Discover Financial Services agreed to pay $200 million in refunds to more than 3.5 million customers who paid for credit protection services over the phone. The company must also pay $14 million in civil penalties to banking regulators.
The Federal Deposit Insurance Corporation and The Consumer Financial Protection Bureau have investigated Discover with regards to its deceptive telemarketing and sales practices. These include misleading customers into thinking that identity theft protection and credit and credit score tracking were free.
Discover didn’t admit nor deny the charges but it agreed with the regulators that it will stop similar practices in the future. It also promised to inform customers of all the costs and conditions of its products and services. Discover agreed to improve its audit and compliance programs.
The agencies said that Discover marketed the products from December 2007 to August 2011. These included wallet protection services and payment protection. The company offered the products to its credit card customers by saying that they were free instead of having to pay for them.
Discover billed the fees for the said services directly to the customers’ credit cards. Discover violated Section 5 of the Federal Trade Commission Act and parts of the Consumer Financial Protection Act that were part of the Dodd-Frank financial regulation law enacted during the financial crisis. The FDIC also charged Discover of utilizing unsafe banking practices.
This was just the second enforcement action that the consumer bureau made since it was formed in July 2011. The bureau and the Office of the Comptroller of the Currency in July charged Capital One with deceptive practices. Capital One agreed to pay a total of $150 million in customer refunds and $60 million in fines.
Discover announced that the enforcement action and tentative settlement last Friday afternoon. The consent order was approved by the agencies Monday. Its customers don’t need to take any actions in order to get the refunds. Former cardholders will get a check or have their outstanding balance reduced by the amount of the refund while current cardholder will receive a refund directly to their account.