The U.S. government may face legal action from JPMorgan Chase over Zelle scams.

• The Consumer Financial Protection Bureau has the power to penalize JPMorgan for its involvement in Zelle, a large peer-to-peer digital payment system.
• JPMorgan issued a veiled threat of litigation as it evaluated its next steps.
• In earlier times, the possibility of a bank suing its regulator was unimaginable, but due to certain factors, the gap between banks and their regulators has widened to an unprecedented level, according to policy experts.
• Federal agencies' power has been weakened by banks, airlines, pharmaceutical companies, and energy firms, according to legal experts.

The eight words in a 200-page quarterly filing from last month reveal the contentious relationship between the bank and the government.

JPMorgan could face penalties from the Consumer Financial Protection Bureau for its involvement in Zelle, a large peer-to-peer digital payments network, according to sources who spoke about an ongoing investigation. The bank is accused of not removing criminal accounts from its platform and not compensating some scam victims.

JPMorgan issued a veiled threat of litigation as it evaluated its next steps.

In the past, the possibility of a bank suing its regulator was unthinkable, as corporations were cautious about provoking their overseers, especially in the American banking industry, which relied heavily on taxpayer bailouts following the 2008 financial crisis due to reckless lending and trading practices.

The distance between banks and their regulators has increased due to a combination of factors in the intervening years.

Populist attacks from Democrat-led regulatory agencies have been directed at banks following the financial crisis, according to trade groups. On the other hand, those who support regulators argue that banks and their lobbyists have increasingly turned to courts in Republican-dominated districts to evade reform and safeguard their profits at the expense of consumers.

According to Tobin Marcus, head of U.S. policy at Wolfe Research, going back 15 or 20 years, the view was that it was not wise to antagonize your regulator, and that litigating all this stuff was just stirring up trouble.

"The gap between the ambition of President Joe Biden's regulators and the conservatism of some courts is historically significant, creating numerous chances for successful industry litigation against regulatory proposals, Marcus stated."

Assault on fees

This year, the collision of those forces resulted in one of the most significant years for bank regulation since the post-2008 reforms, which limited Wall Street risk-taking, established annual stress tests, and created the industry's chief adversary, the CFPB.

The Biden administration aimed to reduce credit card late payment, debit transaction, and overdraft fees in the final months of its tenure. However, the industry's biggest challenge was the Basel Endgame, a comprehensive plan to require large banks to hold significantly more capital for activities such as trading and lending.

JPMorgan's consumer bank head, Marianne Lake, cautioned investors in May about the potential regulatory and legislative changes that the industry may face.

JPMorgan's disclosure about the CFPB probe into Zelle follows years of scrutiny by Democrat lawmakers regarding financial crimes on the platform. Zelle was introduced in 2017 by Early Warning Services, a bank-owned company, as a response to the threat posed by peer-to-peer networks.

Last year, only $166 million in transactions were disputed as fraud by customers of JPMorgan, despite the $806 billion that flowed across the Zelle network.

According to a July Senate report, the three banks collectively reimbursed only 38% of the claims related to disputed unauthorized transactions.

According to the Electronic Fund Transfer Act, banks are obligated to reimburse fraudulent Zelle payments made without the customer's permission, but they do not typically refund losses resulting from scams where the customer unknowingly authorized the payment.

In July, a JPMorgan payments executive informed lawmakers that the bank fully reimburses unauthorized transactions; however, the Senate report's discrepancy arises due to bank employees frequently deeming transactions as authorized by customers.

The bank issued warnings to Zelle users on the Chase app to "Stay safe from scams" and included disclosures that customers may not receive refunds for fraudulent transactions.

JPMorgan declined to comment for this article.

Dimon in front

Jamie Dimon's company, now the largest and most profitable American bank, faces regulatory battles.

JPMorgan CEO Jamie Dimon's reputation helped the bank navigate the 2008 crisis and the 2019 regional banking turmoil, giving him the standing to openly criticize regulators. This year, Dimon led a campaign, both publicly and privately, to weaken the Basel proposal.

At JPMorgan's investor day in May, Dimon's deputies argued that Basel and other regulations would ultimately harm consumers rather than safeguard them.

According to JPMorgan, the implementation of pending regulations would increase the cost of mortgages by at least $500 annually and raise credit card interest rates by 2%. Additionally, banks would be required to charge two-thirds of their customers for checking accounts.

Consumers will bear the brunt of the extra costs from regulation, as banks won't absorb them entirely.

Despite ongoing battles, the financial industry has already achieved several victories.

The threat of litigation may have influenced the Federal Reserve to propose a new Basel Endgame plan that reduces the extra capital required by large institutions by half, along with other favorable industry changes.

The implementation of the watered-down version of the proposal, a long-awaited response to the 2008 crisis, may be delayed until after the U.S. elections as it has not yet been finalized.

If Donald Trump wins, the rules may be weakened or eliminated, and even under a Kamala Harris administration, the industry could challenge the regulation in court.

The CFPB credit card rule aimed to limit late fees to $8 per incident, but banks have taken a different approach.

The implementation of the rule was temporarily halted by Judge Mark Pittman of the Northern District of Texas, who granted a freeze at the request of the U.S. Chamber of Commerce and bank trade groups.

'Venue shopping'

Lori Yue, a Columbia Business School associate professor, has found that banks often file cases in conservative jurisdictions where they are likely to win.

The 5th Circuit Court of Appeals, located in the Northern District of Texas, is renowned for being favorable towards industry lawsuits against regulators, as stated by Yue.

"Corporate strategy involves venue-shopping like this," Yue stated. "The financial industry has been actively suing regulators this year."

An analysis by Accountable US reveals that since 2017, nearly two-thirds of the lawsuits filed by the U.S. Chamber of Commerce challenging federal regulations have been in courts under the 5th Circuit.

Large players in various industries, such as banks, airlines, pharmaceutical companies, and energy firms, often have well-funded trade organizations that are more likely to resist regulators, according to Yue.

According to Brian Graham, co-founder of bank consulting firm Klaros, the polarized environment, with weakened federal agencies being undermined by conservative courts, ultimately preserves the advantages of the largest corporations.

""The inability to adapt new regulations due to fear of lawsuits results in the long-term negative consequences of locking in place outdated regulations, despite the changing reality of the world," Graham stated."

— With data visualizations by CNBC's Gabriel Cortes.