to meet on a daily, weekly and monthly basis.  See http://securities.stanford.edu/filings-documents/1010/HJM97/ 19971111_f01c_ 97CV6742.pdf.    

Poorly implemented or inadequately monitored production incentives can expose a financial institution to economic losses, reputational damage, regulatory enforcement, and legal actions.  Managers and employees who exceed targets are often rewarded with promotions, and those who do not meet targets are sometimes terminated.  If production targets are set too high, employees could act improperly to meet the target.  Likewise, managers can misuse sales quotas to push employees to improve the manager's career prospects.     

Ways to mitigate and address production incentive risk.

The CFPB and NY Dep't of Financial Services, consistent with prior guidance on compliance programs from other regulators and enforcement agencies, outlined what financial institutions should do to address the risk of production incentives, including:

  • Review and oversight by Management and Board of Directors;
  • Implement written policies and procedures;
  • Conduct employee training on expectations;
  • Monitor employee activity and take corrective action where appropriate;
  • Audit the effectiveness of the controls; and
  • Provide employees and customers with the ability to confidentially report problems.

See https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201611_cfpb _Production_Incentives_Bulletin.pdf; http://www.dfs.ny.gov/legal/ industry/il161011.pdf; see also https://www.americanbar.org/content/dam/ aba/migrated/poladv/priorities/ privilegewaiver/2003jan20_privwaiv_dojthomp. authcheckdam.pdf; http://www.ussc.gov/guidelines-manual/2015/2015-chapter-8#8b21; In re Caremark Int’l Inc. Derivative Litigation, 698 A.2d 959, 962-63 (Del. Ct. Ch. 1996).   

Production incentives should be set appropriately, taking into consideration the ebb and flow of business within the institution and the broader economy.  Senior management and the board should periodically review production incentives to ensure that the risks and rewards are appropriately balanced.  Production targets should also constantly be revisited and revised based on prevailing business conditions.  Policies, training, and oversight should be created and implemented to ensure that employees act ethically.  Written policies should describe appropriate conduct.  Training should explain what is expected of employees, and encourage employees to confidentially report issues or problems.  Oversight should include internal or external audits and should be designed to detect improper behavior, such as by soliciting customer confirmations to a separate department and providing customers with the ability to lodge complaints.

Well-designed and monitored production incentives can help a financial institution succeed in an increasingly competitive landscape, while mitigating the risk of improper behavior.