CFPB Warns Financial Institutions About Incentives

Use caution when creating incentives for employees and service providers to meet sales and other business goals, the Consumer Financial Protection Bureau warned financial institutions in a new Compliance Bulletin.

What happened

Likely triggered by recent allegations tied to one of the nation’s largest banks– where employees allegedly opened bank accounts and other products without the knowledge or authorization of consumers in order to achieve sales goals—the Consumer Financial Protection Bureau (CFPB or the Bureau) published Compliance Bulletin 2016-03 to warn financial institutions about the risks involved in using incentives.

“Tying bonuses and job security to business goals that are unrealistic or not properly monitored can lead to illegal practices like unauthorized account openings and deceptive sales tactics,” CFPB Director Richard Cordray said in a statement. “The CFPB is warning companies to make sure that their incentives operate to reward quality customer service, not fraud and abuse.”

Programs tying outcomes to certain benchmarks abound in the financial industry, the CFPB acknowledged, and can provide benefits to stakeholders and the marketplace as a whole. “For instance, companies may be able to attract and retain high-performing employees to enhance their overall competitive performance,” the Bureau wrote in “Detecting and Preventing Consumer Harm from Production Incentives.” “Consumers may also benefit if these programs lead to improved customer service or introduce them to products or services that are beneficial to their financial interests.”

But when incentives are not properly implemented or monitored, the risks are significant, the CFPB said. According to the CFPB, consumer risks arise out of an unrealistic culture of high-pressure targets at financial institutions that can lead to overly aggressive marketing, sales, servicing, or collection tactics. These high quotas may incentivize employees to achieve a result without actual consent or by means of deception, the Bureau suggested, while paying more compensation for some types of transactions than for others could lead employees or service providers to steer consumers to transactions not in their interests.

“Depending on the facts and circumstances, such incentives may lead to outright violations of Federal consumer financial law and other risks to the institution, such as public enforcement, supervisory actions, private litigation, reputational harm, and potential alienation of existing and future customers,” according to the Bulletin.

The Bureau has taken action over the improper use of incentives by financial institutions, including 12 different cases of improper practices to market credit card add-on products (or retain consumers once enrolled in the products) where employees and service providers received incentives without proper controls in place, leading to deceptive marketing. Incentives also played a role in at least one matter where consumers were deceived into opting in to overdraft services, the CFPB said, as well as an enforcement action based on the opening of thousands of unauthorized deposit and credit card accounts to satisfy sales goals and earn financial rewards pursuant to bank incentives.

Reinforcing the CFPB’s expectations with regard to incentives, the Bulletin emphasizes the importance of a “robust” compliance management system (CMS) reflecting the risk, nature, and significance of the programs to which they apply. The strictest controls are necessary where incentives concern products or services less likely to benefit consumers, the Bureau noted.

An effective CMS typically includes board of directors and management oversight, including a culture of strong customer service related to incentives; policies and procedures (with reasonably attainable sales or collections quotas); training, featuring standards of ethical behavior and common risky behaviors to avoid; monitoring (especially of spikes and trends in sales and financial incentive payouts); corrective action that includes the termination of employees if necessary; a consumer complaint management program; and independent compliance audits.

“The CFPB expects supervised entities that choose to utilize incentives to institute effective controls for the risks these programs may pose to consumers, including oversight of both employees and service providers involved in these programs,” the Bureau wrote.

To read the CFPB’s Compliance Bulletin 2016-03, click here.

Why it matters

The CFPB is paying even more attention to incentive programs, and financial institutions should now re-examine their policies. While the Bulletin does not outright prohibit the use of sales incentives, the CFPB repeatedly cautions financial institutions about the dangers of such programs and the potential for enforcement action when incentives are not properly implemented and monitored. “The risks these incentives may pose to consumers are significant and both the intended and unintended effects of incentives can be complex, which makes this subject worthy of more careful attention by institutional leadership, compliance officers, and regulators alike,” the CFPB notes. “We thus will continue to invite further dialogue and discussion around the issues addressed in this Bulletin.” Violations can also present substantial reputational risk.

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