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From Banking and Finance Law Daily, November 29, 2016

CFPB reminds financial companies of the perils of incentivizing employees

By Stephanie K. Mann, J.D.

The Consumer Financial Protection Bureau is warning supervised financial companies that creating incentives for employees and service providers to meet sales and other business goals can lead to consumer harm if not properly managed. Tying bonuses or employment status to unrealistic sales goals or to the terms of transactions may intentionally or unintentionally encourage illegal practices such as unauthorized account openings, unauthorized opt-ins to overdraft services, deceptive sales tactics, and steering consumers into less favorable products, similar to what led to an enforcement action against Wells Fargo. The CFPB bulletin outlines various steps that institutions can and should take to detect, prevent, and correct such production incentives so that they do not lead to abuse of consumers.

"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," said CFPB Director Richard Cordray. "The CFPB is warning companies to make sure that their incentives operate to reward quality customer service, not fraud and abuse."

Incentives. Banks and other financial companies use incentives to encourage their employees and service providers to accomplish business objectives. Incentives can range from financial bonuses and other monetary compensation to benchmarks that affect whether an employee or service provider will remain employed or retained at all. Incentive programs commonly reward employees for selling or referring new products or services to existing customers, signing up new customers, selling products and services at higher prices, or meeting target amounts for debt collections.

While not unique to the financial sector, these incentives are used in many consumer financial markets, such as credit cards, mortgages, checking accounts, and debt collection. Reasonable incentives that are properly overseen can benefit consumers and enhance an institution’s overall performance. However, incentives that are not carefully managed may encourage and reward behaviors by employees and service providers that harm consumers.

Dangers to consumers. The CFPB’s bulletin warns financial companies that unchecked incentives may lead to violations of consumer financial law. Specific examples of problems include:

  • Opening accounts without consent: Sales goals and incentives may encourage employees and service providers, either directly or indirectly, to open accounts or enroll consumers in services without their knowledge or consent.
  • Misrepresenting benefits of products: Sales benchmarks may encourage employees or service providers to market products deceptively to consumers who may not benefit from or even qualify for the products.
  • Steering consumers towards less favorable products or terms: Rewarding certain terms or conditions of transactions, such as interest rate, may encourage behaviors that overcharge consumers.

The bulletin outlines existing CFPB guidance given in other contexts and reminds institutions of the bureau’s longstanding expectations about how to properly implement and monitor incentives.

Companies: Wells Fargo

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