We’ve asked several Banking Exchange bloggers and other contributors to examine the Wells Fargo affair from the vantage of their areas of specialty. In this special installment of “Common Sense Compliance,” veteran compliance officer Nancy Derr-Castiglione takes a compliance-eye view of sales compensation programs.—Steve Cocheo, executive editor and digital content manager
A compensation sales culture run amok, from what the regulators’ press release would have us believe. A significant number of Wells Fargo employees discovered how to generate illegally opened deposit and credit card accounts in order to meet sales quotas.
Pressure to make sales goals due to what? Lack of supervision? Lack of controls?
Lucy Griffin, my partner in this blog, wrote in “'Wells Problem': How could you stop it in your bank?" last week about how difficult it would be for examiners and auditors to catch this type of unauthorized internal activity.
Because it is difficult to come in and try to identify clearly the practices that have already taken place, we must return to fundamentals.
We must go back to the basic principles of having an effective compliance program in place surrounding the compensation structure.
7 key principles
Getting this done right requires the basic ingredients of:
• Written policy
• Written procedures
• Program ownership
• Internal controls
• Periodic monitoring
• Complaint assessment
Let’s dig into some specifics now.
Running a sound compensation program
This effort must always begin with a written compensation policy, approved by the board of directors of the institution, that clearly outlines the scope, objectives, responsibilities, enforcement and, most importantly, the do’s and don’t’s.
[Editor’s note: Boards anxious to avoid the trap that Wells fell into should read the blog by David Baris, “15 questions your board must ask about sales.”]
Detailed, written procedures are essential. Procedures spell out how the program operates and what steps are taken to determine and pay incentives and commissions.
Human Resources may be the nexus for all employee compensation programs in an institution. However, a specific incentive program should have a business unit owner that is responsible for oversight. The business unit owner must work closely with the compliance manager in the development of the program.
Training is not just a sales pep rally for the staff. One would hope that bank employees from all areas of the institution are getting training that already incorporates UDAAP principles. This is where UDAAP should be especially reinforced as part of any training and communication related to a compensation or incentive program that is introduced or presented.
Adequate internal controls and periodic monitoring (an internal control) certainly appeared to be lacking in the Wells Fargo case. A system of internal controls should include an appropriate level of approvals, verifications, documentation, and testing.
Early complaint assessment may have identified such a problem—if customers complained the right way.
But, often institutions define their “complaints” only as formal written complaints or those that arrive through certain government channels.
Phone calls to customer service centers often don’t get tracked and noticed by anyone in the Compliance Department. That’s a mistake.
Compensation compliance attention has been focused primarily on the Regulation Z Loan Originator Compensation Rule that limits the compensation a loan originator may receive in connection with a closed-end residential mortgage loan.
Recently the FDIC, the Federal Reserve, the Comptroller’s Office, and other primary federal regulators have issued a proposed Incentive Based Compensation Arrangements Rule, which is aimed at depository institutions over $1 billion in assets.
UDAAP makes the compliance focus that much broader. Any way in which a compensation program could have an unfair, deceptive, or abusive impact on the customer is a vulnerability that should be managed through an effective compliance program.