Financial institutions sometimes choose to implement incentive programs to achieve business objectives. When properly implemented and monitored, reasonable incentives can benefit consumers and the financial marketplace.
In November 2016, the Consumer Financial Protection Bureau (CFPB) published “CFPB Compliance Bulletin 2016-03 (Bulletin)” to share the CFPB’s supervisory and enforcement experience in which incentives contributed to substantial consumer harm. The Bulletin also describes compliance management steps the CFPB recommends to supervised entities to mitigate risks posed by incentives.
While the CFPB recognizes incentive programs, orchestrated through benchmarks in sales or other incentives, may accomplish business objectives, it also sees the risks incentives may pose to consumers as significant. It warns that both the intended and unintended effects of incentives can be complex and need to be considered.
The Bulletin compiles guidance the CFPB has already given in other contexts and highlights examples from the CFPB’s supervisory and enforcement experience in which incentives contributed to substantial consumer harm, including:
Credit Card Add-On Matters – The CFPB has resolved several different cases involving improper practices to market credit card add-on products or to retain consumers once enrolled in these products. The CFPB published guidance (CFPB Bulletin 2012-06) in 2012 to describe its expectations with regard to ‘add-on’ products that may be offered by financial institutions in a manner that does not protect consumers from harm. Add-on products might include debt protection, identity theft protection, credit score tracking, and other products that are supplementary to the credit provided by the financial institution. It is important to note that, although the bulletin is directed at credit card add-on products, a footnote to the first page of the bulletin expands the coverage significantly by stating, “Although this bulletin focuses on credit card add- on products, institutions should take the guidance that it provides into consideration when they offer similar products relating to other forms of credit or deposit services.”
Overdraft Opt-in Matters – Of concern for depository institutions, the CFPB looks carefully at financial institutions offering options for overdraft services. In at least one matter, consumers were deceived into opting in to overdraft services. The CFPB found that, because of incentives for hitting specific targets, a bank’s telemarketing service provider had deceptively marketed overdraft services and enrolled certain bank consumers in those services without their consent.
Unfair and Abusive Sales Practices – A CFPB investigation revealed that thousands of bank employees had opened unauthorized deposit and credit card accounts to satisfy sales goals and earn financial rewards under the bank’s incentives. Employees engaged in “simulated funding” by opening hundreds of thousands of deposit accounts without consumers’ knowledge or consent, which caused consumers to incur improper fees.
The CFPB expects financial institutions that choose to utilize incentives to institute effective controls for the risks the programs may pose to consumers, including oversight of both employees and service providers involved in these programs. The Bulletin describes compliance management steps that supervised entities should take to mitigate risks posed by incentives, specifically maintain a robust Compliance Management System (CMS) designed to address incentive program compliance risk. The Bulletin encourages financial institutions to:
- Foster a culture of strong customer service related to incentives.
- Ensure effective policies and procedures for incentives.
- Implement comprehensive training that addresses incentive program risk and proper implementation.
- Design overall compliance monitoring programs that track key metrics – and outliers – that may indicate incentives are leading to improper behavior by employees or service providers.
- Promptly implement corrective actions to address any incentive issues identified by monitoring reviews as areas of weakness.
- Collect and analyze consumer complaints for indications that incentives are leading to violations of law or harm to consumers to identify and resolve the root causes of any issues.
- Schedule audits to address incentives and consumer outcomes across all products or services to which they apply, ensuring audits are conducted independently of both the compliance program and the business functions, and ensuring that all necessary corrective actions are promptly implemented.
Financial institutions should review the Bulletin in its entirety and review all existing incentive programs, as well as building compliance assessments into the development of future incentive programs.
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