Discover Financial Services hit with $250 million penalty

Discover Financial Services (NYSE:DFS), a $40.16 billion financial services giant with a "GREAT" financial health score according to InvestingPro, and its affiliates have been ordered to pay $250 million in civil money penalties, as announced in a recent Securities and Exchange Commission (SEC) filing. The orders, dated April 16, 2025, for Discover Bank, and April 18, 2025, for Discover Financial Services and DFS Services LLC, resolve investigations by the Federal Deposit Insurance Corporation (FDIC) and the Board of Governors of the Federal Reserve System into a card product misclassification issue previously disclosed by the company.

The FDIC issued an amended consent order to Discover Bank, following the board’s consent, which restates an earlier order from September 25, 2023. Similarly, the Federal Reserve’s orders, consented to by the boards of Discover Financial Services and DFS Services LLC, demand changes to policies and procedures to correct the misclassification issue and require restitution to those affected. The company has already begun implementing these changes.

The full penalty amount was accrued by the company as of September 30, 2024, indicating that the financial impact has been anticipated and accounted for in the company’s financial statements. Despite the penalty, Discover maintains strong fundamentals with $13 billion in revenue and has demonstrated commitment to shareholder returns, having raised its dividend for 14 consecutive years. The specific details of the orders, including the required policy changes and restitution measures, are outlined in the exhibits attached to the SEC filing.

This enforcement action underscores regulatory scrutiny in the financial services industry, particularly in areas concerning compliance with classification and disclosure requirements. Discover Financial Services, headquartered in Riverwoods, Illinois, is a prominent player in the personal credit institutions sector, trading at an attractive P/E ratio of 9.03. According to InvestingPro’s Fair Value analysis, the stock appears undervalued, with additional insights available in the comprehensive Pro Research Report, part of InvestingPro’s coverage of over 1,400 US stocks.

The information in this article is based on a press release statement and the SEC filing by Discover Financial Services, which provides transparency into the regulatory proceedings and the company’s compliance efforts.

In other recent news, Discover Financial Services has been at the center of several significant developments. The company is progressing towards a merger with Capital One Financial Corporation (NYSE:COF), valued at $35 billion. Reports indicate that the Department of Justice (DOJ) may not oppose the merger, alleviating some regulatory uncertainty. However, there are still concerns about potential antitrust issues, particularly in the subprime sector, which could pose challenges to the merger’s completion. Despite these concerns, a Capital One representative expressed confidence in gaining approval for the deal, citing compliance with legal requirements under the Bank Merger Act. Additionally, Discover has appointed J. Michael Shepherd as Interim CEO, with his tenure linked to the merger’s completion. Investors are closely monitoring these developments, given their potential impact on the financial services industry. The outcome of this merger could influence the competitive landscape against major players like Mastercard (NYSE:MA), Visa (NYSE:V), and American Express (NYSE:AXP).

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