The compliance burdens being placed on institutions to monitor all aspects of product sales will require a substantial expansion of the types and scope of reporting that are done for product sales.
On November 28, the Consumer Financial Protection Bureau (CFPB) issued a new bulletin, CFPB Compliance Bulletin 2016-03 (Detecting and Preventing Consumer Harm from Production Incentives), which warns supervised financial services companies that improperly managed sales incentives may result in consumer harm. This guidance comes on the heels of the CFPB’s levy of an unprecedented $100 million civil penalty and issuance of a consent order against Wells Fargo for allegedly having allowed the opening of more than two million unauthorized deposit and credit card accounts. According to CFPB Director Richard Cordray, Wells’ employees “secretly opened” these accounts in order to achieve sales targets and receive bonuses.
The terms of Bulletin 2016-03 are broader and far more specific than earlier guidance on sales incentives issued by federal banking agencies.1 In this regard, the bulletin sets forth highly detailed expectations for a supervised entity’s compliance management system (CMS).
According to the bulletin, oversight from boards of directors and management should “ensur[e] that customers are only offered products likely to benefit their interests.”2 In addition, policies and procedures governing sales incentives should only permit sales quotas that are “transparent to employees and reasonably attainable,” and training given to employees and agents is expected to address (i) expectations for incentives, including ethical standards; (ii) examples of known risky sales behaviors; (iii) terms and conditions of the products and services being sold; and (iv) regulatory and internal business requirements for obtaining and documenting customer consent.3
The bulletin also contains suggestions for “possible monitoring metrics” for sales incentives that are notable for both their scope and robustness. Specifically, the bulletin recommends that this monitoring may include:
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Overall product penetration rates by consumer and household
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Specific penetration rates for products and services (such as overdraft, add-on products and online banking), as well as penetration rates by consumer segment
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Employee turnover and employee satisfaction or complaint rates
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Spikes and trends in sales (both completed and failed sales) by specific individuals and by units
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Financial incentive payouts
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Account opening/product enrollment and account closure/product cancellation statistics, including by specific individuals and by units, taking into account the terms of the incentive programs (e.g., requirements that accounts be open for a period of time or funded in order for employees to obtain credit under the program).4
The bulletin also contains detailed expectations with respect to corrective action. To this end, the bulletin suggests that management analyze statistics on employees who were terminated for sales-incentive abuses to identify trends and root causes, and recommends that corrective actions include the “return of funds to all affected consumers as appropriate.”5
Finally, the bulletin provides that periodic independent audits should be performed “across all products and services to which [incentives] apply” and should ensure that all necessary corrective actions are promptly implemented.”6
Because the bulletin was issued by the CFPB as a “non-binding statement of policy,” it was effective upon issuance.
Pepper Points
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The warning that institutions should only offer products that “benefit the interests of consumers” is troubling because it will enable the CFPB to second guess the institution as to which products were offered to and accepted by a consumer. Further, it places a large burden on the institution to adopt a type of “suitability” standard for justifying why products were offered to any particular consumer.
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The compliance burdens being placed on institutions to monitor all aspects of product sales will require a substantial expansion of the types and scope of reporting that are done for product sales.
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Extended training of employees will be required to comply with this guidance as well as increased board and management oversight.
Endnotes
1 For example, OCC Advisory Letter 2002-03 (Guidance on Unfair or Deceptive Acts or Practices) provides that: “[A] bank should carefully consider whether a contract with a telemarketer contains any financial incentive that could lead the telemarketer to mislead consumers. As another example, if a telemarketer’s compensation is based on initial sales, and is unaffected by whether a consumer subsequently cancels the product or service, the telemarketer may have an incentive to mislead the consumer regarding the nature or benefits of the product or service.”
2 Bulletin 2016-03 at 4.
3 Id. at 4.
4 Id.
5 Id. at 5.
6 Id.
