After years of reading compliance-related articles, attending industry trade show panel discussions, and reviewing regulatory directives, you no doubt understand that a comprehensive regulatory compliance strategy should be a central focus in every product provider and administrator’s business. However, many organizations are still troubled with determining whether their compliance obligations extend to the actions of agents and dealers.
Simply put, do providers and administrators have an obligation to ensure their products are offered in a compliant manner, by third-party agents and dealers? The answer is yes.
This article will focus on some background and current trends regarding this obligation, as well as outline some basic compliance best practices to limit exposure.
Increased Awareness of Add-on and Ancillary Products
The issuance of regulatory guidance by federal administrative agencies in combination with numerous federal and state enforcement actions by, among others, the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), and state attorneys general against industry participants — both dealers and product providers — illustrates the emphasis being placed on compliant product sales. From a federal perspective, the CFPB and FTC have been scrutinizing product providers through both exams and enforcement actions.
In 2014, the CFPB issued a consent order to an automotive lender and product retailer stating that the retailer “made deceptive statements regarding the cost of add-on products and the scope of coverage of vehicle service contracts.” More recently, in 2016, the CFPB issued a consent order against a buy-here, pay-here dealer for failing to disclose the sale of packed add-on products as finance charges. The consent orders resulted in large fines and consumer restitution totaling in the millions.
The FTC’s Operation Ruse Control initiative was structured as a broad-scale crackdown on deception and fraud within the auto marketplace. As part of its expanded authority under the Dodd-Frank Act, the FTC has brought numerous actions against dealers and product providers alleging fraudulent and deceptive practices.
In March of 2015, the FTC brought an enforcement action against a dealer and a product provider for failing to disclose that the fees charged for a biweekly financing add-on product negated all, or substantially all, of the program benefits. Similarly, in September of 2016, the FTC issued a consent order against a California dealership and several of its owners, individually, alleging deceptive and unfair sales and financing practices. The FTC alleged, among other things, that the dealership charged consumers for add-on products without their consent or falsely claimed that the products were required or free. These consent orders resulted in fines, waiver of future payments, and consumer restitution totaling in the millions.
In the same way, state attorneys general have continued to increase enforcement related to add-on products. In connection with a recent enforcement action, the New York attorney general has shown its intent by stating that it “will continue to investigate and hold accountable any auto dealers trying to pad their pockets by charging fees for undisclosed products and services that consumers do not need and did not ask for.”
Outside of increased regulatory scrutiny, providers, and administrators need to be aware that plaintiffs’ lawyers may look to include any related parties, including dealers, agents, and providers, within a civil action. Any party who receives compensation related to the sale of a product or service can reasonably expect to be a named defendant in any associated action.
Development of Products and Consideration of Value
Providers and administrators should include their legal and compliance departments in the product development process. The terms and conditions should be drafted to ensure accuracy in coverage, limitations, and exclusions. In addition, all marketing and promotional materials should be scrutinized to ensure they reflect the actual terms and conditions of the products offered. The materials should not include generalized summaries that could be construed as misleading or deceptive to a customer.
Product development and underwriting should include a calculable and reasonable maximum benefit to the purchaser. Providers should consider a reasonable retail seller markup or commission when designing the product benefits to ensure the purchaser receives substantive value through its purchase. All products should contain eligibility and pricing guidelines that are fair, transparent, and prohibitive of discriminatory or disparate pricing.
Sales Process and Guidelines
Providers and administrators should develop sales guidelines or a code of conduct related to the sale of its products by retail sellers. These guidelines should reflect the organizations’ commitment to transparency, accuracy, and the consistent and fair treatment of all customers. All guidelines should encourage disclosure and prohibit sales via high-pressure or coercive sales tactics. Further, all retail sellers should adopt processes to document compliance with applicable laws and the established guidelines.
Providers and administrators should offer compliance, ethics and sales training to agents and dealers. These training materials and scripts should be analyzed for consistency and transparency in relationship to the underlying product being offered; ensure that any sales scripts are consistent with product benefits and can be reasonably understood by the average consumer. Curriculum should be reviewed by the provider or administrator’s compliance and legal team, in the event compliance, ethics, and sales training related to your products is offered by an agent.
Agreements with Agents and Sellers
The provider’s agreement with the agent and dealer should reference your code of conduct and prohibit any sales practices in contradiction with these requirements. In the event a provider or administrator becomes aware of a violation of these sales guidelines or any applicable law, notice should be sent to the dealer or agent requiring it to cease any unauthorized activity and to cure any defects with respect to future sales.
It is imperative that providers and administrators document this notice and any associated resolution. If the dealer or agent fails to remedy its violations, its sales authority to offer your products should be terminated.
Both regulators and plaintiffs’ lawyers have increased enforcement actions and litigation related to the sale of add-on products. Product providers, dealers, and their principals have been fined and forced to pay restitution to consumers. While every organization is different, providers and administrators would be wise to include their legal and compliance professionals in the product design, sales guidelines, and on-boarding of new clients; it may be the deciding factor in defending a potential lawsuit or regulatory enforcement action.