Summary: CFPB Compliance Bulletin 2016-03

Detecting and Preventing Consumer Harm from Production Incentives

NASCUS Legislative and Regulatory Affairs Division
November 2016

The CFPB issued a bulletin that compiles guidance the Bureau has already provided in other contexts and highlights examples from the Bureau’s supervisory and enforcement experience in which incentives contributed to substantial consumer harm.  The bulletin also describes compliance management steps that supervised entities should take to mitigate risks posed by incentives. 

According to the Bulletin, incentive programs pose certain risk to consumers when:

  • They are not carefully and properly implemented and monitored
  • They create incentives for employees or service providers to pursue overly aggressive marketing, sales, servicing or collection tactics

Also, improper incentive programs may lead to violations of federal consumer financial law and risks to an institution such as public enforcement, supervisory actions, private litigation, reputational harm and alienation of existing and future customers.  Examples of problematic incentive programs include (among other things):

  • Those with sales goals that encourage employees to open accounts or enroll customers in services without their knowledge or consent;
  • Those including sales benchmarks that encourage employees or service providers to market products deceptively to consumer that may not benefit or qualify for the product;
  • 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;
  • Paying compensation based on the terms or conditions of transactions (such as interest rate) may encourage 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; and
  • Unrealistic quotas to sign consumers up for financial services may incentivize employees to achieve this result without actual consent or by means of deception.

The Bulletin provides insight on the CFPB’s expectations with regard to incentive programs.  Specifically, the Bureau expects supervised entities that choose to utilize incentives to institute effective controls, which include oversight of both employees and service providers.  Entities should have a “robust” compliance management system (CMS) in order to detect and prevent violations of federal consumer financial law.  The bulletin notes that “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.”

An “effective” CMS has the following components:

  • Board of Directors/Management Oversight
  • Compliance program that includes policies/procedures; training and monitoring and corrective action
  • Consumer compliant management program
  • Independent compliance audit