Citizens Fine Could Spell Trouble for Other Banks

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WASHINGTON — A tip from a whistle-blower led regulators to crack down on Citizens Financial Group for ignoring discrepancies between customer deposit slips and the amount actually placed into the bank — and similar actions against other banks could be on their way.

Regulators on Wednesday charged Citizens' two subsidiaries with $34.5 million in fines and restitution, alleging that they engaged in "unfair and deceptive" practices by not investigating deposit discrepancies and effectively pocketing the difference.

But observers said discrepancies are relatively common among banks, and that regulators were using the action to put institutions on notice.

"Because deposit transactions frequently involve handwritten instruments and a machine is trying to interpret those items, deposit discrepancies are common to every institution," said Andrea Mitchell, a partner at Buckley Sandler. "My sense is that the government has decided to send a message to the industry about a common banking practice, and rather than giving direction to the industry through a rulemaking or guidance, they are sending a directive to the industry through an enforcement action."

Regulators alleged that between 2008 to 2012, the $105 billion-asset Citizens Bank NA of Providence, R.I., and the $34 billion-asset Citizens Bank of Pennsylvania, did not investigate when consumers were under- or over-credited on their deposits by less than $50. Between 2012 and 2013, the banks lowered the threshold to $25.

The situation led to cases where customers failed to receive funds they thought they'd deposited — and some cases where consumers received more than the actual amount deposited.

As a result, regulators said the banks needed to repay $11 million to affected consumers and $3 million to businesses. In addition, the Consumer Financial Protection Bureau, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency charged the banks a combined $20.5 million in fines.

"This is sloppy banking, and it violates the Dodd-Frank Act, which prohibits financial providers from engaging in unfair or deceptive practices," said CFPB Director Richard Cordray on a conference call with reporters. "Even though some customers may have benefited from the policy in different circumstances, that fact did not nullify the harm to others."

Jo Ann Barefoot, CEO at Barefoot Group and a former regulator, said that the Citizens' enforcement action is relevant to other banks that may be doing the same practice without realizing it.

"The regulators today are supplementing the expectation that the banks get technical compliance right with a broader standard that they call principles-based regulation, which is that the practices also have to be fair and not deceptive," she said. "The risk is in the cracks in between the types of things the compliance people check. I do think the lesson for everybody in this is that these risks are an operations issue that is not routinely looked at by the compliance team because there aren't any specific regulations touching the details of it."

She added that the industry "needs to build a new kind of compliance management model to catch these kinds of issues."

In a statement, the bank said it had implemented a new teller system and that its "process is now considered among the best in the industry."

"We are pleased to have resolved this matter from an earlier era," it said.

The action marked a new foray by the CFPB into deposit processing, according to Deborah Morris, the agency's deputy enforcement director.

Susan Weinstock, a director at the Pew Charitable Trusts, said it "reinforces our concern about bank practices with regard to checking accounts."

"It is certainly concerning that a bank would do this," she said.

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