HOW FINANCIAL INSTITUTIONS ARE USING MYSTERY SHOPPING TO HELP MITIGATE REGULATORY COMPLIANCE ISSUES WHILE IMPROVING THE CUSTOMER EXPERIENCE

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1 HOW FINANCIAL INSTITUTIONS ARE USING MYSTERY SHOPPING TO HELP MITIGATE REGULATORY COMPLIANCE ISSUES WHILE IMPROVING THE CUSTOMER EXPERIENCE by Michael Matza, Senior Strategic Consulting Director, Maritz Research & Brian W. Smith, Owner, Smith Regulatory Strategies, LLC 1

2 Financial institution executives increasingly label regulatory compliance as the leading challenge they face for the foreseeable future and readily identify the costs in manpower and expense associated with compliance as increasing dramatically. A compliance-focused mystery shop program, which evaluates the primary methods of consumer communication, is a new weapon financial institutions can employ to quickly identify problem areas and for helping mitigate risk while improving the customer experience. In the last year, federal regulators notably the Consumer Financial Protection Bureau ( CFPB ) and the Office of the Comptroller of the Currency ( OCC ) have increased efforts to ensure financial institutions compliance with the myriad of federal consumer protection regulations. The efforts have resulted in numerous enforcement actions against some of the nation s leading financial institutions and credit card providers, with large fines and consent orders for restitution of literally 100s of millions of dollars to aggrieved consumers. Federal regulators, not content with their results to date, have served notice they will turn their attention equally to deposit gathering processes, mortgage lending, and payments. The CFPB is primarily focused on the largest institutions. They, along with other regulators, have clearly signaled their intention to hold all financial institutions, both large and small, equally responsible for compliance with consumer protection laws, irrespective of the size of those institutions. As never before, today s consumer-facing banking environment is increasingly scrutinized by regulators who employ new arsenals of tools to: invite consumer input, test the performance of the banks and to detect compliance failures. Given these developments, financial institutions across the country now find themselves in need of equally powerful tools to proactively ensure employee, branch, and institution-level regulatory compliance. Well-designed and effectively executed mystery shopping audits have emerged as a particularly useful tool for proactively ensuring regulatory compliance at these three levels. A compliance-focused mystery shop program, which evaluates the primary methods of consumer communication, is a new weapon financial institutions can employ to quickly identify problem areas and for helping mitigate risk while improving the customer experience. What are financial institutions facing with the advent of the Dodd-Frank Act? The Consumer Financial Protection Bureau (CFPB) was created by the Dodd-Frank Act. The CFPB s role is to ensure consumers are not subjected to unfair, deceptive, or abusive practices and further, that information provided to consumers is accurate and clear so consumers can make informed financial decisions. Along with other federal regulatory agencies, the CFPB is charged with enforcement of key consumer protection legislation such as the Truth in Lending Act (TILA) and the Truth in Savings Act (TISA). Largely, as a result of CFPB actions, regulatory focus has shifted toward the behavioral aspects of compliance, i.e., how the interpersonal interaction between financial institution and its customers may impact the fairness or even abusiveness of their treatment of customers. Management and boards of directors are increasingly focused on this as their individual and, collective responsibility and ultimately, their liability for compliance failure has grown exponentially. Given the turmoil and often uncertainty created by Dodd Frank, financial institutions can depend on the following: compliance management programs must change to reflect a more consumeroriented perspective and there is a unique connection between the customer experience and/or marketing research groups and a bank s compliance department s daily activities. 2

3 introducing CrowsNest To address these new challenges and opportunities, CrowsNest by Maritz Research, provides an independent view of a financial institution s regulatory compliance. CrowsNest enables an institution to determine how well employees are following internal compliance guidelines while providing a better understanding of how their customers are responding or being impacted by these guidelines in practice. CrowsNest identifies and evaluates an institution s compliance vulnerabilities and indicates actions for addressing deficiencies. CrowsNest evaluates how well the institution is applying the federal regulations pertaining to product offerings and customer communications from both behavioral and customer experience perspectives. CrowsNest is a mystery shopping solution focused on exploring compliance with regulations. How does CrowsNest work? CrowsNest is a mystery shopping solution focused on exploring a financial institution s success in compliance with consumer protection regulations. Mystery shoppers are asked to make inquiries or to go through the process of opening checking or credit card accounts or obtaining a loan, a mortgage or other service with targeted banks. Specifically, CrowsNest is designed to: Proactively monitor compliance with regulations and internal guidelines Provide insights into customers interaction with and understanding of products, terms and processes Identify opportunities to address vulnerabilities through employee coaching Reduce the risk of incurring penalties through early detection of noncompliance Provide reports to inform management and directors to demonstrate compliance to regulators Address remediation progress and consent orders concerns Thus, a banking regulatory compliance mystery shop program must be flexible and continuous and may include (separately or in combination) the following: In-Branch Mystery Shop Program The shopper visits the branch and, using a pre-determined inquiry scenario, requests information on a new savings or checking account or loan (to include credit card). While at the location, the shopper also retrieves a business card for target-branch address verification. Telephone Mystery Shop Program Depending on the bank s telephone business model (i.e., incoming calls are received at an individual branch or routed to a common call center), a shopper calls a target branch and, using a pre-determined inquiry scenario, requests information on a new savings account or loan (to include credit card) be mailed to their residence. 3

4 Online Mystery Shop Program The shopper conducts an inquiry through the institution s website or other web-based marketing medium. Marketing Materials Program In addition to the telephone, in-branch, and/or online programs, the shopper reviews the financial institution s advertising, signage, and other marketing materials (including material sent to a shopper s residence) to establish if they are current, available, and appropriately displayed. In each solution, the shopper completes an evaluation of the interaction and photographs all materials provided in response to the shop solicitation (once received). Key materials may include: Savings rates and fees / credit card rates and fees sheet Disclosure brochure or information packet Correspondence or other hard-copy information and product marketing material Benefits of Maritz online reporting business intelligence for the right person at the right time Stakeholders have immediate access to shop results via our business intelligence reporting system. In addition to displaying evaluation results, the reporting system may also include photos of the material provided by the institution and the business card received during the mystery shop. An institution can be quickly notified, via an alert, whenever a failure to the evaluation is discovered. The timely notification allows an institution to take immediate and appropriate steps to target failing areas and effect changes. Results are stored as long as necessary, ensuring an audit trail is maintained and available for review. Online benefits include: Timely access to mystery shop results Quick identification of noncompliance issues View performance across multiple channels or regulations Insights via executive summary level reporting Access to industry experts to help interpret and recommend Ability to share results with large groups. Personalized results can be provided to various levels of the bank s organization (e.g., individual branch, call center, or regional managers) Capacity to view trends over time The Keys to Success The keys to a successful regulatory compliance mystery shop program are stakeholder participation, close coordination, and an effective response plan. Institutions must communicate the program s objectives to stakeholders as well as the methodology and value. How the program is to be executed, what the standards are, and what constitutes failure or passing all drive confidence in the mystery shopping tool. Additionally, a planned, methodical process for reacting to reported anomalies, at the point of failure, will drive change and demonstrate an institution s commitment to consumer protection. 4

5 summary Traditional banks and non-depository financial institutions (i.e., mortgage and finance companies, payday lenders, etc.) are now, more than ever, subject to regulatory enforcement with possibly severe economic penalties for noncompliance. While the Dodd-Frank Act and the creation of the CFPB are expected to have significant impact, many of the rules and policies remain to be written. What is clear is that heightened enforcement is coming current evidence abounds. Financial institutions that want to take a proactive approach to compliance, minimize legal liabilities, and reduce the risk of substantial fines should consider using mystery shopping as an integral and ongoing tool in their compliance management strategy. dashboard with key results Location-level Scorecard Individual Shop Results identification prevention remediation For more information, please contact Maritz Research visit call (877) 4 MARITZ CrowsNest@maritz.com RESEARCH 5