Regulatory Alert | January 2017 | KPMG | US

Regulatory Alert | January 2017

Regulatory Alert | January 2017

Cross-Selling and Complaints Risk Management

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Regulatory scrutiny of retail practices and incentive compensation expands to broker-dealers

The Financial Industry Regulatory Agency (FINRA) has initiated a targeted examination into cross-selling activities by broker-dealer employees. The inquiry is directed toward both registered and nonregistered employees, and the programs designed to incent them to (1) promote the bank products of an affiliate or parent company (affiliate/parent) to broker-dealer retail customers through referrals or direct sales; (2) add features (such as securities-based loans, credit or debit cards, or checking accounts) to broker-dealer retail customer accounts; and (3) open additional broker-dealer retail accounts for customers (collectively, referred to as cross-selling programs).1

FINRA’s targeted exam reflects heightened scrutiny of retail sales practices and incentive compensation structures emanating from recently publicized supervisory actions and regulatory announcements. Both bank and securities regulators are concerned that enhancements in these areas might be needed to protect consumers from harm. Recently released guidance from the Consumer Financial Protection Bureau suggests that production incentives, including sales and other incentives provided employees and service providers, may pose significant risks to consumers, adding that “both the intended and unintended effects of incentives can be complex, which makes this subject worthy of more careful attention by institutional leadership, compliance officers, and regulators alike.”2

Consistent with exams announced by federal banking agencies, FINRA’s inquiry will focus on senior management and board of director governance; accountability; and thematic reviews of consumer protection, customer consent, and suitability/customer best interest. FINRA is specifically seeking to review a broad selection of materials, including:

  • Descriptions of the cross-selling programs, communications to employees regarding these programs, monetary and nonmonetary benefits pertaining to the programs, and metrics used to track and evaluate employee performance under the programs;
  • Lists of employees terminated or disciplined for not meeting production goals or for engaging in improper activities pertaining to cross-selling programs, and lists of retail customers whose accounts were impacted by the cross-selling program initiatives without their authorization;
  • Lists of investor complaints, litigation, arbitration, or internal disciplinary actions related to cross-selling programs;
  • Lists of whistleblower, ethics, or other complaints related to cross-selling programs; and
  • Escalation procedures, internal Audit reviews, and third-party reviews related to cross-selling programs, and a description of the firm’s supervisory and compliance procedures, including reports and controls used to detect unsuitable or unauthorized sales of a bank affiliate/parent’s products to the broker-dealer retail customer.

As KPMG noted previously in our October 2016 Client Alert, compliance monitoring programs focused on detecting and preventing improper retail sales conduct will be under intense scrutiny in the near-term. Firms operating in the banking and securities sectors should be actively reviewing and assessing their retail sales programs and incentive compensation structures to promote consistent enterprise-wide application. Boards of directors and senior executives should also consider enhancing, where appropriate, their monitoring and testing programs, training programs, and complaints processes.

Complaints management is a key input to “getting it right:” the connection between complaints, conduct and culture, and risk management

The news reports and regulatory announcements related to the cross-selling of retail bank account products and services have likely heightened public awareness of potential risks for unfair and deceptive acts or practices and associated consumer financial harm. In the near term, consumer inquiries and/or complaints regarding retail products, including securities/investments accounts, may increase as consumers closely review their personal accounts.

For institutions, the news reports and regulatory announcements should have similarly highlighted the importance of internal complaints, commonly reported through Whistleblower portals, for identifying emerging risks and potentially reinforcing issues identified through external consumer complaints.

KPMG's Client Alert outlines how both internal and external complaints can be used to identify current problems and highlight emerging issues. The Alert also highlights that complaints data can be used more broadly to serve as a bellwether for an institution’s prevailing culture and risk governance. Therefore, as institutions conduct reviews of their complaints processes in anticipation of regulatory examinations or in response to public scrutiny (such as in response to the current focus on retails sales and incentive compensation), they should consider expanding the scope of these reviews to include an assessment of whether and how complaints data is further utilized across the institution to inform business strategies, identify conduct and culture issues, and support risk governance frameworks.

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