U.S. regulators ordered Capital One Bank (U.S.A.), N.A. to refund customers that were allegedly pressured or misled into buying its credit card products. But there’s good news. As banks continue to face scrutiny and the global economy slowly recovers from its crisis, Capital One’s financial statements have appeared more conservative in recent months.
The new Consumer Financial Protection Bureau (CFPB) said Capital One’s vendors persuaded consumers to buy at times unnecessary or incomprehensible “add-on products”, such as payment protection and credit monitoring, when they activated their credit cards. Capital One must now set aside $150 million to provide refunds, almost all of which will go to customers impacted by such sales practices between 2010 and 2012. Meanwhile the Office of the Comptroller of the Currency (OCC) also brought an action alleging problematic billing practices related to Capital One’s credit monitoring products administered by third party vendors between 2002 and 2011; that one results in around $7 million in customer refunds. Capital One must also pay a $25 million penalty to the CFPB and a $35 million one to the OCC.
“We are putting companies on notice that these deceptive practices are against the law and will not be tolerated,” CFPB Director Richard Cordray said in a statement Wednesday.
Capital One said its vendors didn’t always adhere to company sales scripts and policies for its products, and the bank didn’t adequately monitor their activities. When it first learned of the breakdowns in late 2011, the company immediately stopped phone sales of the products and began efforts to identify impacted customers in order to provide full refunds. “We are accountable,” said Ryan Schneider, president of Capital One’s card business, in a statement Wednesday. He added “we are committed to making it right.”
Capital One still has room to improve. For example, three of the directors on its board have served for more than 15 years, including chairman and CEO Richard Fairbank. While experience has its merits, those who have grown familiar with the company managers are less likely to hold them accountable. In addition, three directors serve on at least two other boards covered by GMI Ratings; this includes the long-tenured director Patrick W. Gross, who sits on five boards and is a member of 15 board committees. Sitting on this many boards requires a significant time commitment from any director, making it difficult to devote the attention required to fulfil all board-related duties. In part due to such issues, Capital One is rated “D” on its corporate governance overall.
That said, as a result of its participation in the 2009 economic stimulus, Capital One is subject to new restrictions on risk-taking and executive compensation for financial institutions. (Note that the stimulus program differs from the Troubled Asset Relief Program of 2008, which Capital One already repaid according to news reports.)
Meanwhile, the company’s financial statements reflect an AGR score of 50, indicating higher accounting and governance risk than half those comparable to it. In the period between June 2010 and June 2011, the AGR score was no higher than 10 and indicated more risk than most. The improvement is due in part to changes in Capital One’s business practices amid the post-crisis economy. For example, between mid-year 2010 and mid-year 2011 the bank’s ratio of interest receivables to interest income exhibited some volatility, which we flagged as suspect but that has since subsided. In March Capital One also earned on average $4.12 billion from non-interest income such as fees and commissions, down from $5.26 billion two years ago; many banks have been criticised for charging high fees such as late charges.
Also, Capital One had previously reduced its headcount, but then proceeded to make significant acquisitions. After taking a roughly $182 million hit related to severance payments for layoffs between 2007 and 2009, Capital One made investments such as its acquisition of the credit card portfolio of Hudson’s Bay Company from GE Capital Retail Finance in January 2011. Although this particular form of earnings management is legal, it says something about the management’s attitude, as a more typical reaction to declining demand for a firm’s products is to reduce both spending and payroll. Capital One did not recognise any restructuring expense in 2011 and 2010, in an indication that such behaviour has made a recent turn for the better.
While such developments are positive signs, Capital One clearly has more work to do on its corporate governance. Regulators such as the CFPB and OCC will have to keep watching to make sure there is no need for further penalties.
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