American Express 2010 Annual Report Download - page 40

CERTAIN LEGISLATIVE, REGULATORY AND
OTHER DEVELOPMENTS
As a participant in the financial services industry, the Company
is subject to a wide array of regulations applicable to its
businesses. The Company, as a bank holding company and a
financial holding company, is subject to the supervision of the
Federal Reserve. As such, the Company is subject to the Federal
Reserve’s regulations and policies, including its regulatory
capital requirements. In addition, the extreme disruptions in
the capital markets that commenced in mid-2007 and the
resulting instability and failure of numerous financial
institutions have led to a number of changes in the financial
services industry, including significant additional regulation and
the formation of additional regulatory bodies. The Company’s
conversion to a bank holding company in the fourth quarter of
2008 has increased the scope of its regulatory oversight and its
compliance program. In addition, although the long-term impact
on the Company of much of the recent and pending legislative
and regulatory initiatives remains uncertain, the Company
expects that compliance requirements and expenditures will
continue to rise for financial services firms, including the
Company, as the legislation and rules become effective over
the course of the next several years.
The CARD Act
In May 2009, the U.S. Congress passed, and the President of the
United States signed into law, legislation, known as the CARD
Act, to fundamentally reform credit card billing practices,
pricing and disclosure requirements. This legislation
accelerated the effective date and expanded the scope of
amendments to the rules regarding Unfair or Deceptive Acts
or Practices (UDAP) and Truth in Lending Act that restrict
certain credit and charge card practices and require expanded
disclosures to consumers, which were adopted in December
2008 by federal bank regulators in the United States.
Together, the legislation and the regulatory amendments
include, among other matters, rules relating to the imposition
by card issuers of interest rate increases on outstanding balances
and the allocation of payments in respect of outstanding
balances with different interest rates. Certain other provisions
of the CARD Act require penalty fees to be reasonable and
proportional in relation to the circumstances for which such fees
are levied and require issuers to evaluate past interest rate
increases twice per year to determine whether it is
appropriate to reduce such increases.
The Company has made changes to its product terms and
practices that are designed to mitigate the impact on Company
revenue of the changes required by the CARD Act and the
regulatory amendments. These changes include instituting
product-specific increases in pricing on purchases and cash
advances, modifying the criteria pursuant to which the
penalty rate of interest is imposed on a cardmember and
assessing late fees on certain charge products at an earlier
date than previously assessed. Although the Company believes
its actions to mitigate the impact of the CARD Act have, to date,
been largely effective (as evidenced in part by the net interest
yield for its U.S. lending portfolio), the impacts of certain other
provisions of the CARD Act are still subject to some uncertainty
(such as the requirement to periodically reevaluate APR
increases). Accordingly, in the event the actions undertaken
by the Company to date to offset the impact of the new
legislation and regulations are not ultimately effective, they
could have a material adverse effect on the Company’s results
of operations, including its revenue and net income.
Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Reform Act”)
In July 2010, President Obama signed into law the Dodd-Frank
Reform Act. The Dodd-Frank Reform Act is comprehensive in
scope and contains a wide array of provisions intending to
govern the practices and oversight of financial institutions
and other participants in the financial markets. Among other
matters, the law creates a new independent Consumer Financial
Protection Bureau, which will regulate consumer credit across
the U.S. economy. The Bureau will have broad rulemaking
authority over providers of credit, savings, payment and other
consumer financial products and services with respect to certain
federal consumer financial laws. Moreover, the Bureau will have
examination and enforcement authority with respect to certain
federal consumer financial laws for some providers of consumer
financial products and services, including the Company and its
insured depository institution subsidiaries. The Bureau will be
directed to prohibit “unfair, deceptive or abusive” practices, and
to ensure that all consumers have access to fair, transparent and
competitive markets for consumer financial products
and services.
Under the Dodd-Frank Reform Act, the Federal Reserve is
authorized to regulate interchange fees paid to banks on debit
card and certain general-use prepaid card transactions to ensure
that they are “reasonable and proportional” to the cost of
processing individual transactions, and to prohibit debit and
general-use prepaid card networks and issuers from requiring
transactions to be processed on a single payment network. The
Company does not offer a debit card linked to a deposit account,
but does issue various types of prepaid cards. The Dodd-Frank
Reform Act also prohibits credit/debit networks from restricting
a merchant from offering discounts or incentives to customers in
order to encourage them to use a particular form of payment, or
from restricting a merchant from setting certain minimum and
maximum transaction amounts for credit cards, as long as any
such discounts or incentives or any minimum or maximum
transaction amounts do not discriminate among issuers or
networks and comply with applicable federal or state
disclosure requirements.
The Dodd-Frank Reform Act also authorizes the Federal
Reserve to establish heightened capital, leverage and liquidity
standards, risk management requirements, concentration limits
on credit exposures, mandatory resolution plans (so-called
“living wills”) and stress tests for, among others, large bank
holding companies, such as the Company, that have greater than
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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW