New Pitfalls in Consumer Disclosures and Marketing
Banks developing new products and services need to pay as much attention to how they plan to describe and market the offerings as to their actual design.
That’s the lesson to be derived from the major enforcement actions taken so far by the Consumer Financial Protection Bureau (CFPB), together with federal and state banking regulators, according to Clifford Stanford, counsel in the financial services and products group of the Atlanta law firm of Alston & Bird, LLP. “It was the messages of the disclaimers and sales pitches that undermined compliance,” Stanford says, referencing the CFPB’s recent settlements with Discover, American Express, and Capital One.
Stanford will explore this topic in more depth on March 12 at BAI Payments Connect 2013 in Phoenix, Arizona, in a panel presentation entitled “Product Design in the Age of UDAAP: What Have We Learned to Expect from the Regulators?” He will be joined onstage by Kathlyn L. Farrell, managing director, Treliant Risk Advisors, Washington, D.C.
With the arrival of new rules governing unfair, deceptive and abusive acts and practices (UDAAP), bank compliance officers have to be prepared for a departure from the way banking regulators and the Federal Trade Commission have acted in the past to protect consumers, according to Stanford. “The traditional compliance function in a bank could say you can do this and that, because the regulation says x and y,” Stanford says. “The compliance officer doesn’t have the ability to do this when you talk about UDAAP” because UDAAP “is a principle-based rather than a prescriptive approach to regulation.”
In the Discover, American Express and Capital One cases, the CFPB “extracted huge penalties from banks and really made an example of them,” Stanford says. “In some cases it was not so much what the institutions were selling being impermissible and unfair or abusive but how they were selling it.”
Even though disclosure and marketing may now constitute major danger points, that does not mean banks do not also need to pay very close attention to product design, according to Farrell, Stanford’s co-panelist. Since banks often partner with third parties in the development of new products, they will have to be more diligent in investigating a new product or service “to make sure it’s offering a net value to the consumer – and that fees aren’t going to outrun the value to most people,” she says.
Once it is determined that a product offers a net value to the consumer, the next step is to test it before introducing it to customers. “In a good percentage of situations where an institution is in trouble, it’s because they developed something internally or because they partnered with an external party and they didn’t test it well enough,” Farrell says. “There are all kinds of unintended things that can happen.”
The new product should be reviewed by a focus group first, according to Farrell. And, then the bank should have some of its employees pilot the product or service before it is introduced. That test should determine, among other things, whether consumers understand the new product. Farrell recommends that banks have focus groups look at the disclosures and terms and conditions and ask participants questions about the product to see if it is properly understood.
Farrell relates how the top executives at one community bank that lacked the budget to do focus groups tested new products with their spouses, who in one case nixed a proposed offering. She cites the $85 million consent agreement between CFPB and American Express as an example of how banks can fail to understand how customers will react or understand their disclosures. In that case, new customers mistakenly expected to receive $300 in cash when they signed up for the Blue Sky credit card offered by American Express Centurion Bank. The disclosure actually promised that customers who signed up for the card would receive 22,500 bonus points with a value of $300.
“I’m sure the technicalities were all just 100% correct – and yet (the Amex disclosure) ran afoul of the overall, more subjective standard that’s out there now,” Farrell says, noting that the CFPB looks at whether the consumer would likely read the material or whether the type size was big enough for the consumer to see – all things that are not specifically stated in federal rules and regulations.
The bottom line is that bankers can no longer rely just on the considerable expertise they have built up in complying with all the technicalities of disclosures and product marketing. “You can have everything single thing right and still run afoul” of the CFPB, Farrell says.
Mr. England is a contributing writer to BAI Banking Strategies and the author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance.