The FDIC Board is considering today a proposed rule that would strengthen the recordkeeping requirements for FDIC-insured depository institutions (hereinafter “banks”) for deposits received from non-bank companies that have accepted those deposits on behalf of consumers and businesses.
Background
Banks are increasingly pursuing business strategies to acquire deposits through non-bank third-party companies that offer consumers access to banking products and services through apps and websites operated by the non-bank companies. These non-bank companies may not have a depth of knowledge, experience, or expertise in the business of banking or financial services. The non-bank companies place their customers’ funds at a bank and have arrangements with the bank to provide various banking services, such as processing transactions, including paying bills or receiving money on behalf of their customers.
Rather than creating separate accounts for each individual customer, the non-bank company may open a single account at a bank and pool all customer funds into one account on behalf of, or for the benefit of, its customers. The funds of thousands of consumers and businesses may be placed in a single, commingled bank account. In this way, the non-bank company serves as the custodian of the funds placed at the bank on behalf of its many customers, who are the actual owners of the funds. If properly documented and accounted for, the funds in these “custodial deposit accounts” qualify for FDIC deposit insurance in the event of the failure of a bank. These arrangements may provide for “pass-through” insurance – where the insurance passes through the custodian to protect the actual or beneficial owner of the funds, who are often consumers.
These developing arrangements have created risks for consumers. These risks include confusion and uncertainty regarding whether their deposits have actually been placed in a bank and, if so, in the event of a bank failure, whether deposit insurance is available to protect their money from loss. These arrangements have also increased risks that the FDIC will be unable to make prompt and accurate payment of deposit insurance in the event of a bank’s failure since the FDIC can only pay deposit insurance claims if it can identify the actual consumer who owns the funds held at the bank at the time of the bank’s failure.
In addition to the risks to consumers, these third-party deposit arrangements increase the risk of facilitating money laundering or terrorist financing if the third party does not establish and monitor customer accounts in compliance with applicable laws and implementing regulations.
FDIC staff have been monitoring issues associated with bank arrangements with third parties to deliver bank deposit products and services for some time. Recent events have underscored the significance, scale, and impact of the risks associated with some of these arrangements.
Synapse Bankruptcy
The bankruptcy of Synapse, a technology company that worked with several banks and numerous non-bank companies, has affected the ability of consumers to access funds placed at banks for several months, resulting in significant and ongoing harm to those consumers. In many cases, it was advertised that these funds were FDIC insured, and consumers may have believed that their funds would remain safe and accessible due to representations made regarding placement of those funds in banks. Consumers may not have understood that FDIC insurance protects consumers only in the event of failure of a bank, not the failure of a non-bank company that they placed their money with or the non-bank technology company that served as a middleman to place their funds at a bank. In fact, it is likely that few consumers had ever heard of Synapse prior to the interruption of access to their funds that occurred.
During the bankruptcy of Synapse, consumers have been unable to access their funds for an extended period of time due to significant deficiencies and discrepancies in the records essential to accurately determine individual consumers’ account balances. The banks that had arrangements with Synapse have been working with the bankruptcy process to attempt to determine ownership of the funds deposited by various non-bank companies through Synapse so that consumers and businesses can regain access to funds placed by Synapse at these banks.
These circumstances have highlighted the importance of complete, accurate, and reliable deposit account records, particularly when banks have arrangements with third parties that deliver deposit products and services directly to consumers. Complete and accurate deposit account records for these arrangements are of critical importance when consumers are relying on these products to manage their daily financial needs, such as making purchases, paying bills, and receiving income.
These events also highlight substantial risks with respect to the FDIC fulfilling its statutory mandate to maintain public confidence in the banking system by ensuring the prompt and accurate payment of deposit insurance in the case of a bank’s failure. If a bank fails, the FDIC cannot pay deposit insurance to depositors based on inaccurate or incomplete records. Knowing the identity of the actual owners of the deposits – called “beneficial owners” who are often consumers – and their account balances are necessary in order for the deposit insurance to “pass through” the third-party non-bank company -- the custodian in this relationship who deposited funds at a bank on behalf of consumers -- to the actual owners of the funds. Any inaccuracies or discrepancies in the relevant records can delay a deposit insurance determination, leaving depositors in a state of uncertainty during a critical time.
Given the rapid growth and increased complexity of these third-party deposit arrangements, instituting requirements to strengthen recordkeeping in order to ensure knowledge of the actual owner of the deposits and to support the prompt payment of deposit insurance in the event of a bank’s failure is necessary and past due.
Proposed Rule’s Requirements
The proposed rule would create new recordkeeping requirements that establish guardrails and controls for banks with custodial deposit accounts with transactional features, subject to a list of defined exemptions. If banks hold custodial deposit accounts that are subject to the rule, they would be required to maintain records identifying the beneficial owners of those deposits and the account balance attributable to each beneficial owner.
For banks that choose to maintain the required records through an arrangement with a third party, certain additional requirements would need to be satisfied. These additional requirements are intended to promote the integrity of records and ensure that the bank has continued access to the records. Among other things, the bank would be required to have direct, continuous, and unrestricted access to the records of the beneficial owners, including in the event of the business interruption, insolvency, or bankruptcy of the third party.
The proposal would also establish a new requirement for an annual validation by an independent person or entity to assess and verify that third parties are maintaining accurate and complete records consistent with the proposal’s provisions. This validation would assist banks in ensuring they have accurate records of deposits placed by third parties at banks on behalf of consumers and businesses.
Whether custodial account records are maintained by the bank or through a third party, internal controls would be required to be in place to ensure that balances of custodial deposit accounts are accurate and are reconciled on a daily basis. While this proposed rule is designed to enable the FDIC to provide prompt determination of deposit insurance in the event of a bank failure, improved recordkeeping and internal controls by the bank would also reduce the likelihood that consumers will experience significant delays in accessing their funds in the event of the bankruptcy of a third party.
The proposal also would require certain measures by banks to achieve and maintain compliance with the proposal. Banks would be required to complete an annual certification of compliance and an annual report of compliance, which must be submitted to the FDIC and the appropriate federal banking agency. The proposed rule provides for oversight by the bank’s primary federal supervisor to review for compliance with this rule, and enforcement authority if the bank fails to meet these requirements. In addition, the FDIC and other agencies may use other authorities, such as those under the Bank Service Company Act, to examine the recordkeeping of the deposit aggregation services performed by third parties for the bank.
FDIC and Other Regulators’ Responses
Recent events have underscored the precarious nature and risks of third-party deposit arrangements. Even prior to Synapse’s bankruptcy, the FDIC observed instances where consumers had been unable to access funds in custodial deposit accounts at banks. For example, in 2022, Voyager Digital, a nonbank company, falsely represented that customer funds held with Voyager were insured by the FDIC up to $250,000 in the event of Voyager’s failure, not just the failure of the bank where Voyager deposited customer funds. Many customers were unable to access the funds in their accounts for a period of time after Voyager’s failure, which led to significant uncertainty and frustration for consumers who were unable to access their deposited funds.
In recent years, the FDIC also observed an increasing number of instances where financial service providers, other entities, or individuals, engaged in false advertising or made misrepresentations about FDIC insurance coverage on the internet in violation of the Federal Deposit Insurance Act. Such misrepresentations and omissions are false and misleading, have the potential to harm consumers, and are in violation of the law.
While some of those issues fall outside the scope of this proposed rulemaking, the FDIC has taken a number of actions to address the risks related to these third-party arrangements. These actions include cease-and-desist letters to stop misrepresentation of deposit insurance, a rulemaking to strengthen FDIC sign and advertising requirements, an interagency statement on third-party deposit products, and a national public awareness campaign on deposit insurance.
I believe this proposed rulemaking is an important complement to these efforts and addresses significant vulnerability and risk to consumers that are navigating an increasingly complex and interconnected system of financial services.
Conclusion
In conclusion, the proposed rule the FDIC is considering today is an important step to ensure that banks know the actual owner of deposits placed in the bank by a third party, whether the deposit actually has been placed in the bank, and that the banks are able to provide the depositors their funds even if the third-party company fails. In addition, it will strengthen the FDIC’s ability to promptly make deposit insurance determinations and, if necessary, pay deposit insurance promptly in the event of failure of the bank. Further, the proposed rule will strengthen compliance with anti-money laundering and countering the financing of terrorism law.
I am pleased to support this proposed rule and its publication for a 60-day comment period. I would like to thank the staff of the FDIC for their thoughtful and diligent work on this proposal.