The World Health Organization has now declared COVID-19 a pandemic, and as more businesses begin to face the impacts of quarantines and travel restrictions, they may find themselves managing unexpected legal risks. Among those are risks related to communications with customers by sales and marketing functions.
Those businesses hardest hit in the initial stages of the crisis — e.g., cruise lines, airlines and hotels — quickly face pressures that raise the risks of private litigation and government enforcement in connection with sales and marketing efforts. For example, what assurances should sales representatives give in response to inquiries about the chances of contracting the virus in connection with the use of a product or service? What information should be provided about safety measures being taken? Do sales commission and incentive programs exacerbate the risks of non-compliant responses, and should they be suspended?
In the coming weeks, a far larger range of businesses, including most retail-facing businesses, are likely to find themselves having conversations with customers who are considering cutting back on spending in the face of the virus risks or who are altering their investment strategies in the wake of market volatility. Market volatility is unlikely to subside quickly, and based on our experience and observations during and after the 2007-08 financial crisis, prolonged financial stress typically increases the risk of improper sales and marketing conduct occurring.
In this alert, we have set out a brief summary of the major consumer protection regimes in the US and the UK governing sales and marketing practices, and have included a quick list of best practices and proactive steps an institution’s compliance, legal, and human resources, and senior management teams, as well as the board of directors, can be taking to tackle these risks, including considerations on how to handle the impact of incentive compensation arrangements.
Consumer Protection Regimes
- General Federal Consumer Protection Laws: The Federal Trade Commission (“FTC”) has traditionally been the main federal regulator overseeing consumer protection outside of the banking industry. Section 5(a) of the FTC Act provides that “unfair or deceptive acts or practices in or affecting commerce” unlawful. The FTC’s investigative and enforcement authority is broad, touching almost every industry other than banking.
- Federal Financial Consumer Protection Laws: Following passage of the Dodd-Frank Act, the disparate consumer protection authorities of the banking and financial regulators were consolidated under the newly formed Consumer Financial Protection Bureau (“CFPB”). The Dodd-Frank Act gives the CFPB enforcement authority over unfair and deceptive acts, mirroring the FTC’s interpretation of these terms, but also adds an additional authority relating to “abusive” acts or practices. The CFPB’s enforcement authority relates to financial products offered to “consumers primarily for personal, family, or household purposes.”
- State Consumer Protection Laws: Each state has some form of consumer protection law prohibiting deceptive practices, and many additionally prohibit one or more of unfair, unconscionable, or abusive acts or practices. Certain states (e.g., California) provide broader causes of action for private litigants than others. State attorneys general also have the authority to bring certain enforcement actions under the CFPB Act. Finally, common law claims of fraud may also be relevant.
- Consumer Protection Laws in the United Kingdom: The Consumer Protection from Unfair Trading Regulations 2008/1277 (the “Regulations”) set out a general prohibition against unfair commercial practices, and specifically against misleading actions, misleading omissions and aggressive practices as well as certain other specific unfair practices. Local Authority Trading Standards Services and the Competition and Markets Authority have powers to bring enforcement action (including criminal prosecutions) for breach of the Regulations in addition to rights of redress for consumers. Claims by consumers under common law or statute for misrepresentation may also be relevant.
- Review and Update Policies and Procedures: Compliance and legal personnel should review the policies and procedures governing sales and marketing practices so that they are up to speed on the steps the institution takes to prevent potential violations of law or actions that pose significant reputation risk, and should consider where such policies and procedures may need to be updated.
- Keep an Open Line of Communication with Sales Personnel: Compliance and legal personnel should work together to draft one or more communications to sales and marketing personnel explaining the institution’s policies, procedures, and expectations on all communications with customers related to COVID-19. Senior management and/or the board of directors should strongly consider being involved as well, in order to set the appropriate “tone at the top.”
- Monitor Sales Communications, Especially Where Remote Working Is in Effect: Compliance personnel should consider enhancing monitoring of sales personnel’s communications with customers, including for large institutions, scanning for key words related to COVID-19 in recorded customer communications, as well as other terms more typical of general misconduct. Different industries should calibrate their monitoring to the particular stresses applied to their sales and marketing efforts, be it directly or indirectly related to COVID-19, or to the knock-on effects of prolonged market instability. This is especially true where the institution has instituted remote working arrangements, as this may impede compliance’s abilities to effectively monitor sales activities and communications.
- Keep an Ear Out for Complaints about Sales Practices: Compliance personnel should be particularly sensitive to any employee statements, complaints, or other indications that sales and marketing practices may be downplaying the risks related to COVID-19 in communications with customers in order to increase or maintain sales numbers. This is especially true where incentive compensation arrangements are tied to the performance of a team.
Sales and Management Incentives
Finally, senior management, human resources personnel, and potentially the board of directors should consider adjusting sales commission and other similar incentive arrangements, as well as management incentives tied to financial metrics that could be impacted by the crisis. While a well-designed incentive compensation plan is an important component in supporting the institution’s goals and incentivizing value-maximizing behavior, such plans can give rise to unintended incentives and risks in unusual circumstances, such as the current environment, including by incentivizing employees to communicate with customers in a way that emphasizes sales over the customer’s health, a potential quagmire of legal and reputational risk.
As COVID-19 continues to spread, management should proactively consider messaging to employees that emphasizes the importance of careful attention to compliance issues and a perspective that values the long-term sustainability of the business and stakeholder interests over short-term financial impacts. Incentive compensation plans lacking flexibility may appear to punish sales personnel for general market conditions, which may ultimately drive out key talent that is important to an institution’s long-term health.
 15 U.S.C. Sec. 45(a)(1) (emphasis added). An “unfair” act or practice is one which (1) causes or is likely to cause substantial injury to consumers (typically, but not always, monetary), (2) such injury cannot reasonably be avoided by consumers, and (3) such injury is not outweighed by countervailing benefits to consumers or to competition. FTC Policy Statement on Unfairness (Dec. 17, 1980). A “deceptive” act or practice requires (1) a representation, omission, or practice that misleads or is likely to mislead a consumer, (2) the consumer’s interpretation of such representation, omission, or practice must be reasonable, and (3) the misrepresentation, omission, or practice is material. FTC Policy Statement on Deception (Oct. 14, 1983).
 12 U.S.C. §5531. To be “abusive,” an act or practice must either (1) materially interfere with a consumer’s ability to understand the terms of a consumer financial product or service, or (2) take unreasonable advantage of a consumer’s (a) lack of understanding of the material risks, costs, or conditions of such product or service, (b) inability to protect their own interests in selecting such a product or service or (c) reliance on a party covered by the CFBP Act to act in the interest of the consumer. 12. U.S.C. §5531(d).
 12 U.S.C. § 5481(5).
 12 U.S.C. § 5552.
 Consumer Protection from Unfair Trading Regulations 2008/1277, Reg. 3. A commercial practice is deemed to be unfair if it (a) is not “professionally diligent” and (b) materially distorts, or is likely to materially distort, the economic behavior of the average consumer.