Consumer Compliance Outlook: Second Issue 2024

The Benefits of a Formal Complaint Management Program

By Scott Sonbuchner, Senior Examiner, Federal Reserve Bank of Minneapolis

A formal program to manage complaints can be an important part of a financial institution’s compliance management system (CMS). Complaints can help identify products, services, and practices that violate consumer protection laws or cause pain points for customers. This information can then be used to address these issues before they escalate and provide an opportunity for the institution to enhance its CMS to mitigate the risks revealed in the complaints.

A formal complaint program also makes good business sense. A Harvard Business Review study found customer loyalty increases for businesses providing prompt and personal customer service: “A mere acknowledgement of the customer’s problem can defuse initial frustration and put the customer back on the road to loyalty. Instead of the customer seeing the company as the enemy, a sympathetic response can reorient the situation so that the customer now feels that the company is on his or her side.”1 Complaint management programs can therefore be an integral part of an effective CMS.

This article identifies five common elements of a formal complaint management program, reviews its direct benefits, and discusses how it benefits other components of a CMS. Before discussing these elements, it’s important to recognize that complaint management programs should be calibrated based on the size and complexity of each institution. A bank operating in 50 states with millions of customers that receives thousands of complaints per day will have a more complex program than a community bank with two branches that receives two complaints per week.

WHAT DOES AN EFFECTIVE COMPLAINT MANAGEMENT PROGRAM LOOK LIKE?

A written policy is an important part of a sound complaint management program. While the details will vary based upon the size and complexity of an institution, most policies define complaints, discuss the institution’s procedures for addressing them, provide instructions on collecting and compiling them, and outline the strategy for using complaint data to monitor the institution’s compliance risk. The policy helps to ensure staff are uniformly identifying and addressing complaints.

Defining a Complaint

How an institution defines a complaint is a crucial aspect of a complaint management program because it determines which communications are captured and addressed. Defining a complaint also helps ensure a uniform approach across different departments and avoids the myopic view that a complaint is defined solely as a communication containing that word.

While complaint is not specifically defined in a law or regulation, defining it broadly is a sound practice to ensure communications that qualify as complaints are identified. For example, defining a complaint as “a communication that expresses dissatisfaction with the bank’s products or services” specifically avoids limiting complaints to consumer communications because certain consumer protection laws also apply to commercial transactions, such as the Equal Credit Opportunity Act, the Servicemembers Civil Relief Act, and the Flood Disaster Protection Act of 1973. (For more information, see “Consumer Compliance Requirements for Commercial Products and Services,” Consumer Compliance Outlook (First Issue 2024)). This approach also benefits from not limiting complaints strictly to customers, as potential customers may complain about products and advertisements.

For clarity, some policies explicitly state that complaints can be received through any medium, including in person; in writing; or by telephone, email, or social media. This point is important because customer communications have evolved with changes in technology. Finally, including examples of communications that qualify as complaints and those that do not can help clarify the distinctions for staff.

Collecting and Tracking Complaints

Complaint management policies may also include instructions on how to collect and compile complaints. Collecting complaints at smaller institutions may be straightforward. However, larger institutions with multiple departments may need a centralized complaint tracking program. Additionally, since complaints can come from many different channels, banks may want to establish policies and procedures for collecting complaints and forwarding them to a central tracking point. This may require a complaint tracking sheet for employees to complete and use to facilitate forwarding the complaint details to a centralized location.

Collecting complaints can not only help with trend analysis (as discussed later in the article), but also track how long complaints take to resolve. To promote consistent, reliable service, some institutions include a maximum number of days employees may take to resolve complaints. A centralized tracking program can help a bank monitor whether it is consistently responding to complaints in a timely manner. This is especially helpful when resolving a complaint requires multiple subject matter experts, as resolution may require handing parts of the complaint to other employees. By tracking complaints in a centralized location, banks can document how quickly they respond to consumer complaints and more readily identify pain points.

Classifying and Responding to Complaints

Classifying complaints is an important aspect of a formal complaint program. This can be done in different ways, including by department, product, or regulation. Since complaints can fall into more than one category, it is important to confirm if complaints should be classified according to their primary category or if they will be classified in more than one category. To ensure all complaints are collected, some institutions specify that complaints immediately resolved must still be documented. Otherwise, employees may assume that solving a customer’s complaint means it does not have to be documented.

Assigning a risk classification to a complaint is a sound practice from a risk management perspective because it allows an institution to prioritize addressing a high-risk complaint and include an escalation protocol. For example, if a customer credibly alleged a loan officer made a derogatory comment about his race and denied his loan application on that basis, the complaint could be classified as high risk and notice sent to the compliance and fair lending officers and senior management, with close monitoring. The classification system could also be used to identify frivolous complaints. Thus, the classification system can provide management information system data on the number and types of complaints an institution is receiving and further categorize them based on their risks.

Addressing Complaints and Root Cause Analysis

For impacted customers, addressing the complaint is the most important aspect of the complaint program. When an institution is at fault, it should provide restitution to affected customers by putting them in the position they would be in if the error had not occurred. This may require fixing more than just the specific issue underlying the complaint. For example, if a payment was not posted properly, the institution may need to reimburse a late fee, credit improper interest rate charges, correct the customer’s payment history in its records, and update the information furnished to the consumer reporting agencies.

After addressing a customer’s harm, a financial institution can perform a root cause analysis if the issue appears to be systemic and repeatable. Without investigating and addressing the root cause, resolving the complaint is merely treating a symptom; addressing the root cause systemically will help identify similarly situated individuals who were also harmed and prevent harm to other customers. Fully addressing a complaint includes proactively correcting the harm incurred by consumers who have not yet complained. Because only a small number of impacted consumers are likely to complain, even an individual complaint can indicate a significant compliance weakness.

Analyzing Aggregated Complaint Data

Aggregating complaints can help institutions monitor risk trends. When aggregated complaint levels rise, the compliance department should investigate the cause. From a compliance risk perspective, complaint trends are particularly notable when an increase in complaints outpaces an increase in product or transaction volume. If complaints are categorized, compliance can sort and filter them to help understand why they increased.

Sorting complaints by different filters can provide greater insights into the data:

These data can help the institution better understand whether its controls are functioning as intended.

Reviewing aggregated complaints can provide insight into customer tendencies, which provides an opportunity to remove friction from customer experiences. While some complaints result directly from bank errors, some complaints result from customer misunderstandings. By aggregating complaints and looking for trends, banks can isolate which misunderstandings happen frequently enough to warrant a more comprehensive solution. Even complaints that indicate a customer had imperfect knowledge of a bank’s product or service may put the bank on notice about how some customers, who may be busy and multitasking, interpret the bank’s disclosures or practices. Reviewing complaints for repetition and patterns can help banks identify and improve suboptimal processes and minimize misunderstandings.

BENEFITS OF A FORMAL COMPLAINT MANAGEMENT PROGRAM

Beyond the supervisory expectation to manage complaints appropriately, a formal complaint management program provides several strategic benefits, including reducing reputational risk, limiting the risk of unfair or deceptive acts or practices (UDAP), and decreasing the number of consumer complaints lodged directly with regulators.

Reducing Reputational Risk

Complaints can increase reputational risk by generating negative publicity about the bank’s business practices. The publicity could prompt some customers to switch to another institution, could increase litigation risk, or could otherwise reduce revenues.2 Social media can amplify reputational risk, as online complaints reach a wider audience and even unvetted allegations can persist indefinitely for others to see. In one extreme example, a musician’s $3,500 guitar was damaged by an airline’s baggage handlers. When he complained, and the airline refused to pay for the repair, he released a music video that went viral on social media with millions of views and published a book about his experience.3

By requiring employees to address complaints promptly, institutions can reduce the risk of consumers turning to social media to vent their frustration. Additionally, by performing a root cause analysis and correcting the accounts of other similarly situated customers, institutions will limit the number of customers affected by harmful products and practices. Finally, institutions also reduce reputational risk by creating an expectation that employees will reach out to resolve online complaints, connect with those who allege they were harmed, and correct possible errors or misunderstandings.

Limiting UDAP Risk

Section 5(a) of the Federal Trade Commission Act prohibits unfair or deceptive acts or practices.4 Because legal tests of whether an act or practice is unfair or deceptive consider the consumer’s perspective in determining if a violation occurred,5 multiple consumer complaints can be the proverbial canary in the coal mine of potential UDAP risk. For this reason, all of the federal banking regulators routinely examine an institution’s complaint log during the scoping of a compliance examination to help inform the areas on which they will focus. Failing to capture and review complaint logs for consumer harm can be a lost opportunity to identify and address potential UDAP risk before it escalates into a violation or enforcement action.

Decreasing the Number of Consumer Complaints to Regulators

Effectively addressing consumer complaints may reduce the number of complaints consumers file directly with an institution’s regulator. All bank regulators provide consumers with the opportunity to submit complaints directly to them. However, consumers usually attempt to resolve complaints directly with their financial institutions first. Consumers tend to escalate complaints to regulators when financial institutions do not initially respond to a complaint. By addressing complaints immediately, banks might reduce the number of complaints that are routed to regulators, which could result in the conservation of resources and customer retention.

INDIRECT BENEFITS OF A FORMALIZED COMPLAINT MANAGEMENT PROGRAM

An effective complaint management program favorably impacts other components of the bank’s CMS. A well-functioning complaint management program can enhance the other components of a compliance program, while an inadequate program can impair them. To illustrate, we provide three examples in which effective complaint management programs positively impacted other factors of a bank’s CMS.

Example 1: A uniform definition of “complaint” helped board and senior management to maintain effective oversight. The institution’s complaint policy defined complaint broadly to include oral complaints. A number of customers called to complain that they opened a checking account that was advertised as free, but fees were imposed for failing to maintain a minimum balance. After investigating, the institution recognized charging balance fees on an account advertised as free or low cost violates §1030.8(a)(2) of Regulation DD.6 The fees were removed and the system updated to stop charging maintenance or activity fees on those accounts.

Example 2: Effective tracking and analyzing of complaint data improved change management. An institution had previously originated loans in portfolio and sold the servicing rights but now saw value in retaining those rights for its extensive mortgage portfolio to generate fee income and interest on escrow accounts. Several consumers complained their property taxes managed through an escrow account were not paid on time, resulting in late fees from the local taxing authorities. After investigation, the institution determined it sent the tax payments too close to the deadline to avoid a penalty, in violation of §1024.17(k)(1) of Regulation X.7 The bank adjusted its system to send the payments with a sufficient cushion to ensure they were received on time. The complaints provided insights into compliance issues with the new servicing business and allowed the bank to correct the issues and provide restitution to affected customers. The complaint data also prompted the audit department to increase the intensity of the audit of the servicing business.

Example 3: Tracking complaints assisted with internal audit’s risk-focused scoping. The institution’s complaint management program documented and tracked complaints through to resolution. This practice assisted the bank’s internal audit scoping process, as the scope aimed to focus on higher-risk areas of the bank. By having well-documented metrics on the number, type, and resolution of complaints, the audit department could more accurately align the scope of its audit schedule with the risk of the bank. Thus, an effective complaint management program facilitated the audit department’s risk-focused approach.

These examples illustrate the benefits of an effective complaint management program. In all three cases, proactively reviewing customer complaint data identified systemic issues that otherwise might not have been noticed and addressed. Further, the Uniform Interagency Consumer Compliance Rating System (CC Rating System) specifically enhances compliance ratings of institutions demonstrating proactive compliance programs: “Strong compliance programs are proactive. They promote consumer protection by preventing, self-identifying, and addressing compliance issues in a proactive manner. Accordingly, the CC Rating System provides incentives for such practices through the definitions associated with a 1 rating.”8

CONCLUSION

Financial institutions are expected to have a system in place that adequately addresses complaints. While institutions have flexibility on how they implement their complaint management programs, the five common elements discussed in this article are frequently found in successful programs. Specific questions or concerns should be raised with your primary regulator.


ENDNOTES

1 Wayne Huang, John Mitchell, Carmel Dibner, Andrea Ruttenberg, and Audrey Tripp, “How Customer Service Can Turn Angry Customers into Loyal Ones,” Harvard Business Review (January 16, 2018).

2 Supervision and Regulation letter 95-51, “Rating the Adequacy of Risk Management Processes and Internal Controls at State Member Banks and Bank Holding Companies” (November 12, 1995).

3 Christine Negroni, “With Video, a Traveler Fights Back,” New York Times (October 28, 2009); Nicola Clark, “Airlines Follow Passengers onto Social Media Sites,” New York Times (July 29, 2009).

4 15 U.S.C. §45(a).

5 “An act or practice may be found to be unfair where it ‘causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.’ A representation, omission, or practice is deceptive if it is likely to mislead a consumer acting reasonably under the circumstances and is likely to affect a consumer’s conduct or decision regarding a product or service,” Federal Reserve Board and the Federal Deposit Insurance Corporation, “Unfair or Deceptive Acts or Practices by State-Chartered Banks” (March 11, 2004).

6 This section of the regulation prohibits misleading or inaccurate advertising, saying an advertisement cannot “refer to or describe an account as ‘free’ or ‘no cost’ (or contain a similar term) if any maintenance or activity fee may be imposed on the account.”

7 This section of the regulation requires servicer to “pay the disbursements in a timely manner, that is, on or before the deadline to avoid a penalty, as long as the borrower’s payment is not more than 30 days overdue.”

8 81 FR 79473, 79479 (November 14, 2016). The Federal Reserve discussed the rating system in Consumer Affairs letter 16-8, “Uniform Interagency Consumer Compliance Rating System” (November 22, 2016).