Jonathan Foxx
Managing Director
Production incentives have been around since the dawn of modern capitalism. They are not going anywhere. Incentives have been called sales incentives, sales bonuses, compensation bonuses, and take into account any additional remuneration that tends to be transactionally based. All such incentives can be grouped into business objectives where a transaction may be tied to certain benchmarks, met by employees or service providers, the achievement of which leads to an increase in wage or reward for the party achieving the stated goal. For the sake of discussion, let’s call forms of such economic inducement, collectively, as “incentives.”
Managing Director
Production incentives have been around since the dawn of modern capitalism. They are not going anywhere. Incentives have been called sales incentives, sales bonuses, compensation bonuses, and take into account any additional remuneration that tends to be transactionally based. All such incentives can be grouped into business objectives where a transaction may be tied to certain benchmarks, met by employees or service providers, the achievement of which leads to an increase in wage or reward for the party achieving the stated goal. For the sake of discussion, let’s call forms of such economic inducement, collectively, as “incentives.”
Typical incentives include cross-selling, where
sales or referrals of new products or services are pitched to existing
consumers; sales of products or services to new customers; sales at higher
prices where pricing discretion exists; quotas for customer calls completed;
and collections benchmarks.
Some of these incentives are very complex in the
way they are achieved and applied, whether optionally or required. The
incentive challenge is one of the usual conundrums arising when money and
capital formation meet: the opportunity for harm to the consumer. Obviously,
incentives offer a way to further enhance revenue for the seller of services
and products. Indeed, in our market economy, an incentive can reveal the
economic interest of market participants in a particular service or product,
which is extrapolated from consumers’ responses to the offerings. Like so much
in finance, incentives are not inherently good or bad, but how they are applied
makes them so!
The Consumer Financial Protection Bureau (“Bureau”)
has decided to weigh in with guidance on production incentives. I am going to
provide my reading of the Bureau’s most recent bulletin on this topic, entitled
“Detecting and Preventing Consumer Harm from Production Incentives” (Bulletin
2016-03, November 28, 2016, hereinafter “Bulletin”). It is an interesting read,
because it endeavors not only to compile guidance that the Bureau had provided
in other contexts but also draws on the Bureau’s supervisory and enforcement
experience in which incentives contributed to substantial consumer harm.
Importantly, the Bulletin offers some actions that supervised entities should
take to mitigate risks posed by incentives.
This White Paper article is an adjunct to an earlier published web article (December 2016), with further elaboration herein, plus now including a "Compliance Checklist for Production Incentives," which provides some helpful guidelines to creating production incentive plans. The full White Paper, Article, and Compliance Checklist may be downloaded from our firm's website at LendersComplianceGroup.com.
RISKS
The most obvious risk of incentives to the consumer
is a sales program that includes an enhanced economic motivation for employees
or service providers to pursue overly aggressive marketing, sales, servicing,
or collections tactics. These kinds of incentives are and always have been
features of sales tactics that do not meet regulatory scrutiny. Consequently,
it is the case that the Bureau has taken enforcement action against financial
institutions that have expected or required employees to open accounts or
enroll consumers in services without consent or where employees or service
providers have misled consumers into purchasing products the consumers did not
want, were unaware would harm them financially, or came with an unexpected
ongoing periodic fee.
One or more regulatory violations may be triggered
as a result of such incentives. To name but a few of the more salient
regulatory frameworks that can be violated, impermissible incentives can cause
violations of unfair, deceptive, and/or abusive acts or practices (UDAAP)
(Dodd-Frank Act, §§ 1031 & 1036(a), codified at 12 USC §§ 5531 &
5536(a), the Electronic Fund Transfer Act (EFTA), as implemented by Regulation
E (15 USC § 1693 et seq.; 12 CFR Part 1005); the Fair Credit Reporting Act, as
implemented by Regulation V (15 USC § 1681-1681x; 12 CFR Part 1022); the Truth
in Lending Act (TILA), as implemented by Regulation Z (15 USC § 1601 et seq.;
12 CFR Part 1026); and the Fair Debt Collection Practices Act (15 USC §
1692-1692p). And to this the Bureau itself notes that violations can stir up
public enforcement, supervisory actions, private litigation, reputational harm,
and potential alienation of existing and future customers.
Although not meant to be comprehensive, here are
some impermissible incentives that surely trigger regulatory violations:
- Opening Accounts: sales goals that encourage employees, either directly or indirectly, to open accounts or enroll consumers in services without their knowledge or consent, which may result in improperly incurred fees, improper collections activities, and/or negative effects on consumer credit scores;
- Benchmarks: sales benchmarks that encourage employees or service providers to market a product deceptively to consumers who may not benefit from or even qualify for it;
- Terms or Conditions: paying compensation based on the terms or conditions of transactions (such as interest rate) that encourages employees or service providers to overcharge consumers, to place them in less favorable products than they qualify for, or to sell them more credit or services than they had requested or needed;
- Tiered Compensation: paying more compensation for some types of transactions than for others that were or could have been offered to meet consumer needs, which could lead employees or service providers to steer consumers to transactions not in their interests; and
- Quotas: unrealistic quotas to sign consumers up for financial services may incentivize employees to achieve this result without actual consent or by means of deception.
