Regulators Crack Down On FinTechs' Misrepresentation Of Deposit Insurance – Fin Tech & More Latest News Here – Up Jobs

In a recent series of regulatory statements and a high profile
demand letter, federal banking regulators have given clear warnings
to the banking and fintech industries about their customer
disclosures and the significant risk of customer confusion relating
to bank/fintech relationships and customers’ deposit insurance
status. These statements follow a significant increase in fintechs
offering “banking as a service” to their customers
through partnership models, as well as recent bankruptcy filings by
crypto platforms, which have raised customer disclosure issues.
This Advisory discusses the recent regulatory guidance and provides
suggestions for managing the risks identified by the
regulators.

On July 28, 2022, both the Federal Deposit Insurance Corporation
(FDIC) and the Board of Governors of the Federal Reserve System
(Board of Governors) issued a joint letter (Letter) to the crypto brokerage firm Voyager
Digital, LLC (Voyager) demanding that it cease and desist from
making false and misleading statements about Voyager’s deposit
insurance status, in violation of Section 18(a)(4) of the Federal
Deposit Insurance Act (FDI Act)¹, and demanded
immediate corrective action.

The Letter stated that Voyager, by and through its officers,
directors, and employees have made false and misleading statements
online, including its website, mobile app, and social media
accounts, stating or suggesting that: (1) Voyager is FDIC-insured;
(2) customers who invested with the Voyager cryptocurrency platform
would receive FDIC insurance coverage for all funds provided to,
and held by, Voyager; and (3) the FDIC would insure customers
against the failure of Voyager itself.

Contemporaneously with the cease and desist letter, the FDIC
issued an advisory (Advisory) to FDIC-insured institutions
regarding FDIC deposit insurance and dealings with crypto
companies, in which it addressed the following risks and
concerns:

• Risk of consumer confusion or harm arising from crypto assets
  offered by, through, or in connection with insured depository
  institutions (insured banks). This risk is elevated when a non-bank
  entity offers crypto assets to the non-bank’s customers, while
  offering an insured bank’s deposit products.




• Inaccurate representations about deposit insurance by
  non-banks, including crypto companies, may confuse the
  non-bank’s customers and cause them to mistakenly believe they
  are protected against any type of loss.




• Customers can be confused about when FDIC insurance applies and
  what products are covered by FDIC insurance.




• Legal risk of insured banks if a crypto company, or other
  third-party partner of an insured bank, makes misrepresentations
  about the nature and scope of deposit insurance.




• Potential liquidity risks to insured banks if customers move
  funds due to misrepresentations and customer confusion.

The Advisory also includes the following risk management and
governance considerations for insured banks:

• Assess, manage, and control risks arising from all third-party
  relationships, including those with crypto companies.




• To measure and control the risks to the insured bank, it should
  confirm and monitor that these crypto companies do not misrepresent
  the availability of deposit insurance, and should take appropriate
  action to address any such misrepresentations.




• Communications on deposit insurance must be clear and
  conspicuous.




• Insured banks can reduce customer confusion and harm by
  reviewing and regularly monitoring the non-bank’s marketing
  material and related disclosures for accuracy and clarity.




• Insured banks should have appropriate risk management policies
  and procedures to ensure that any services provided by, or deposits
  received from, any third-party, including a crypto company, are in
  compliance with all laws and regulations.




• Part 328, Subpart B of the FDIC’s Rules and
  Regulations² can apply to non-banks, such as
  crypto companies. Insured banks should determine if its third-party
  risk management policies and procedures effectively manage risks
  related to crypto assets.

Along with the Advisory, the FDIC published this Fact Sheet: What the Public Needs to Know
About FDIC Deposit Insurance and Crypto Companies, with links to
additional resources including information to help consumers understand FDIC
deposit insurance.

At a time when crypto companies are being increasingly
criticized for perceived excessive risk and insufficient
transparency in their business practices, the FDIC and other
banking agencies are moving to ensure that these companies’
practices do not threaten the banking industry or its customers. As
guardian of the Deposit Insurance Fund (DIF), the FDIC has shown
that it is willing to act aggressively to protect the DIF and the
depositors who rely on it.

In addition to the FDIC’s suggestions for insured banks, we
suggest both insured banks and their fintech vendors consider the
following measures to protect against regulatory criticism or
enforcement:

• Banks should build into their vendor contracts/joint venture
  agreements with fintechs the right to review and approve all
  communications to bank customers, and should revisit existing
  contracts to determine if any adjustments are needed;




• Banks should consult with legal counsel as to current and
  expected regulatory requirements and examination attitudes with
  respect to “banking as a service” arrangements;




• Fintechs should be sure to engage with experienced bank
  regulatory counsel as to the risks inherent in their business and
  contractual arrangements with insured banks by which the services
  of the fintech is offered to bank customers; and




• Insured banks should conduct appropriate diligence as to their
  fintech partners’ compliance framework and record.

In addition, if a bank’s fintech partner goes bankrupt, a
bank should obtain clarity–to the extent unclear–as to
whether funds on deposit at such bank are property of the
bankruptcy estate or property of a non-debtor person or entity
(e.g., the fintech’s customers). If funds on deposit are
property of non-debtor parties, banks should be prepared to address
such party’s claims, including by obtaining bankruptcy court
approval regarding the disposition of such funds on deposit.
Additionally, banks may have claims against the bankrupt fintech
entity (including claims for indemnity) and should understand the
priority and any set-off rights related to such claims (e.g.,
against the funds deposited with the bank if such funds are
property of the debtor).

Footnotes

1. Section 18(a)(4) of the FDI Act, 12 U.S.C. §
1828(a)(4), prohibits any person from representing or implying that
an uninsured deposit is insured or from knowingly misrepresenting
the extent and manner in which a deposit, obligation, certificate,
or share is insured under the FDI Act. Voyager also has attracted
the scrutiny of state regulators, some of whom have issued their
own cease and desist orders alleging Voyager is selling
unregistered securities.

2. See, 12 C.F.R. Part 328, Subpart B, False
Advertising, Misrepresentation of Insured Status, and Misuse of the
FDIC’s Name or Logo, available at:
https://www.ecfr.gov/current/title-12/chapter-III/subchapter-B/part-328#p-328.100(d).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.