Compliance bulletin focuses on ‘production incentives’

“Production incentives” are the topic of a compliance bulletin published today by the CFPB, which highlights examples where incentives “contributed to substantial consumer harm” and which describes compliance management steps CFPB-supervised entities should take to “mitigate risks posed by incentives.”

The compliance bulletin is the latest in a series of items (including reports and studies) issued by the consumer bureau focusing on the incentives. The bureau defines “production incentives” as programs that tie outcomes to certain benchmarks, both required and optional. The incentives may be applied to employees, service providers or both, according to CFPB.

“The Bureau acknowledges that incentives have been common across many economic sectors, including the market for consumer financial products and services,” the bureau notes. “When properly implemented and monitored, reasonable incentives can benefit all stakeholders and the financial marketplace as a whole. For instance, companies may be able to attract and retain high- performing employees to enhance their overall competitive performance. Consumers may also benefit if these programs lead to improved customer service or introduce them to products or services that are beneficial to their financial interests.”

However, the bulletin also outlines the risks to consumer from incentives, particularly when the incentives create and “unrealistic culture of high-pressure targets.”

“When such programs are not carefully and properly implemented and monitored, they may create incentives for employees or service providers to pursue overly aggressive marketing, sales, servicing, or collections tactics,” CFPB states. “Depending on the facts and circumstances, such incentives may lead to outright violations of Federal consumer financial law and other risks to the institution, such as public enforcement, supervisory actions, private litigation, reputational harm, and potential alienation of existing and future customers.”

Compliance Bulletin 2016-03: Detecting and Preventing Consumer Harm From Production Incentives