Customers Are Now Banks' Greatest Regulatory Threat

WASHINGTON — Banks need to revamp their customer service operations to encourage irate consumers to complain to them instead of turning to the Consumer Financial Protection Bureau, where a complaint could spark added regulatory scrutiny.

In multiple speeches and public pronouncements, CFPB officials have aggressively urged consumers to file a complaint on the agency's public database, which has swelled to more than 200,000 complaints since going live in March. The agency uses that data to determine where it will focus its attention next, including both what regulations it writes and enforcement actions it takes against individual institutions.

As a result, some observers said banks need to realize that the best way to avoid the added attention or an enforcement action derived from complaints is by making it easier for customers to resolve the issue with the institution first. That includes improving the visibility of their complaint-taking systems and attempting to address problems quickly before a customer seeks out regulators for help.

"All of the [banking] agencies are looking at complaints much more intensely," said Ed Kramer, executive vice president of regulatory affairs at Wolters Kluwer Financial Services. Complaint handling "ties into your overall risk management program and that affects your Camels rating. And what you think of as an operational issue becomes a compliance issue, which then becomes a safety and soundness issue."

The CFPB's consumer complaint database has been controversial since it was first announced, with bankers arguing it's unfair to make unsubstantiated allegations against institutions public. But CFPB officials clearly see it as a critical tool to both encourage better customer responsiveness at institutions as well as guide policymaking. Yet bankers have been slow to fully grasp to its importance, observers said.

In interviews with bankers, regulators and industry representatives, several said institutions need to step up their customer service operations to comply with CFPB expectations. They recommended, for example, that banks jettison automated systems that require consumers to spend a half hour pressing buttons on a phone, or making several clicks online, in order to file a complaint. They also said lenders need to become more efficient and respond faster to complaints they receive compared to the CFPB's 15-day window.

"You want to reduce the number of complaints to the CFPB and a way you can do that is to cut them off at the pass," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr. Banks should "have a very good system in place from the get go to resolve a complaint quickly."

Banks must collect, monitor and gauge every complaint in their entire operation, looking for what regulators might view as a potential violation to consumer protection and marketing laws, experts said.

The complaint portal "really has been a key way that the CFPB has tried to be consistent with its mantra of protecting consumers and looking for consumer risk anywhere it can find it," said Robert Bostrom, a shareholder at Greenberg Traurig and former Freddie Mac general counsel. The CFPB expects that lenders' "complaint resolution process was recorded, documents were verified and what remedial action was taken. They also want to know was it consumer specific or systemic in the bank."

The CFPB has already taken enforcement actions based on consumer complaints, including a recent action against U.S. Bancorp (USB) and its vendor in June for allegedly improperly marketing and collecting fees from service members in an auto loan program. CFPB officials said their investigation was triggered by customer complaints.

"We have made it very clear that there are parts of the bureau such as supervision, enforcement and fair lending who pay very, very close attention to the complaints we receive," said Scott Pluta, the assistant director for the CFPB's office of consumer response, in an interview with American Banker. "So the advice I have seen out in the market is that if you want to stay ahead of and be compliant with what the bureau is doing, you really need to pay attention to the complaints because we're paying attention to them."

Some larger banks like TD Bank (TD) in Cherry Hill, N.J. are already putting that into practice by encouraging consumer feedback through multiple channels and having all complaints fed to a so-called "chairman's service center" to be monitored for trends and resolutions. The bank is also running product materials and written communication through consumer-friendly testing in addition to making sure it's compliant with laws.

"We've gone through every letter that leaves this place to make sure it's clear and we're putting that in plain language so the customer understands," said Linda Verba, executive vice president and head of service strategy at TD Bank. "Are the rules and regulations a little tighter than people would like? Yeah. Is it because some people got out control when the rest of us didn't? Yeah… But I firmly believe if you learn the rules of the game, you can play to win. And you can't change the rules but you can win."

But winning is going to be a costly endeavor.

Banks can no longer place an entry-level team of customer service representatives into one department and trust that customers' concerns will be resolved no matter how technical the issue is, consultants said. They recommended that complaints be integrated, monitored and handled by every department.

"It is something that will reach the highest level of management and it has to be totally incorporated into the compliance management systems in all the institutions," said Gil Rudolph, co-chair of the financial institutions practice at Greenberg Traurig.

Some bankers argue this includes creating a team devoted to monitoring what the public says about lenders on social media sites such as Facebook and Twitter.

"We track and trend those responses so our social media group has become more and more active," Verba said. "When we see or hear something, we will reach out to the customer and say we want to know more."

For example, Verba said if someone Tweeted about waiting too long at a drive-through teller window, she could quickly video conference in management at that branch and gauge the length of time cars are sitting at the window.

"It really does allow us to deal with things in real-time," she said.

TD Bank has also implemented a policy to address social media comments within four hours and any other form of complaints typically within 24 hours. That was partly because the bank wanted to let customers know they could respond faster than the CFPB, Verba said.

Social media has played a big role in ramping up the bank's response time, regardless of whether the complaint is true. Some customers, too, are getting smart to the situation, with anecdotal reports of a few threatening to escalate an issue on Twitter or Facebook in order to win concessions from a bank.

"That part, on some days, can become a bit frustrating," Verba said. "I'm working with a customer now who is as close to extortion as you can get… At the end of day, if he decides to do whatever damn thing he wants, there's nothing I can do about it. But I firmly believe we've got to listen to our customers and be more responsive."

Kaplinsky said social media outlets have raised significant challenges for banks and though such comments are often times unfounded, the CFPB still takes it seriously.

"A lot of times the complaints are baseless but companies have to bend over backwards to try to treat the consumer well," he said. "We've told clients that even if the consumer is wrong, it's not worth fighting him or her because if you fight it, you spend more time trying to deal with it once a regulatory agency gets involved."