Troubling Signals for Discover Financial Services

Discover Financial Services' recent announcement of CEO Roger Hochschild stepping down is causing concern on Wall Street, given the company's regulatory position. Late Monday, Discover revealed that John Owen, a current board member, will take over as interim CEO, while J. Michael Shepherd, a former BancWest CEO with vast experience in compliance and risk management, will join the company's board of directors.

These changes were prompted by Discover's disclosure last month that it had misclassified certain credit-card accounts into its highest merchant pricing tiers for an extended period. To address this issue, Discover will be compensating affected merchants and merchant acquirers. Furthermore, in July, the company received a consent order from the Federal Deposit Insurance Corporation regarding consumer compliance.

As a result, Discover's stock experienced a more than 10% drop on Tuesday.

Piper Sandler analyst Kevin Barker stated in a note to clients that given the recent announcement of the CEO search and the identification of internal corporate governance issues by regulators, it is expected that the board will focus on external candidates during a search process that may take several months. The addition of J. Michael Shepherd to the board suggests that Discover may also face additional regulatory or legal challenges.

Donald Fandetti from Wells Fargo noted that the CEO announcement is a cause for concern and raises questions about wider regulatory and compliance issues.

On the other hand, Richard Shane from JPMorgan believes that Hochschild's departure may not impact the internal investigation or FDIC consent order significantly but could contribute to restoring confidence among investors and regulators.

Shane adds that while the FDIC consumer inquiry is likely to result in expenses for Discover, there is still a possibility that it may affect the company's core business economics if it becomes a more significant product/practice issue.

Overall, Discover Financial Services faces uncertain times ahead as it navigates regulatory challenges and strives to regain investor and regulator trust.