Market Conduct

Punish Bad Behavior?

In an article (subscription required) by Corrie Driebusch, posted in the Risk and Compliance Journal section of the Wall Street Journal on February 12, 2014, a new compensation model at Barclays Advisers is discussed. Barclays Advisers’ New Performance Metric: Their Behavior: Bank Could Dock Compensation in U.S. Wealth-Management Unit for Misconduct. Compensation can now be reduced for misconduct.

I applaud Barclays for taking a stand that conduct does matter. However, I am a strong believer that carrots generally work better than sticks. In my experience, positive incentives are simply more effective than negative consequences for actually making behavioral changes. I would have recommended that compensation be higher based on good conduct rather than being reduced for bad.

“The change is a small part of a global reshaping of London-based Barclays’s business and practices, with the aim of polishing a reputation tainted in recent years by scandals, including involvement in efforts to rig benchmark interest rates and improper sales of insurance and other financial products. It also follows regulatory and internal criticism of the U.S. wealth-management unit’s culture for allegedly putting boosting profits ahead of following the rules.”

While Barclays says the change has been well received by its advisers, it seems hard to imagine that it would be. Imagine the difference if these advisers had been told they had the chance to make more by following the best practices for sales, particularly with vulnerable consumers. That type of incentive seems much more likely to improve morale and result in those sought after sales practices. In addition, some advisers who might be at more risk for reductions in their pay due to their poor conduct in the field may leave Barclays and show up at another firm. That means the overall risk of misconduct in the industry doesn’t change, even if there is a bit of a clean up at Barclays.

The article concludes “Deep pay cuts for anything less than serious misconduct wouldn’t make sense, Mr. Smith [an analyst at research firm Cerulli Associates] said. ‘I don’t think anyone’s going to be docked 20% of their pay because grandma had a complaint.’” That may be true, but if it is, how successful will the change in compensation be? And if pay isn’t docked in some significant way “because grandma had a complaint” does the policy do any real good for Barclays, in its apparent attempt to show a culture of compliance that is reflected in its compensation program? If having a year with no complaints (from grandma or otherwise) meant a bonus, those advisers might be very interested in treating each and every grandma the way they would want their own grandma treated. And that would create a culture of compliance that could make a real difference.

Only time will tell what this change in compensation means for sales practices at Barclays. I hope it succeeds, but I suspect that it will have only a marginal impact. Perhaps others looking at the same issues will decide to pursue a carrot approach and reward those who demonstrate a real commitment to best practices. That is what I hope to see.

Spring Conference Season

It has been a week since the IAdCA annual conference in Seattle ended. As always, it was a great event and the board, with Murray Vassar as President, did a great job making it an educational and fun time for everyone. I enjoyed the two sessions that I presented—Market Conduct Issues & Developments and Producer-Generated Advertising. I am looking forward to seeing the participant feedback, hoping attendees found the sessions useful and informative.

In the Producer-Generated Advertising session, one of the main topics of discussion was Kansas Bulletin 2012-1. I had picked the topic several months earlier and it was a welcome addition to have a Bulletin—so directly on point—be issued so close to my presentation on the topic. The bulletin leads with:

Due to a growing problem with advertising practices by third-party marketing entities, the Department issued in January 1991 Bulletin 1991-4 in order to remind insurers authorized to transact life and/or accident and health insurance in Kansas of the applicability of K.A.R. 40-9-100 and K.A.R. 40-9-118 to the marketing activities conducted by third-party entities. Over the last couple of years the Department has experienced a similar increasing trend in the number of complaints regarding life and health insurance advertisements produced and distributed by third-party marketing firms.

Some session attendees were very much aware of the bulletin, while others were not. But there was a lot of interest from both groups. Since I am leading a similar session at the New England Chapter of the AICP Education Day in Springfield MA on May 11, I realized that it would greatly enhance the value to have the Kansas regulators co-present/discuss the issues related to advertising produced and distributed by third-party marketing firms. I am pleased to announce that Ms. Jennifer Sourk, an attorney with the Kansas Insurance Department and Mr. Jason Lapham of the Life Division will both be attending E-day and will be sharing the panel with me. I am quite sure our discussion will be a lively one.

In between IAdCA and E-day is IRES. LHCA, the Life and Health Compliance Association, wrapped up yesterday on an altered schedule because of the religious holidays. E-Reg is coming, too. In the spring and fall, there are so many conferences; it sometimes feels that they are right on top of each other. I always look forward to the opportunity to share information and rekindle connections in person when so much of our interactions are by e-mail and telephone. At the end of each conference season I feel a sense of relief but also a bit of sadness as my work world again pulls inward. To those of you I will see soon, I am looking forward to it! To those of you who will not be at this round, perhaps I will see you during the fall conference season?

Changes to New York’s Market Conduct Profile for 2011 Reporting

On March 2, 2012, the New York Department of Financial Services posted changes for the Market Conduct Profile due later this year, to be completed with data from 2011 on its website. There were only two changes indicated from last year:

  1. Question 7 in the Compliance Section is added. These questions relate to the Company’s AML Program and the specific products that are covered under the AML Program.
  2. In question 12 of the Compliance Section (formerly question 11), the question concerning membership in IMSA has been replaced with question concerning the membership with The Compliance & Ethics Forum for Life Insurers (CEFLI) or other similar organizations.

It is the second one that I found particularly interesting. As we have discussed here previously, the change from IMSA to CEFLI was a very big change and one that eliminated the compliance assessment and certification requirement for membership. I was a qualified independent assessor under IMSA, so I have a bias, but I do not think that membership in an organization that hosts webinars and conferences on general compliance topics is the same as one that mandates an exhaustive in-house assessment process and then has an outside assessor review that work.

Membership in CEFLI is not the same as membership was in IMSA. That is not to say that CEFLI doesn’t provide important information or the opportunity for significant discussions on insurance compliance topics. However it does not reflect the significant commitment to a process of assessment and evaluation of a large number of company policies and procedures the way IMSA membership used to. I am sure that the New York Department of Financial Services knows that and they do indicate that other similar organizations can be included in the response. I am, therefore, hopeful that membership in all the other organizations that support life insurance companies in their compliance efforts (e.g., the Association of Insurance Compliance Professionals, the Insurance Advertising Compliance Association, and the Life and Health Compliance Association) are given similar weight to CEFLI membership.

What made IMSA different was the rigorous assessment process. Without that in CEFLI, there are a number of equivalent organizations to which companies may turn to obtain information and compliance support. In my opinion, all should “count” in their favor on the market conduct profile.