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On Monday, the US regulators slammed American Express Co. ( AXP - Analyst Report ) (AmEx) with charges worth $112.5 million as a result of a legal settlement that found the company guilty of charging undue fines for late payments on the cards since 2003.
The company has also been held for breaching its practices related to billing, marketing and debt collection of its credit cards. AmEx falsely assured the customers that their debt would be completely scrapped once a partial debt was paid. However, the consumers’ debt on the AmEx credit cards continued to escalate and the company further denied new cards to such customers.
Moreover, customers who registered for the company’s “Blue Sky” credit cards were promised $300 and additional bonus points, although this money was never paid. AmEx also failed to comply with the consumer-protection laws.
As a result of claims made by the consumers, a multi-agency investigation was conducted by prime US regulators including the Federal Reserve, the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and the Utah Department of Financial Institutions. These regulators found AmEx guilty of all the accusations charged by the consumers.
Accordingly, AmEx has accepted the allegations and agreed to settle the lawsuit by paying back $85 million to 250,000 consumers and the remaining $27.5 million as civil damages. The refund to consumers is expected by March 2013.
The settlement also requires the company to make additional modifications to its business policies that protect the consumer rights. Additionally, AmEx will provide a pre-approved credit card and $100 to the consumers who were previously denied debt dismissal and issue of new cards.
The the US Consumer Protection Act enacted in 2010 has axed many banks and credit card companies who were found guilty of practicing faulty business policies, which in turn, failed to recognize the consumers’ interest and led them to a debt trap. Last week, Discover Financial Services ( DFS - Analyst Report ) was charged with a consumer-protection settlement of $200 million to over 3.5 million consumers along with $14 million as civil fines to regulators.
In July this year, MasterCard Inc. ( MA - Analyst Report ) and Visa Inc. ( V - Analyst Report ) alsoentered into a formal agreement with the federal court of Brooklyn to settle a multi-state US merchant lawsuit. About 7 million merchants or retailers had accused these card companies in 2005 of fixing prices and unduly increasing processing or interchange fees on transactions made through debit and credit cards.
Accordingly, Visa and MasterCard have agreed to pay about $6.6 billion to the retailers, of which Visa has incurred cash settlement charge of $4.4 billion. Meanwhile, MasterCard recorded a liability of $790 million against the litigation settlement.
While the new financial reforms are coming as a relief to merchants and consumers in one way or the other, going ahead, these regulations are liable to weigh on the margins of the card giants.
AmEx currently retains a Zacks #3 Rank, which translates into a short-term Hold rating and long-term Neutral recommendation on the stock.
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