Discover Card may have been voted No. 2 in overall customer satisfaction in the most recent J.D. Power credit card survey, but that didn’t exempt it from penalties enforced by the Consumer Financial Protection Bureau for deceiving customers when marketing card protection products. The CFPB and the Federal Deposit Corporation announced a joint enforcement action Sept. 24 which requires Discover Financial Services to refund about $200 million to more than 3.5 million customers who enrolled in optional card protection products. The company must also pay a $14 million civil penalty–$7 million to the U.S. Treasury and $7 million to the CFPB Civil Penalty Fund.
The order is the result of an investigation conducted by the CFPB and the FDIC into marketing practices utilized by Discover outbound telemarketers as well as inbound customer service agents. Products offered included payment protection, identity theft protection, credit score monitoring and wallet protection.
Although in the ruling, Discover neither admits nor denies any wrongdoing, the FDIC and CFPB found that between Dec. 1, 2007 and Aug. 31, 2011, Discover sold the products in question to about 4.7 million customers, and representatives used various scripts that contained product misrepresentations and omissions. For example, outbound telemarketing scripts included statements which led customers to believe they were receiving a courtesy call in order to offer a free benefit, rather than a product that incurred a fee.
The scripts also included language asking the customer if they agreed to become a member or be enrolled in a service, rather than asking permission to purchase a product. The question was generally asked prior to advising the customer about any sort of pricing terms or conditions. Customers were also advised they would receive a letter describing the product before they would have to pay for it, which led customers to believe they were not purchasing anything during the phone call. In fact, customers were enrolling for a fee-based program during the initial call, and the letter was sent out after the product was already purchased.
In monitoring sales calls, the agencies found Discover representatives often read scripts at a quicker pace during the sale portion of the call, including fees disclosures. Furthermore, the scripts used by Discover’s telemarketers did not disclose vital details of the payment protection product. For example, customers who were self-employed, unemployed, employed part-time or had a pre-existing medical condition were not advised they could not benefit from various features of the product.
“Consumers can’t make good decisions about whether they want to buy something or not if they are deceived in the process of it being sold to them,” CFPB assistant director of enforcement Kent Marcus said in a conference call with reporters.
Through the CFPB and FDIC order, Discover does not have to stop marketing the products, but must correct all violations regarding its marketing of the card protection products within 60 days. Discover must also make corrective action in notifying customers who have purchased products on at least three statements, willingly cancelling products when customer request to do so, and placing customers who decline solicitations on a Do Not Call list.
A Discover executive stated the company will continue to market the products under the new guidelines.
“We have worked hard to earn the loyalty of our card members, and we are committed to marketing our products responsibly,” Discover Chief Executive David Nelms stated Sept. 28.
The $200 million will be awarded to all customers who were impacted by Discover’s deceptive marketing practices during the investigated period. Refunds will vary based upon amount billed to customers and any refunds already applied. Every customer will receive at least 90 days of billed fees as either a statement credit—if the customer still has an open Discover account or a balance on a closed account—or a check in the mail. About 2 million customers will receive a refund of all fees paid for the product.
The CFPB and FDIC took similar action against Capital One in July when it was required to pay a $210 million settlement. Capital One, however, moved to end its marketing of protection products entirely.
“We have no intention to sell these card add-on products in the future, because the economics of our credit card business does not depend on revenues from add-on products, and we have a lot of opportunities to grow our franchise in other ways,” Capital One Chief Executive Officer Richard Fairbank said during a July 19 call with investors.
CFBP warns the action against Discover will not be the last.
“This is the second action that the Bureau has taken, in coordination with a fellow regulator, to address the deceptive marketing of credit card add-on products,” CFPB Director Richard Cordray said. “We have also published a compliance bulletin to put other institutions more specifically on notice that such tactics are illegal and should be halted. We continue to expect that more such actions will follow. In the meantime, we are signaling as clearly as we can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services.”