JPMorgan Chase is signaling potential legal action against the U.S. government as scrutiny over its involvement with Zelle intensifies. In a recent quarterly filing, the bank disclosed that the Consumer Financial Protection Bureau (CFPB) may penalize it for failing to remove criminal accounts from its Zelle platform and for insufficiently compensating scam victims. In response, JPMorgan stated it is considering litigation, a rare move in the financial sector, particularly against a regulator.
A New Era of Bank-Regulator Tension
Historically, banks avoided challenging their regulators, particularly following the 2008 financial crisis when many required taxpayer-funded bailouts. However, the relationship between large financial institutions and regulators has since become strained. Banks argue that they are now unfairly targeted by Democrat-led agencies, while regulators counter that banks are exploiting courts to fend off reforms and preserve profits at the expense of consumers.
Tobin Marcus, head of U.S. policy at Wolfe Research, noted that the regulatory environment has become more polarized, with President Biden’s ambitious regulatory agenda clashing with conservative courts, opening more opportunities for financial institutions to litigate against government proposals.
Regulatory Pressure and Bank Pushback
Banks are currently facing one of the most significant waves of regulation since the post-2008 reforms, including measures to limit fees on credit card late payments, overdrafts, and debit transactions. Additionally, the Basel Endgame, a major proposal to increase capital requirements for large banks, threatens to reshape the financial landscape. JPMorgan’s consumer banking head, Marianne Lake, warned that the industry is facing an “onslaught” of regulatory changes.
Zelle Scams and Reimbursements
Zelle, a peer-to-peer payment network launched by banks, including JPMorgan, has come under fire for fraud-related issues. In 2022, out of $806 billion in Zelle transactions, $166 million were disputed as fraudulent, with JPMorgan, Bank of America, and Wells Fargo reimbursing only 38% of claims. While JPMorgan claims to refund 100% of unauthorized transactions, the discrepancy arises from the bank’s determination that some payments were authorized by customers, even if they were scammed into making them.
In response to criticism, JPMorgan has issued warnings to Zelle users via its app and added disclosures clarifying that customers are unlikely to be refunded for authorized payments made under fraudulent pretenses.
Dimon’s Leadership and Regulatory Battles
JPMorgan’s CEO, Jamie Dimon, has been at the forefront of challenging new regulations. Under Dimon’s leadership, the bank has grown into the largest and most profitable in the U.S., and Dimon’s influence has allowed him to openly criticize regulatory proposals. For example, JPMorgan has opposed the Basel Endgame, arguing that it would increase costs for consumers and raise mortgage prices by at least $500 annually, along with a 2% hike in credit card rates.
Legal Battles and Venue Shopping
JPMorgan’s potential legal action against the CFPB is part of a broader strategy by the financial industry to challenge regulations through the courts. Banks have increasingly filed cases in conservative jurisdictions, such as the Northern District of Texas, where they are more likely to succeed in lawsuits against regulators. The 5th Circuit Court of Appeals, which covers Texas, is known for its favorable rulings towards industry lawsuits.
Lori Yue, a professor at Columbia Business School, explained that this “venue shopping” has become a well-established corporate strategy, particularly for industries like banking that are dominated by a few large players.
Impact on Regulatory Environment
While the financial industry has secured some victories, including a more lenient Basel proposal, the long-term impact of banks’ resistance to regulation could be harmful. Brian Graham, co-founder of Klaros, a bank consulting firm, warned that the ongoing legal battles prevent the adoption of necessary regulatory updates, ultimately preserving outdated policies that fail to address a rapidly changing world.
JPMorgan’s potential lawsuit against the CFPB marks a significant shift in how banks approach their regulators, reflecting a growing divide between the financial sector and government agencies.
- Inputs taken from CNBC
