In the past two years, the increased growth of the sale of nondeposit products by banks has raised awareness of customer rights in the marketplace. Therefore, the importance of regulatory compliance in the sales force has taken on a whole new focus.
As a way of testing compliance with regulatory standards, many banks, consumer groups, and even one regulator have taken to "mystery shopping," a technique by which individuals masquerading as consumers evaluate the way bank brokers do their jobs.
Is mystery shopping really an effective, or even a necessary, tool to monitor compliance of nondeposit sales programs? Or has the industry gone overboard?
While there is clearly a place for mystery shopping, I believe that this technique is being vastly overused by institutions that misunderstand its value.
Obviously a financial institution has a responsibility to its customers when it sells nondeposit products, and there are various ways to ensure compliance with federal guidelines, including the use of mystery shoppers.
One objective that mystery shopping does accomplish is to measure the number of sales reps who are in compliance.
But if a bank's management isn't going to firmly establish requirements for its sales reps and enforce them, then all the mystery shopping in the world isn't going to improve compliance.
All mystery shopping will do is continue to provide the percentages of sales reps that are in compliance.
One recent mystery shopping report reflected that 70% of all the sales reps tested made the required interagency statement disclosures.
Yet in another report, the figure is closer to 60% And if it's less than 100%, there will be a perceived problem and the names of financial institutions will continue to hit the press.
One of the main problems with many mystery shopping programs is that for regulatory compliance issues it is very difficult to assess the performance of the sales reps because a sale is never actually completed.
So the required disclosures, theoretically, may not be made and certainly would not have been acknowledged by the customer, because this is done at the time of sale.
Mystery shopping programs and users alike tend to forget that mystery shopping analyzes the performance of the sales reps. This makes more sense for studying selling and interpersonal skills than it does for testing regulatory compliance.
It's time to rethink the purpose of mystery shopping and to ensure that the objectives of your mystery shopping program are properly focused.
There may be much better tools to test regulatory compliance than mystery shopping.
Call-back programs, which the Office of Comptroller of the Currency actively advocated for a while, are much cheaper and tend to be better focused as a testing tool than mystery shopping.
A call-back program for testing customers' perceptions about the sales experience can be equally, if not more, important, than a mystery shopping program that tests compliance in a specified transaction.
To comply with the regulations, mystery shopping has become an industry unto itself. Everyone is doing it; the government, consumer groups, and banks themselves are hiring firms to mystery-shop their sales representatives.
One San Francisco consulting firm has a plan to shop 60 banks, selling detailed information about the banks' investment sales program for $72,000 a year to anyone who wants it.
While dollar figures aren't available for what financial institutions have spent in total on mystery shopping, it is obviously a growing industry.
Even the Federal Deposit Insurance Corp. has contracted with a firm to perform mystery shopping.
I'm sure we are all looking forward to finding out what the results will be used for. But with all the mystery shopping being performed today, it would seem to me that the FDIC's money could be better spent on ensuring the financial institutions have appropriate compliance programs in place.
To contract to test sales reps makes no sense to me. Especially since there are several consumer advocacy and industry groups that are already testing.
The time and money banks, consumer groups, and the government are spending on mystery shopping is incredible. Does it ensure that a financial institution will not be sued or even not have its name spread across the newspapers? No, it does not.
What mystery shopping does is simply test one sales transaction by a sales rep to ensure it complies with whatever standards the mystery shoppers are testing for.
Generally, the test results of a number of sales reps are compiled for management so that assumptions can be made about the sales program as a whole.
Management needs to set the boundaries for its sales reps and be prepared to fire those reps that step outside the boundaries.
I believe it's time to rethink the purpose of mystery shopping to ensure it plays an effective role in a well-thought-out quality-improvement program for the sale of nondeposit products.
Such a program should incorporate a written compliance program, including a training program for the sales reps, an audit program, a call- back program, and, yes, a focused mystery shopping program.
Ms. Perkins is a senior manager with KPMG Peat Marwick's financial services regulatory advisory practice. She specializes in fiduciary issues.
