Discover 2010 Annual Report Download - page 70

does so through a variety of measures, including increased capital and liquidity requirements, limits on leverage,
enhanced supervisory authority (including authority to limit activities and growth), regulatory oversight of non-banking
entities, broad new powers to seize and wind down failed systemically-important financial firms, including non-bank
financial companies (and the establishment of a mechanism to recover such costs through assessments on large financial
firms), enhanced regulation of derivatives, restrictions on and additional disclosure of executive compensation, additional
corporate governance requirements, and oversight of credit rating agencies. Effective July 2011, the Reform Act requires
a bank holding company that elects treatment as a financial holding company, such as us, to be both well-capitalized
and well-managed in addition to the existing requirement that a financial holding company’s subsidiary banks be well-
capitalized and well-managed.
Additionally, the Reform Act established the Bureau of Consumer Financial Protection (the “BCFP”) within the Federal
Reserve, which will regulate consumer financial products and services. On July 21, 2011, many consumer financial
protection functions currently assigned to the federal banking and other designated agencies will shift to the BCFP. The
BCFP will have broad rulemaking authority over providers of credit, savings and payment services and products. The
BCFP will be directed to prevent “unfair, deceptive or abusive practices” and ensure that all consumers have access to
markets for consumer financial products and services, and that such markets are fair, transparent and competitive. The
BCFP will have rulemaking and interpretive authority under existing and future consumer financial services laws and
broad supervisory, examination and enforcement authority over large providers of consumer financial products and
services, such as us. State officials will be authorized to enforce consumer protection rules issued by the BCFP. For more
information regarding the BCFP and how it may affect us, see “Risk Factors.”
In addition, the Reform Act requires, effective July 21, 2011, that interchange fees paid to or charged by payment card
issuers on debit card transactions be “reasonable and proportional” to the issuer’s cost in connection with such
transactions. The Reform Act directs the Federal Reserve to enact rules to implement this requirement and to prohibit debit
card networks and issuers from requiring debit card transactions to be processed solely on a single payment network or
two or more affiliated networks. Further, the Reform Act prohibits credit/debit network rules that restrict merchants from
offering discounts to customers in order to encourage them to use a particular form of payment, or from setting minimum
transaction amounts of $10.00 or less for use of credit cards, as long as such merchant practices do not differentiate on
the basis of the issuer or network. The impact of these provisions on the debit card market and the PULSE network will
depend upon Federal Reserve implementing regulations, the actions of our competitors, and the behavior of other
marketplace participants. The Federal Reserve issued proposed regulations in December 2010, and we are currently
evaluating the proposal. The provisions applicable to the debit card market may adversely affect PULSE’s business
practices, network transaction volume, revenue, and prospects for future growth. For more information regarding the
potential impact of these provisions on us, see “Risk Factors.”
In addition, the Reform Act contains several provisions that could increase the Federal Deposit Insurance Corporation
(“FDIC”) deposit insurance premiums paid by Discover Bank. See “ – FDIC Initiatives Regarding Assessments” below for
more information. Various other assessments and fees are also authorized in the legislation and others could be
authorized in the future.
As described below under “ – Asset-Backed Securities Regulations,” the Reform Act also imposes a number of
significant changes relating to the asset-backed securities and structured finance markets, which may impact our ability
and/or desire to utilize those markets to meet funding and liquidity needs.
Many provisions of the Reform Act require the adoption of rules to implement. In addition, the Reform Act mandates
multiple studies, which could result in additional legislative or regulatory action. The effect of the Reform Act and its
implementing regulations on our business and operations could be significant. In addition, we may be required to invest
significant management time and resources to address the various provisions of the Reform Act and the numerous
regulations that are required to be issued under it. The Reform Act, any related legislation and any implementing
regulations could have a material adverse effect on our business, results of operations and financial condition.
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