Managing Director
Lenders Compliance Group
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 attention to 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.
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.
