CFPB warns financial companies: tying employee incentives to sales may lead to fraud or consumer abuse

Banking Alert

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The CFPB has issued a bulletin warning financial companies that tying employee incentives to unrealistic sales goals or to terms of transactions may lead to consumer harm if not properly managed.

In issuing the bulletin, the CFPB recognized that the practice of using incentives to boost employee performance and accomplish business objectives is widespread and can be beneficial to both the institution and consumers alike when benchmarks are reasonable and the practice is properly monitored. But incentives that are not carefully managed, and especially those that create an unrealistic culture of high-pressure targets, may encourage and reward behavior by employees that could harm consumers.

The bulletin, released on November 28, cites specific examples of potential harm to consumers, including:

  • Unauthorized opening of accounts: Sales goals that reward employees for customer cross-selling into different products and services may encourage employees to open accounts or enroll consumers in services that are not necessary or without customer knowledge and consent, potentially leading to excessive customer fees, improper collections, and a negative effect on consumer credit scores.
  • Misrepresenting benefits of products: By compensating employees based on the terms or conditions of transactions, employees may be disinclined to draw a consumer's attention to negative features or terms which are not conducive to a customer's situation or objectives. Similarly, employees may over-state or over-emphasize benefits that are compelling to the consumer. Strict sales benchmarks may also encourage employees to deceptively market a product.
  • Steering consumers to less favorable products or terms: By paying more compensation for the sale of some types of products or services than for others that could have been offered to meet consumers’ needs (e.g., larger bonuses for sales of credit options with higher interest rates or fees), a financial institution could lead employees to place consumers in products with less favorable terms.

The bulletin reminds financial companies that the CFPB has taken recent action against companies that have engaged in problematic incentive practices, particularly the unauthorized opening of accounts, deceptive marketing, enrollment of consumers in overdraft services without their consent, fraudulent marketing of credit card add-on products, and fraudulent retention of consumers once enrolled.

The CFPB also outlines various steps that companies can take to detect, prevent, and correct risky incentive programs so that they do not lead to consumer abuse, beginning with a robust compliance management system comprised of the following components:

  • Board of directors and management oversight
  • Policies and procedures for the incentive program that ensure reasonable goals, clear controls for managing risks, and mechanisms for identifying and investigating improper behavior
  • Implementation of comprehensive training addressing standards of ethical behavior, terms and conditions of products, and regulatory requirements
  • Compliance monitoring metrics and tracking
  • Prompt corrective action to address any incentive issues identified by monitoring reviews
  • An effective and responsive consumer complaint management program
  • Independent compliance audits

Financial institutions should be aware of the guidance and aware that recent enforcement actions, together with the CFPB bulletin, will make compensation structures a prime point of inquiry and potential scrutiny in coming examination cycles. Of course, incentive-based compensation is not prohibited and can still be a useful mechanism to align employee, institutional, and customer interests. Financial institutions would be well advised, however, to be informed about the risks and be able to demonstrate to their regulators how their compensation program avoids or effectively monitors potentially risky approaches to sales incentives.