June 10, 2011

The following is one of a series of tools produced by Treliant Risk Advisors as a companion to the June 2011 ABA Banking Journal cover story, “Don’t get lost in UDAAP: How to find your way as regulators shift focus to Unfair Deceptive and Abusive Acts and Practices.” To learn more, return to the compliance tools homepage.

 

 

Let’s look at an example of how a new product launch would work in a transformed compliance system. Note that this is just one of many ways the bank might choose to address fairness issues in this kind of product.

 

 

Scenario
Bob Smith, EVP of retail products, has come up with an idea.

He thinks many of the bank’s customers--and also many non-customers within the bank’s footprint--cannot qualify for a credit card. At a senior management staff meeting, Bob mentions that he wants to explore launching a secured credit card product in which the consumer will pledge a certificate of deposit equal to the amount of the credit card line.

What happens next?

• In a bank with a traditional compliance program, Bob would work with a business team to evaluate and develop the product with a focus on market, operational, and profit issues. At some point--probably well into the review--compliance would be asked to sign off.

• In a bank with a transformed compliance management program, the scenario might be as follows; the numbered steps parallel the steps outlined in the June cover story.

1. Proactive/strategic

The Meeting
When Bob speaks up in the meeting, the senior management team is receptive, but has questions about the consumer fairness risk surrounding secured credit cards. Bob has already thought about risks and mentions some—marketing will be a challenge, for example.

The Chief Compliance Officer (who attends all senior management meetings) lists other issues, such as potential customer steering; how to make adequate disclosures; and how to design fees. The team discusses the pros and cons of offering the product, including the costs to mitigate the fairness issues.

The bank President notes the escalating controversy around products aimed at people with financial and credit problems. He is concerned that regulatory standards are in flux. He also reiterates that all products must align with the bank’s overall customer strategy and with its mission, which is dedicated to serving customers’ needs.

The Chief Risk Officer asks whether revenue from the product will be enough to pay for mitigation efforts, such as training and monitoring. The mortgage department head urges evaluation of fairness risk over the full product lifecycle, not just at the outset, citing recent regulatory criticism of UDAAP issues on foreclosed homes.

The team agrees the secured card is worth considering but is potentially controversial, especially since it will serve a “vulnerable” market. Fortunately, the bank has a process for screening and designing such products, and the President assigns a more-specific team to pursue it.

 

 

The Team Assesses The Product
The team is led by Bob and includes the Chief Compliance Officer and staffers from the business line, marketing, and IT.

Notably, the team also includes the bank’s Consumer Champion, a veteran retail banking person with the part-time role of advocating the consumer’s perspective to assure such views are fully voiced.

The product review team analyzes the secured card concept much as it would any other product, but taking extra care to identify and address possible harm to customers and potential UDAAP risks.

 

 

The Recommendation
After vigorous discussion and some strategic market research, the product task force recommends a credit card secured by a one-year CD in an amount equal to the credit limit. The card will have a low application fee and no other first-year fees.

If the consumer has a good payment record for the first year, the CD will be released and the card will become unsecured, at which point the consumer can request an increased credit line. The product is designed to meet the needs of customers with credit problems and to develop them into good bank customers over time, rather than to generate high short-term fee income.

The product team also makes a list of risk mitigation controls to reduce the inherent consumer hazards of the product to a level the bank’s management will tolerate.

 

 

2. Integrated into the business units
Once the concept is approved, the compliance issues surrounding the product are mapped out and assigned to the business units.

Marketing compliance is owned by the marketing department, which is charged with developing simple advertisements and disclosures that are easily understood by the target audience.

Sales training is assigned to the training department. The department is responsible for developing training for customer-facing personnel and the customer service staff who will explain the terms of the product, including coaching on how to resolve consumer questions and complaints.

An incentive program is implemented for all front line staff for selling the card, with incentives based on customer satisfaction.

Card compliance is assigned to appropriate members of the compliance, audit, and risk management teams.

Marketing designs customer satisfaction surveys for the card product. Feedback will go the executive team, and managers will relay the satisfaction scores to the branch staff.

Targeted monitoring and auditing processes also provide feedback on compliance to the various customer facing staff.

Consumer complaint management scores product satisfaction and reports to senior management on levels, trends, and root causes of complaints, leading to changes in terms, sales, and/or marketing.

Both the promotional materials and staff training and scripting encourage secured-card customers to take advantage of the bank’s financial education programs.

 

 

3. Human resource systems, including an appropriate incentive structure
Incentive programs for customer fairness are developed and implemented for branch and customer service personnel.

Incentives are not paid until the customer has the card for six months and is satisfied with the product.

One branch manager receives a supervisory warning because the bank’s compliance mystery shopping program finds significant deviation from the sales script in her team’s promotion of the secured card.

 

 

The card compliance program is built into the existing compliance and customer service programs.

 

 

5. Focused on results and metrics
The secured card program is measured in several ways beyond tracking outstanding principal and revenue.

Customer satisfaction surveys and complaint metrics both measure customers’ perception of the fairness of the product and whether it performs as they understood it would. The conversion rate from secured to unsecured (success rate) is measured and reported. The delinquency rate is also measured and reported.

 

 

6. Strong compliance leadership
The bank’s president and the card sponsor both kick off the card promotion with a communication in the bank’s newsletter explaining the program, why and how it meets the needs of some customers, and how it has been designed to assure fairness. The communication includes easy-to-understand explanations of the product and the financial education opportunities provided to customers.

 

 

7. Cultural shift
The bank’s marketing staff prepares a marketing campaign for the public and also one for internal use. The latter emphasizes the bank’s commitment to consumer fairness. This campaign includes internal newsletters, speeches from the CEO, and short scenarios in which actors show how to answer consumer questions on the product.

The advertising campaign also spells out the bonus program for the product, explaining that bonuses won’t be paid if the consumer is not satisfied or defaults on the payment of the card.


The above material is one of a series of tools produced by Treliant Risk Advisors as a companion to the June 2011 ABA Banking Journal cover story, “Don’t get lost in UDAAP: How to find your way as regulators shift focus to Unfair Deceptive and Abusive Acts and Practices.”

 

 

To learn more, return to the compliance tools homepage.

 

 

[This report was posted on June 10, 2011 on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.]   

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