Lead Generation in Financial Services: Let Both the Buyer and the Seller Beware | Bressler, Amery & Ross, P.C.
Lead generation in the insurance field has become a robust business over the last decade as competition increases and the market place remains stable or shrinking. The advent of sales on an electronic platform, cross marketing opportunities and the concept of paid advertising based upon the level of interest received as a result of the advertisement, tied to a per click, lead, quote, application or even policy transaction raises regulatory concerns as to unlicensed activity or the sharing of compensation derived from insurance sales with an unlicensed person or entity. Ramifications for both lead generators and those who purchase leads are clear in the event of non-compliance with applicable laws.
As a general matter, pursuant to the National Association of Insurance Commissioners’ Model Insurance Producer Licensing Act (Model 218) (which the majority of states use as the basis for produced licensing laws) the sharing of commissions (or the payment of fees) to unlicensed individuals is permissible so long as they are not “selling, soliciting, or negotiating” insurance. See NAIC MDL-218, § 13. The difficulty in distinguishing between allowable insurance referrals and impermissible solicitations, and determining allowable methods of payment for referrals, has been compounded by the advent of unlicensed tech participants in insurance transactions. In determining whether an insurance transaction constitutes a permissible referral or a solicitation requiring licensure, a state insurance department generally will view the totality of the parties’ conduct, focusing on the level of “action” by the non-licensee.
I. Lead Generation, Generally
A rule of thumb, as explained by the New York Department of Financial Services for example, is that when referral fee is paid to a non-licensee only where the “introduction bears fruit,” that payment is impermissibly tied to the “sale” of insurance. While some states stop their analysis there, others go further (i.e., in states such as Louisiana, Michigan, Oregon, and West Virginia) and prohibit compensation based on individual or total applications started or completed, or individual or total placed policies. In many such states, the compensation must be “fixed” meaning unchanging for every referral provided. Some states (such as Tennessee, Texas, Virginia, and Washington) have specific dollar amounts built into their guidance placing a cap on the amount of these fees. For states that are more restrictive, placement-blind referrals can be based on other factors including total number of visits (clicks) to the carrier or plan’s website in a given period, starting or completing a quote for insurance, and/or total number of quotes started/completed in a given month. Of course, proof that the lead generator is responsible for these clicks may be difficult to establish. As the payment triggers comes closer to an actual sale, the propriety of payment without a license decreases. Thus, payment per click is likely compliant, but per completed quote or per application is suspect. When payment is provided on an aggregate basis, payment ranges based on started quotes or clicks within a range or an add on payment after so many started quotes or clicks would be the most risk averse payment mode as the specific, individual prospect is downplayed.
States across the country employ a variety of approaches when considering referral fee structures and the type of compensation that is permissible. The bases for compensation is critical to a compliance review. We generally observe five broad types of compensation structures designed to secure insurance leads:
- Flat Fee Compensation;
- Per Lead Compensation;
- Per Engagement Compensation; and
- Total Engagement Compensation
- Compensation based upon a combination of the foregoing
Flat Fee Compensation considers wholly passive marketing: sending a letter or having a link on a website, and getting paid for the presence of the same. Per Lead Compensation consists of compensation paid on the number of leads generated by a third party, regardless of product placement, and could mean either number of mortgage applicants/recipients, number of clicks on the appropriate website, or a combination of both. Per Engagement Compensation is compensation paid only when the potential lead engages with carrier or plan – either by submitting a request for a quote, completing and submitting an application, or by actually purchasing a policy. Total Engagement Compensation is based on the total volume of activity (clicks/quotes started in a given period).
Certain states view referral compensation tied to the application for or actual placement of insurance to, per se, be the solicitation or sale of insurance. This could either be codified in a state’s statutes or regulatory guidance, or be a regulatory practice implemented by the state but not codified. For example, New York has multiple Office of General Counsel Opinions (OGC Opinion No. 08-04-25, OGC Opinion No. 01-01-17, OGC Opinion No. 06-11-23) which indicate that referral payments are permitted so long as they are not contingent on the ultimate purchase of insurance. In Louisiana and South Carolina (among others), this restriction is codified into the state statutes themselves. La. R.S. 22:1598; S.C. Code Ann. §38-43-200. Conversely, New Jersey regulators, though substantially following the Model Act, have indicated on a “no names” basis that referral payments tied to policy placements carry a strong presumption that the referral source was conducting the sale, solicitation, or negotiation of insurance.
The legality of payments to unlicensed persons per a prospect’s click to quote as opposed to upon per click to apply, is less clear as there is no guidance on this distinction. If the click to quote were to elicit a quote from any number of carriers as opposed to exclusively one carrier or plan, it arguably would be less likely to be considered by a state regulator as a “solicitation” or “sale”.
Additionally, we do note that some states may take issue with the mailing of Product information to potential insureds. The language in such mailing (or in the posting of any link to the carrier or plan’s website form the referral sources’ s site ) would have to be decidedly passive in nature, and serve to merely inform the potential customer of the type of product that carrier or plan offers, and not encourage or endorse the same in any way. This is especially important as many states prohibit any discussion of specific policies or insurance companies. See, e.g., Michigan, MCLS § 500.1201 (“solicit” defined as “ … asking or urging a person to apply for a particular kind of insurance from a particular company.”); Wisconsin, Wis. Stat. § 628.02 (defining an intermediary requiring licensure as anyone who “advises other persons about insurance needs and coverages.”); Washington, WAC § 284-17-825 (referrer cannot “make representations to the prospective insured about the terms of or specific need for a policy.”).
It is arguable that the user who clicks on the link to apply for or actually purchase the insurance product, and then fills out and submits the application on the carrier or plan’s site, is not simply a potential lead, but rather a person who has already made the decision to purchase coverage. If an application is prepared on the lead generator’s website states would likely require that the lead generator be licensed. Once on the carrier site, paying per click to “Quote” is more defensible as opposed to paying per click to “Apply”. Paying per started quote or per number of hits to the quote tool (as opposed to per completed quote) arguably entails less risk to the extent that the licensed agent or carrier/plan’s underwriting staff would then take substantive steps to confirm the quote and consummate the sale – making the referral passive and not truly sales activity. If the link brought the prospect to a specific carrier or plan’s product page where all of that carrier or plan’s products are listed in a drop down menu for selection and underwriting considerations, but no sale had yet been confirmed, as opposed directly to a Quote tool, there would be a stronger argument that payment to the lead generator was permissible. The key is to force substantive decision making about the policy’s purchase to a point where the licensed carrier or plan or its licensed sales force, not the unlicensed referrer, drives the process. Unless a licensed agent is involved in the process, paying based upon quotes does not seem to fully ameliorate the risks associated with paying per policy or even per application since the unlicensed person will have taken critical steps to bring a sale to fruition.
Disclosure/disclaimers on a lead generator’s website or in its marketing materials that the lead generator is not licensed cannot fully remediate sales or solicitation conduct by an unlicensed person if that conduct is what triggers compensation. Any payment premised upon a threshold of total quotes is likely more defensible than payment per individual quote started or completed. If the communication is written so as not to constitute a solicitation (no product type mentioned) and there is no urging a customer to do anything – just simply providing a link to learn, this is less likely to be characterized as “solicitation activity.” Again, regulators will review the transaction under the totality of the circumstances, not based solely on disclaimers or disclosures. To avoid having to make these distinctions, Flat Fee and Per Lead compensation arrangements are the more supportable approach from a licensing standpoint and may be easier to administratively support on a nationwide basis. While not issuing payment for leads in states which prohibited quote/application compensation would mitigate some risk, the digital nature of the process would likely still cause risk as applicants may be applying from one state but residing in another, or other cross-border issues may be implicated. Additionally, even in states that such conduct may appear permissible, there still may be restrictions which are not readily apparent in the laws or interpretive guidance.
II. Impact of CMS Marketing Guidelines
In addition to state licensing laws, the Centers for Medicare & Medicaid Services (CMS) regulations and the CMS Marketing Guidelines regulate the role of unlicensed persons in the sale or solicitation/enrollment of Medicare and Medicare Supplemental or qualified health plans on the federally facilitated marketplace. Since May 2011, CMS Guidelines address termination and reporting of agents who are not appropriately licensed to sell Medicare Advantage and Part D plans. Medicare Marketing Guideline 120.2 specifically indicates:
Plan sponsors must terminate upon discovery and report incidences of submission of applications by unlicensed agents and brokers to the authority in the state where the application was submitted.
Before selling any MA or PDP plan, it is the agent’s responsibility to make sure it is properly licensed, appointed and certified with the carrier, the state and CMS. Each carriers or plan should perform an adequate due diligence investigation to assure that it accepts applicants only from such qualified sources.
III. Lead Generation In The Mortgage Industry
Lead generation in the mortgage business, while similar in regulation to that which occurs in the insurance business, is perhaps even more strictly regulated as there is a significant federal overlay. The laws governing Mortgage Lead Generation are threefold:
- The Consumer Financial Protection Act (“CFPA”) and state laws prohibit unfair or deceptive acts or practices, including the dissemination of false or misleading advertising. The CFPA also prohibits “abusive” practices.
- Specific statutes, both state and federal, regulate certain marketing channels. For example, the Telephone Consumer Protection Act and CAN-SPAM Act regulate telephone and email communications, respectively, and the Telemarketing Sales Rule applies to many forms of telemarketing. A lead generation vendor, whether in the context of insurance sales or mortgage lending or brokerage, must have a SAN number for the National Do-Not-Call Registry. Whether making out-bound calls for telephonic sales, or from leads initially generated from an electronic platform, these likely apply.
- There are statutes that regulate specific consumer products and services, such as mortgages, credit cards and other consumer loans (e.g., Truth in Lending Act and Regulation Z, Credit Card Act, and the Mortgage Acts and Practices Advertising Rule (“MAP Rule” or Regulation N)). These laws typically regulate how such products are advertised, in addition to how they must be structured and serviced. In particular, state laws which address solicitation activities that may trigger licensing requirements under state mortgage licensing or consumer loan licensing laws. Licensed persons (lenders and mortgage brokers) should also be aware of these restrictions before they purchase leads from mortgage lead generation and consumer loan lead generation businesses.
Lead generation companies should take precautions to ensure that they are in compliance with licensing laws before conducting lead generation activities in any state. In order to determine whether or not a state license is required for lead generators, it is necessary to carefully read state licensing statutes and regulations. Most states define the activities of a mortgage broker, mortgage banker, or consumer loan company very broadly, evaluating whether the conduct amounted to “soliciting, processing, placing, negotiating, assisting, etc.” “Soliciting” or “assisting” borrowers are the most common licensing triggers. If the contact is determined to be within these triggers, lead generators will be subject to the same laws, requirements, and restrictions as companies that originate such loans. In other words, a mortgage loan license will be required.
It also may be prudent to contact state regulators and request a written opinion as to licensing requirements based upon the specific business model of the lead generator. Every lead generator conducts its business differently, requiring that a new analysis be undertaken for each company. Given the regulatory scrutiny directed to the mortgage industry in the last two decades, both the CFPB and state regulators are highly focused on lead generation practices. This has created enhanced review and compliance measures by lenders and mortgage companies. Thus, mortgage licensing has become a prerequisite for lead generators to do business with mortgage companies. This is true regardless of whether the lead generator actually needs a state license or not (based upon a legal analysis of its business model).
IV. Consumer Finance Concerns
In addition to state regulation and that by the FTC, the Consumer Financial Protection Bureau, created by Title X of the Dodd-Frank Act Consolidates and duplicates various supervisory and program authority areas related to nonbank financial products and services, including private student loans, and many banks. CFPB has authority over consumer financial products and services, includes – Private Student Loans – Small-Dollar Loans (i.e., payday) – Debt Relief Services – Automotive Vehicle Loans – Mortgages – Credit Cards – Money Transmission – Prepaid Cards – and more. Notably, CFPB supervision and enforcement efforts focus on primary providers and service providers, including “lead generators.”
Under the Consumer Financial Protection Act, it is unlawful for any provider of consumer financial products or services or a service provider to engage in any unfair, deceptive or abusive act or practice. The Act also provides CFPB with rule-making authority and, with respect to entities within its jurisdiction, enforcement authority to prevent unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.
CFPB also has supervisory authority for detecting and assessing risks to consumers and to markets for consumer financial products and services CFPB Enforcement Authority and is expressly authorized to conduct investigations to determine whether any person is, or has, engaged in conduct that violates Federal consumer financial law. Investigations may be conducted jointly with other regulators, and may include: – subpoenas or civil investigative demands for testimony, – responses to written questions, – documents, or – other materials As a result of these investigations. Specifically with regard to lead generators, the CFPB will examine and identify whether the provider is a third party or provider , review advertising ( including, TV, radio, print, Internet, scripts, recordings, etc.); will determine whether the relationship between the advertiser/lead generator and the mortgage lender or originator is appropriately disclosed . Particular attention is paid to the disclosure of fees and other terms and conditions, privacy precautions, online data and other sharing of consumer data.
V. Other Areas Of Concern
Lead marketers must navigate their pursuit of leads in a way that complies with the rules of play. Below are additional areas of legal significance marketers must be aware of.
The Stop Online Piracy Act (SOPA) and Protect IP Act (PIPA) created very public tension between media companies and consumers. Microsoft’s “Do Not Track” feature in its Internet Explorer 10 Web browser highlights a growing emphasis on user privacy on the Internet.
Critically, Lead-gen marketers must have a compliance team in place that monitors the usage of their brand’s proprietary content, particularly from foreign-owned websites, and marketers must be prepared to update their online tracking systems or use platforms that can support ‘cookie-less’ tracking down to granular levels.
The FTC has extensive guidance regarding online advertising, and the commission has been tightly enforcing these laws. Marketers need to be aware of the FTC’s guidelines regarding testimonials and product claims. For example, Lead-gen marketers must ensure they can substantiate all product claims with research and written approval from the individual providing a testimonial. Additionally, if there is any money or other tangible benefit exchanged for such testimonials, a clear disclaimer is necessary on the website landing page to let consumers know it is a paid endorsement.
The CAN-SPAM Act , noted above, lays out rules for commercial email correspondence and gives consumers the right to stop receiving emails from businesses. Marketers need to remember that the CAN-SPAM Act doesn’t just apply to bulk email. All email must comply with the law. Each separate email in violation of the CAN-SPAM Act is subject to penalties of up to $16,000, so non-compliance can be costly, according to the FTC. To comply with CAN-SPAM, a company’s email must include an accurate subject line, a valid physical postal address and information on how the customer can opt out of receiving more email from the company. This is especially important for businesses sending emails to leads. The FTC also notes that companies must monitor what others are doing on your behalf. In other words, no one can contract away his or her legal responsibility to comply with the law when hiring another company to conduct email marketing.
- “Affiliate nexus” tax laws.
Several states have passed or are in the process of passing “Amazon tax” laws, or “nexus tax” laws. This is related to the Marketplace Equity Act and the Marketplace Fairness Act, two pending bills that would enable states to make online retailers collect sales tax from in-state customers.
Whether in the context of insurance, Medicare, or mortgages, state and federal enforcement activity is often triggered by complaints from licensed lead generators actively informing state regulators of unlicensed lead generator competitors. Lead generators which have made a substantial investment in nationwide state licensing and compliant practices want a level playing field where all lead generators are licensed. As a result, regulatory investigations are more common. In the case of investigation findings which demonstrate that licensing was required and was not obtained, the consequences for that lead generator can be substantial – state attorney general lawsuits, massive fines, cease and desist orders, and often referral to the CFPB or the appropriate state regulator for additional investigation and the imposition of sanctions, including fines, cease and desist orders and the requirement to submit remediation plans. Given the risks and substantial investment that those who generate leads for or sell financial process make in their business models, careful evaluation of state and federal laws should be conducted before business begin operation or purchase leads, respectively.