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Mystery shopping becomes an important supervisory tool in retail banking

Rapid developments and increasing competition in the retail banking landscape require greater need for closer supervision and monitoring from industry regulators to protect the rights of the consumers.

April 18, 2017 | Janine Marie Crisanto
  • Regulators are using mystery shopping to monitor practices in the retail banking industry to protect the consumers and identify possible malpractices
  • In June 2016, a BancorpSouth loan officer was caught discriminating against African-Americans in its mortgage products, charging them with higher mortgage interest rates
  • Banks such as Wells Fargo have also used mystery shopping to manage internal unethical sales practices

Policymakers and financial institutions have introduced various mechanisms to monitor compliance and best practices in the industry over the years. One of the effective tools or methodologies used is mystery shopping, in which investigators pose as regular customers and test out bank products, services and processes during real life situations. This is to measure actual consumer experience and behaviour of the test subjects. A successful mystery shopping programme can indicatively assess and identify issues and deficiencies, as well as recognise good players in the market.

Recent mystery shopping exercises globally resulted in significant insights on sales practices and lapses in consumer protection.


In June 2016, the Consumer Financial Protection Bureau (CFPB) and the US Department of Justice filed a joint complaint against regional bank BancorpSouth Bank for supposedly discriminating against African-American borrowers, particularly in its mortgage lending products – violating both the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. Specifically, the complaint alleges that the bank engaged in illegal “redlining” by excluding majority-minority census tracts from its Community Reinvestment Act (CRA) assessment area; failing to open branches in majority-minority neighbourhoods; and failing to generate mortgage applications from minorities at rates comparable to those of its peers. Instead of just reviewing the banks loan applications for the first time, the CFPB used mystery shoppers to support the claims of discrimination.

The exercise uncovered that a BancorpSouth loan officer treated African-American customers and white applicants differently, charging the former with higher interest rates for mortgages. The CFPB sent African-American and white testers to six distinct BancorpSouth branches to inquire about its home loan products. According to the CFPB allegations, the results indicated that loan officers favoured white testers than African-American testers with identical credit qualifications. The CFPB claimed that BancorpSouth officers provided African-American testers with information that restricted them to smaller loans.

Wells Fargo

Similarly, Wells Fargo is utilising mystery shoppers to manage internal unethical sales practices since January. The bank was previously fined by the CFPB for allegations that its employees opened more than two million unauthorised new accounts for customers in order to meet sales quotas and gain bonuses. According to John Shrewsberry, Wells Fargo’s chief financial officer, the bank has allotted $50 million for monitoring such practices, including a mystery-shopper programme that includes more than 15,000 visits a year. It also eliminated sales goals in retail banking.

In Asia Pacific, mystery shopping has also been exercised to survey various industry-wide practices and identify key areas for improvement, as well as assessing the implementation of regulations and the compliancy of financial institutions.

Hong Kong Monetary Authority

The Hong Kong Monetary Authority (HKMA) assesses the practices and monitors regulatory compliance of banks through on-site examinations and off-site surveillance, such as off-site reviews, surveys and returns.

As an additional supervisory tool, the HKMA deploys mystery shopping programmes (MSP), when appropriate, to check retail banks’ practices in respect of selling of investment and insurance products, and to identify areas for improvement and good practices. The HKMA also takes into account the findings of MSP in formulating its supervisory plans and focuses as well as regulatory policies. It implemented mystery shopping in 2010 as well as from 2013 to 2014.

HKMA said that "the results of the two mystery shopping programmes in the past years showed that retail banks were generally in compliance with the relevant regulatory requirements, save for some samples on investment products which revealed room for improvement on information disclosure and suitability assessment; and some samples on insurance products which suggested weaknesses in collection of customer information, suitability assessment and information disclosure.”

The HKMA maintains close communications with the banking industry in relaying and clarifying regulatory standards, and has issued circulars to share observations and good practices identified, including the results of mystery shopping programmes. Banks are encouraged to adopt the good practices and pay attention to issues of concern as revealed.

Moreover, it monitors follow-up actions, for example in enhancing controls and staff training, as taken by individual banks concerned over issues and deficiencies identified in our supervisory work. Over the years, it is observed that banks in general have improved their internal controls and compliance awareness.

Hong Kong’s central bank also revealed that “apart from MSP instituted by the HKMA from time to time, retail banks are required to conduct their own MSP to test check selling practices of investment products to help ensure compliance and foster a customer-centric culture."

Monetary Authority of Singapore

The Monetary Authority of Singapore (MAS) and industry associations such as Life Insurance Association (LIA) and the Association of Banks in Singapore (ABS), as well as individual financial advisory firm including banks and insurers which provide financial advisory services, periodically conduct mystery shopping to assess the quality of financial advisers’ sales and advisory process.

In 2012, the MAS conducted a mystery shopping exercise to survey the implementation of its rules covering the quality and suitability of advice and adequacy of information disclosure. These guidelines on fair dealing covers the bank’s and the issuer’s responsibility of providing adequate information during the advisory and sales process and ensuring that advice provided to customers is suitable. The exercise mobilised 126 mystery shoppers, who made 500 visits to 11 licensed banks and four registered insurance companies. The mystery shopping assessment revealed that although most representatives obtained information on the shoppers’ personal particulars and employment, they lack in other pertinent information such as the shoppers’ investment experience, financial objectives, risk preferences and financial situation. Furthermore, most representatives disclosed basic information about the products recommended but did not mention risk factors, fees and charges, warnings, exclusions and caveats during a number of advisory sessions. More importantly, almost a third of the product recommendations were deemed by the industry panel as unsuitable in terms of financial objective or stated investment plan.

Importance of investigative tools in keeping pace with the evolving financial landscape

Integrating investigative mechanism into the monitoring of financial players is valuable as regulations and policies are also adapting to new entrants in the industry. To foster responsible banking, culture of compliance and encouraging a pro-consumer industry, regular assessment of practices in all facets and operations should be done. This will ensure that financial institutions are giving adequate services, consumers are informed and suitable for the products and risks and the financial industry as a whole is stable.


Regulation, Retail Banking, Risk and Regulation

Keywords:HKMA, Wells Fargo, BancorpSouth, CPFB, MAS, Mystery Shopping