This week the Consumer Financial Protection Bureau (CFPB) issued a Compliance Bulletin entitled “Detecting and Preventing Consumer Harm from Production Incentives.” While not mentioning Wells Fargo Bank, N.A. (Wells Fargo) by name, the Bulletin is clearly written in response to the CFPB action against Wells Fargo Bank where the CFPB, the Office of the Controller of Currency (OCC), and the city of Los Angeles levied a $185 million penalty against the bank. insideARM wrote about the action on September 9, 2016.
Fallout from the Wells Fargo scandal has been ongoing in the nearly 3 months since the announcement.
This new Bulletin applies not only to banks and financial services companies, but also all entities supervised by the CFPB. Per the Bulletin:
“Financial services companies, including entities supervised by the Consumer Financial Protection Bureau (CFPB or Bureau), may accomplish business objectives through programs that tie outcomes to certain benchmarks, both required and optional. Companies may apply these production incentives, including sales and other incentives, (“incentives”) to employees or service providers or both. 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. We thus will continue to invite further dialogue and discussion around the issues addressed in this Bulletin.
This 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. It also describes compliance management steps that supervised entities should take to mitigate risks posed by incentives.”
The Bulletin discusses the potential risks to consumers when supervised entities utilize incentive programs when dealing with consumers:
"Despite their potential benefits, incentive programs can pose risks to consumers, especially when they create an unrealistic culture of high-pressure targets. When such programs are not carefully and properly implemented and monitored, they may create incentives for employees or service providers to pursue overly aggressive marketing, sales, servicing, or collections tactics. (Emphasis added.)
Depending on the facts and circumstances, such incentives may lead to outright violations of Federal consumer financial law1 and other risks to the institution, such as public enforcement, supervisory actions, private litigation, reputational harm, and potential alienation of existing and future customers.”
The Bulletin also outlines the CFPB expectations for supervised entities:
"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. As the CFPB has emphasized repeatedly, a robust compliance management system (CMS) is necessary to detect and prevent violations of Federal consumer financial law.
An entity’s CMS should reflect the risk, nature, and significance of the incentive programs to which they apply. Accordingly, the strictest controls will be necessary where incentives concern products or services less likely to benefit consumers or that have a higher potential to lead to consumer harm, reward outcomes that do not necessarily align with consumer interests, or implicate a significant proportion of employee compensation. While the CFPB does not mandate any particular CMS structure and recognizes that CMS structures may appropriately vary based on the size and complexity of an organization, the Bureau’s supervisory experience has found that an effective CMS commonly has the following components:
- Board of directors and management oversight;
- Compliance program, which includes:
- Policies and procedures;
- Training; and
- Monitoring and corrective action;
- Consumer complaint management program; and
- Independent compliance audit.
The Compliance Bulletin is a non-binding general statement of policy articulating considerations relevant to the Bureau’s exercise of its supervisory and enforcement authority. The Bureau has determined that this Compliance Bulletin does not impose any new or revise any existing recordkeeping, reporting, or disclosure requirements on covered entities or members of the public that would be collections of information requiring OMB approval under the Paperwork Reduction Act.
In our September 9, 2016 story on the Wells Fargo matter insideARM suggested that ARM companies review their collector compensation incentive programs to consider whether they had the potential to lead to collector behavior that could harm consumers.
In light of this new Compliance Bulletin, insideARM again strongly suggests that industry organizations review those programs. Additionally, all ARM companies should review their CMS to determine whether their policies and procedures are robust enough to identify any potential problems with incentive compensation plans.