The backlash against Wells Fargo (and, in its wake, virtually all financial institutions) continues unabated as the Consumer Financial Protection Bureau (CFPB) recently warned such companies in a bulletin to properly manage their employee incentives which can pose significant risks to consumers.

Though the agency did not specifically mention Wells Fargo by name, it provided examples of past enforcement and supervisory actions where incentives played a role. The CFPB said it wanted to remind companies about the downside risks of incentives and the use of sales quotas, and how companies should monitor them.

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

The CFPB also warned said that improper incentives may lead to violations of federal consumer financial law, public enforcement actions, supervisory actions, private litigation, reputational harm and a consumer backlash — all issues that have come to pass for Wells Fargo.

In early September, Wells Fargo paid out $190 million in penalties after revealing that 5,300 of its former employees were fired for opening up about 2 million bank and credit card accounts that consumers had not authorized. Those fake accounts were created largely by employees seeking to cash in on lucrative bonus payments based on sales targets, thereby placing millions of consumers as risk.

The bureau recommended that an effective compliance management system would include oversight by a company's management and board of directors, an independent compliance audit, and policies and procedures that include training, monitoring and corrective action.

The CFPB expects strict controls when incentives concern products or services that are "less likely to benefit consumers or that have a higher potential to lead to consumer harm, [or] reward outcomes that do not necessarily align with consumer interests, or implicate a significant proportion of employee compensation."

The bureau highlighted specific problems involving incentives such as opening of accounts without consent, misrepresenting the benefits of products and steering consumers to products with less favorable terms or conditions such as higher interest rates.

Impact on CUs

While the CFPB's latest salvo appeared to be targeting the bigger banks, it could also apply to credit unions. But given that the scale of fraud and malfeasance found at Wells Fargo is unlikely to be uncovered at a credit union — and because many more similar acts of financial misconduct may still emerge — advocates and compliance experts for credit unions have mixed views regarding the current scenario.

Suzanne Yashewski, senior vice president- regulatory compliance counsel for the Cornerstone Credit Union League, noted that the Dodd-Frank Act required all of the joint financial institutions regulators to develop a rule regarding incentive-based compensation arrangements.

"In response to that rule, which is not yet finalized, and the CFPB order against Wells Fargo bank, we anticipate that [the National Credit Union Administration] will be reviewing incentive-based compensation arrangements for all credit unions, even those below the $1 billion threshold for reporting under the rule," she said.

Yashewski said she thinks that credit unions should be reviewing incentive-based compensation plans to ensure that they are not structured in a way that could increase risk of wrongdoing by employees. "Credit unions should investigate internal and external complaints carefully for any activity relating to unauthorized actions regarding accounts and loans," she added.

Yashewski indicated that the credit union business model — which focuses on the needs of the individual member rather than maximizing profits for the institution and/or shareholder — helps to mitigate the kind of behavior seen at Wells Fargo. Still, she cautioned that while many CUs have strong compliance systems in place, "if they don't have specific systems in place already, they should be doing so as a result of these actions."

But Dennis Dollar, a former NCUA and now a credit union consultant in Alabama, said that incentive programs for employees at Wells Fargo were not the problem — the real culprit was that there were no institutional controls over such programs to make sure they were not abused by the employees.

"Most banks and credit unions have incentive plans, and there haven't been very many — if any — egregious Wells Fargo-type scandals," he said. "A properly structured and well-managed incentive program, complete with integrity and institutional control, is a proven way to drive business and reward those employees who do so."

Like any other program, Dollar added, if it is not managed well, an incentive plan can be abused — but that does not make incentive plans inherently bad.

"When well-managed, an incentive plan works for both the institution, the consumers and the employees by rewarding those who match and meet the financial service needs of consumers with products to meet those needs," Dollar asserted.

Positive Fallout

Amanda J. Smith, an attorney at Messick & Lauer P.C. in Media, Pa., and an expert on credit union compliance matters, said she believes that the fallout from Wells Fargo is having a "positive impact" on credit unions, while noting that the action against Wells certainly gives credit unions an additional regulatory issue to be cognizant of.

"I think it has caused consumers to become wary of big banks and [to] seek more trustworthy alternatives, such as credit unions," she said. "This is a marketing opportunity that should be capitalized on by the credit union industry."

Generally speaking, Smith noted, credit unions do not foster the same culture that was the root cause of the issues at Wells Fargo. That being said, she cautioned, it is certainly worth the time to reevaluate any incentive or quota programs that are in place at credit unions — not just on paper, but in practice.

"While written policies and procedures may be compliant, even a slight deviation from them in implementation may be problematic," Smith stated. "When the CFPB gives us a glimpse into what it deems to be unacceptable practices, we should listen."

As for the strength of existing compliance practices at financial institutions, Smith wryly noted that Wells Fargo itself had a compliance program in place that was "more robust" that most any credit union — and, of course, that did not prevent the fraudulent activity from occurring. This, she offers, was because Wells Fargo had created a culture that not only condoned but also promoted that type of activity.

"A compliance system is only effective when an institution has prohibited such activity," she explained. "It can help to detect and rectify the actions of a few bad actors, but it will not be of use against a systematic failure like the one present at Wells Fargo."

Nonetheless, Smith said she expects a few credit unions may decide to shut down their sales quota-incentive programs in response to the Wells Fargo — at least temporarily.

"For those credit unions with a low regulatory-risk tolerance, the knee-jerk reaction to highly publicized actions is always to halt potentially noncompliant activity until a full evaluation takes place and any necessary changes are made," she elaborated. "I feel the vast majority of credit unions will not shut down their programs, but rather seek out legal counsel to assure that their programs are compliant."

Brandy Bruyere, director of regulatory compliance at National Association of Federal Credit Unions (NAFCU), said that federally chartered CUs are already subject to "pretty robust" regulations and compliance directives from NCUA with respect to sales incentives, as well as mandates which require the monitoring and review of such programs on an annual basis.

Nonetheless, Bruyere noted that her organization has heard from some credit unions seeking some guidance in light of the CFPB bulletin. "But I think this was the result of an abundance of caution, rather than from any real concerns about how they might be affected by this," she said.

But there is another issue to consider — is the CFPB meddling too much in the internal affairs of credit unions and other financial institutions and overstepping its legal bounds?

Attorney Smith believes while that may indeed be the case in some actions, in this instance she feels the CFPB has done exactly what it was tasked to do. "It isolated, investigated and reprimanded behavior that was not only illegal, but was also causing real financial harm to consumers," she said. "This is exactly the type of egregious behavior that the CFPB was meant to protect consumers from."

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