The Consumer Financial Protection Bureau just fired a shot across the bow of all companies that provide financial services to consumers, warning companies about the risks inherent in sales incentives programs like the one that led to a massive fine being handed down against Wells Fargo.
In September, the CFPB joined with the Office of the Comptroller of the Currency and the city and county of Los Angeles to fine Wells Fargo $185 million after 5,000 of the bank’s former employees opened up as many as 2 million fake accounts in order to get sales bonuses.
Now, the CFPB is warning all the other companies under its supervision not to engage in similar practices.
In a bulletin issued Monday, the CFPB states that creating incentives for employees and service providers to meet sales and other goals can lead to “consumer harm if not properly managed.”
The CFPB isn’t outlawing sales incentives or other similar programs, but it is cautioning companies that such programs can lead to abuse.
“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,” the CFPB said.
As the CFPB notes, Wells Fargo is far from the only company that uses incentives to reward its employees for performance, and the CFPB states that it recognizes that incentive programs can be good for the consumer, the employee and the company alike when monitored carefully.
“Reasonable incentives that are properly overseen can benefit consumers and enhance an institution’s overall performance,” the CFPB said.
“Consumers may receive improved customer service or companies may be able to attract and retain more high-performing employees,” the CFPB continued. “However, incentives that are not carefully managed may encourage and reward behaviors by employees and service providers that harm consumers.”
In its bulletin, the CFPB identifies three specific ways that incentive programs can be (and have been) abused, including:
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. Unrealistic quotas to sign consumers up for financial services, or quotas that are not properly monitored, may incentivize employees to achieve this result without actual consent or by means of deception. Consumer harm can include unauthorized fees, improper collections activities, or negative effects on their credit scores.
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. Employees or service providers may misrepresent the value or utility of a product or service to consumers in order to meet sales targets and reap rewards.
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. Consumers may be placed in less favorable products than they qualify for or may be sold more products or credit than they requested or needed. In other instances, incentives could lead employees or service providers to steer consumers to transactions that may not benefit them or may affirmatively harm them.
In the wake of the Wells Fargo fake account scandal, CFPB Director Richard Cordray said the bureau planned to conduct on-site reviews of financial companies to ensure that the same types of issues are not occurring at other companies.
And now the bureau is providing companies with a blueprint of what to avoid.
“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,” Cordray said. “The CFPB is warning companies to make sure that their incentives operate to reward quality customer service, not fraud and abuse.”
Click here to read the CFPB’s full bulletin on incentive programs.