A proposed rule to strengthen insured depository institutions’ recordkeeping regarding third-party deposits by fintechs to protect the owners of those funds was issued for comment by unanimous vote Tuesday of the Federal Deposit Insurance Corp. (FDIC) Board.
The rule addresses potential issues with some insured depository institution (IDI) arrangements with third parties to deliver IDI deposit products and services. It noted in particular the bankruptcy this spring of the nonbank entity Synapse Financial Technologies, Inc. (Synapse), which worked with IDIs and fintech companies, that has affected consumers’ ability to access funds placed at IDIs for a months, “resulting in significant and ongoing harm to those consumers.”
The FDIC, in a Financial Institution Letter (FIL), noted that following Synapse’s bankruptcy, the firm’s banking partners encountered “significant difficulties” in obtaining, reviewing, and reconciling Synapse’s records and have raised concerns about the records’ accuracy. It also noted that in many cases, “it was advertised that 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 insured institutions.
The agency said these events “have exposed substantial risks of inadequate or unreliable recordkeeping by a third party that has a custodial account arrangement with an IDI.”
The proposed rule’s requirements would strengthen FDIC-insured depository institutions’ (IDI) recordkeeping for custodial deposit accounts with transactional features, the agency said, and preserve beneficial owners’ and depositors’ entitlement to the protections afforded by federal deposit insurance. The FDIC said the requirements would only apply to IDIs offering custodial accounts with transactional features and that are not specifically exempted.
“The proposal is intended to promote the FDIC’s ability to promptly make deposit insurance determinations and, if necessary, pay deposit insurance claims ‘as soon as possible’ in the event of the failure of an IDI holding custodial accounts with transactional features,” the agency said in its draft Federal Register notice. “The proposed requirements also are expected to result in depositor and consumer protection benefits, such as promoting timely access by consumers to their funds, even in the absence of the failure of an IDI.”
In its FIL, the FDIC said that under the proposed rule, IDIs holding custodial deposit accounts with transactional features, subject to a list of defined exemptions, would be required to maintain records relating to the account. For each custodial account, it said, such records would identify the beneficial owners of the custodial account, the balance attributable to each beneficial owner, and the ownership category in which the beneficial owner holds the deposited funds.
IDIs also would be required to implement internal controls to ensure that account balances are accurate, including reconciliations no less frequently than as of the close of business daily.
The FDIC said its proposal would permit records to be maintained through a third party if certain specific requirements are satisfied.
Comments will be due 60 days after the proposal is published in the Register.
FDIC Proposes Deposit Insurance Recordkeeping Rule for Banks’ Third-Party Accounts
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