Let’s look at what each should comprise. In the process, we’ll
include cautionary tales about practices that left financial institutions without a safety harness, and which get bonus points for
pleasing the judges.
Documented Express Consent
If a primary key to UDAAP compliance is making sure that customers have all of the information to make an informed decision
about what products and services are right for them, the flip side
of the informed decision is that the bank should have express
consent from the customer for each product the bank sells to
the customer. Controls and control monitoring for evidencing
this consent is crucial in the current regulatory environment.
It sounds simple enough—when a customer signs up for a
product, make sure the customer puts it in writing or takes some
proactive step that evidences approval. The bank should have a
way to capture the customer’s signature and retain it, perhaps on
the signature card or on an application, or with a digital signature.
Secondary controls are also in order to ensure the bank has
actually captured the customer’s signature. For example, the back
office should verify that credit/debit card applications include a
signature before authorizing delivery of the card.
■ ■ ■ Cautionary Tale 1: No control can ensure that it was actually
the customer who signed the consent form rather than an eager
sales rep. The Bank should monitor complaints for indications of
fraud. If that toll gate is tripped, the bank must respond quickly by
validating actual signatures. For example, the bank might monitor signatures coming from a problematic branch to ensure they
appear to be signed by different people.
Bonus Points: Banks can choose to send a welcome email for
all new accounts. While it can be written as a customer service
benefit, it will allow customers the opportunity to see what has
been opened in their name.
■ ■ ■ Cautionary Tale 2: While it makes sense to obtain signatures
for in-person sales, banks must consider how to “document” phone
sales. In many cases, audio recordings and call monitoring routines
may be acceptable. However, banks should consider whether to
suspend opening products until after the bank receives written
authorization. Alternatively, the bank may consider the account
open on a trial basis, allowing the customer 30 days to send in
their signature. Don’t forget, if you let sales reps decide which
customer gets the “trial basis” and which customer must wait,
make sure you build controls around that decision.
Incentive Compensation and Sales Goals
At the heart of many UDAAP cases lies incentive compensation.
As wind surfers go where the breeze takes them, so employees
follow the incentives. In other words, if the bank incents its sales
staff to open lots of accounts, that’s what they will do—sometimes
by any means necessary if the sales goals are perceived as too high.
Consider the following different ways of incenting the sale of
credit cards. If a bank incentive plan rewards employees strictly
for taking credit card applications, it increases the risk that an
employee will sign-up a consumer for a credit card without the
consumer’s knowledge or consent. However, providing incentive
to an employee when a consumer activates a credit card would
limit some of the risk in the previous scenario. To further reduce
the risk, the bank could provide incentives only when a consumer
first uses a credit card. Generally speaking, incenting employees
based on customer-initiated behavior generates the least amount
of risk of unauthorized account opening because an employee
will not receive incentive for unauthorized enrollment.
Sales goals are closely tied to incentives and also drive sales
staff behavior. The bank’s sales culture will also set the tone for
how sales goals are evaluated. For instance, how frequently are
the goals measured? If a branch manager must call in his or her
numbers several times a day, the exercise will likely put more
pressure on their employees to make sales at any cost. Several large
banks have shifted away from setting any sales goals, and in fact,
are finding other ways to compensate employees. Instead, they
will increase base salary and set incentives around branch metrics
rather than individual scores. This may be the upcoming trend.
For banks that continue to set sales goals, related incentives
should be developed and monitored with consideration of staffing and market conditions. Incentives should encourage proper
behavior and be balanced with a factor that encourages UDAAP
compliance. For example, sales goals could be balanced with
customer satisfaction results. Alternatively, incentives may be
delayed 60 days after account opening to ensure the customer
authorized and is using the account.
Several large banks have shifted away from
setting any sales goals, and in fact, are finding
other ways to compensate employees. Instead,
they will increase base salary and set incentives
around branch metrics rather than individual
scores. This may be the upcoming trend.