“Opt-In” to Ethical Conduct and Third Parties
A recent Consumer Financial Protection Bureau consent order, and a $10 million penalty, against a financial institution illustrate the dangers of unethical conduct, especially when exercised by third parties to conduct business.
Like many banks, Santander Bank charged overdraft fees to customers who purchased items via ATM and debit card transactions without sufficient funds. In exchange, the bank paid for the transaction and allowed it to go through. This was known as an overdraft service.
The overdraft service was a standard feature and automatically applied. After consumers expressed confusion about being charged fees, the Consumer Financial Protection Bureau (CFPB) passed the “Opt-In Rule,” a federal regulation that requires financial institutions to receive a customer’s affirmative consent before enrolling them in overdraft services.
Considering the Rule to negatively impact their bottom line, Santander erected a telemarketing campaign to get customers’ consent and hired a third-party vendor to do it. Santander paid the vendor premiums for hitting sales targets, so the vendor made sales quotas, sent underperforming employees home early, and terminated underperforming employees.
According to the consent order, the vendor used deceptive, misleading, and aggressive sales tactics from 2010 to 2014 to get customers’ consent.
For example, some of the most egregious conduct was automatically enrolling customers without even asking, misrepresenting the overdraft service as “free,” advising customers they would be charged if they didn’t enroll, and lying about the amount and frequency of the fee if an overdraft occurred. As a result, customers did not make an informed choice to enroll.
While the $10 million penalty is something (in September 2015, Santander had $89.4 billion in assets), the bigger consequence is what Santander has to do. Encompassing over ten pages of directives, the CFPB ordered Santander to:
(*) Contact all “opt-ins” collected by the vendor and expressly confirm their consent to enrollment before charging them overdraft fees
(*) Stop using any vendor to sell the overdraft service to customers
(*) Stop providing financial incentives to employees tasked with selling the overdraft service
(*) Develop a new policy governing the management of third-party vendors engaged in telemarketing
(*) Submit documentation of its compliance with the consent order to the CFPB
Responsibility and Duty
To be fair, Santander and its vendor aren’t the only companies embroiled in compliance controversy. The Federal Trade Commission reached a settlement with three collection agencies who engaged in unethical conduct and alleged abusive conduct against customers.
But there should be no doubt about the unethical conduct of both Santander and the third-party vendor. The vendor broke the law while Santander turned a blind eye. While some may argue that that Santander shouldn’t be held responsible for the vendor, that argument is wrong on many levels. From a legal perspective, we are generally responsible for the conduct of agents acting on our behalf. Here, Santander’s vendor provided a “material service” to customers by selling Santander’s overdraft service.
Outside of its regulatory compliance duties, Santander had ethical duties to its customers, and itself. Santander was on notice of the vendor’s aggressive sales tactics and did little to remedy them. During a pilot test in 2010, Santander listened to the calls of the vendor’s representatives and acknowledged they were being too aggressive and were misleading customers. Based on the consent order, Santander’s solution was to conduct a few days of additional training in 2010, but otherwise leave the vendor to its own devices from 2010 to 2014. This was not enough
The Ethical Tenets of Culture
All companies, like Santander, should take preemptive measures. They should erect robust compliance systems to monitor, audit, and remedy not just illegal behavior, but unethical behavior as well. Closely tracking how financial incentives affect on-the-ground decision-making can provide insight into intrinsic and extrinsic motivation. For example, employees may be forced to choose between their livelihood and poor decision-making, implicating them and their companies. Additionally, companies should try to harness a workplace culture of purpose where business objectives benefit both employees and the business, making bad decisions harder to make. A recent enforcement action by the Securities and Exchange Commission shows the benefits of self-reporting and tightening of internal controls.
Compliance training is one way employers can imbue compliance into their culture. This case study on Namely, an HR-compliance startup that combined growth and culture with training, provides an inside look.