Your go-to guide: The FDIC has issued a Notice of Proposed Rulemaking (Proposed Rule) that would impose new recordkeeping requirements on certain custodial deposit accounts, such as those commonly used in bank-fintech partnerships.
The proposed rule is intended to allow the FDIC to make deposit insurance decisions more quickly. However, the cost of complying with the new requirements can be significant.
FDIC-insured banks and fintechs should review their business models and assess what steps they need to take to become compliant.
If the proposed rule is adopted in its current form, affected entities should also consider submitting comments by December 2, 2024 to express their concerns with the proposed requirements.
On October 2, 2024, the Federal Deposit Insurance Corporation (FDIC) issued a proposed rulemaking aimed at strengthening recordkeeping requirements for custodial deposit accounts with transactional features, such as those commonly used in banking-as-a-service. We have published a notice of (proposed regulations). (BaaS) models and other bank-fintech partnerships. This proposed rule is intended to ensure the FDIC’s ability to make deposit insurance decisions promptly following the failure of an FDIC-insured bank in which it holds custodial accounts and to pay deposit insurance claims as quickly as possible, if necessary. .
“The (proposed rule) approved by the FDIC Board today is an important step toward ensuring that banks know who actually owns deposits that third parties place with them. “Banks can provide funds to depositors even if a third-party institution fails,” said FDIC Chairman Martin J. Gruenberg. “Furthermore, the FDIC’s ability to make deposit insurance decisions and pay deposit insurance if necessary in the event of a bank failure would be strengthened.” This will strengthen compliance.”
background
Under the Federal Deposit Insurance Act (FDI Act), the FDIC is required to pay deposit insurance “as soon as possible” after the failure of an insured depository institution (IDI). To pay deposit insurance, the FDIC typically uses records of a failed IDI to determine the amount of all deposits the depositor maintains in the same “right and capacity” (i.e., legal basis of ownership). and apply standard maximum deposit amounts. The insured amount is $250,000. However, in certain circumstances, the FDIC may use the records of a party other than the failed IDI in determining deposit insurance, for example, if the custodial account records are maintained by a third party.
In the proposed rule, the FDIC would use third-party records to make rapid deposit insurance decisions and limit the ability to pay insurance claims to depositors, if necessary, if those records are insufficient or unreliable. explained that it would be hindered. That risk was highlighted by the recent bankruptcy of a technology company that acted as an intermediary between fintechs and IDIs. Following the technology company’s bankruptcy, IDI faced difficulties obtaining, reviewing, and reconciling company records, impacting consumers’ ability to access funds deposited with IDI.
proposed rules
Against this backdrop, the FDIC’s proposed rule, if finalized in its current form, would create new record-keeping requirements and related compliance obligations for IDIs for certain “custodial deposit accounts with trading capabilities.” It will be established.
Subject to certain express exemptions,1 the proposed regulations would define the term “custodial deposit account with trading capabilities” to mean a deposit account that meets the following three requirements:
The Account is established for the benefit of the Beneficial Owners.
The account holds mixed deposits of multiple beneficiaries. and
Beneficiaries, through Account Holders, may authorize or direct transfers from the Account to parties other than the Account Holder or Beneficiaries (for example, for Seller payment purposes).
The proposed regulations define the term “beneficiary” to mean “a person or entity that owns.” . . “Interest on deposits held in a custodial deposit account.” This typically refers to a person or entity that contracts with a BaaS provider or fintech company to obtain services. The term “account holder” is defined to mean “an individual or entity that opens or establishes a custodial deposit account with transaction capabilities with (IDI)” and generally provides services directly to customers. This could be a BaaS provider or a fintech company. public.
Recordkeeping requirements
For custodial deposit accounts with transactional capabilities, the IDI must maintain records of beneficial ownership in a specified data format and layout, and the specified format requires, among other things, that the IDI identifies each beneficial owner. , will request the current balance attributable to that beneficiary. Each Beneficiary and the Ownership and Capacity of Each Beneficiary.
If the IDI itself maintains the required records, it must implement appropriate internal controls, including:
Maintain accurate balances in custodial deposit accounts with trading capabilities at the beneficial ownership level. and
Reconciliations with beneficial ownership records are performed as frequently as at the close of business each day.
If IDI maintains the required records through a third party, including a vendor, software provider, service provider, or similar entity, it must implement the controls referenced immediately above and also:
Direct, continuous and unrestricted access to records, including in the event of third party business interruption, insolvency or insolvency.
have an adequate continuity plan, including backup recordkeeping and appropriate technical capacity to ensure compliance with the requirements of the proposed rule; and
We enter into agreements with third parties that clearly define roles and responsibilities and allow IDI to access relevant data. Require third parties to implement appropriate internal controls. Require periodic (at least annual) verification of account records by a third party. It also does not relieve IDI of its liability under the Rules.
Additional compliance obligations
IDIs that hold custodial accounts with transactional capabilities are also subject to additional compliance obligations, including:
Establish and maintain written policies and procedures to achieve compliance.
The FDIC enforces recordkeeping requirements, tests implementation of the requirements, and prepares and submits annual certifications to the FDIC confirming compliance with the requirements. and
Prepare and submit an annual report to the FDIC that describes significant changes to the agency’s information technology systems. Lists non-exempt holders of custodial accounts with trading capabilities, their respective balances, and number of beneficiaries. We also provide the results of IDI’s regular testing and independent verification.
takeout
The proposed rule reflects the FDIC and other federal banking agencies’ continued focus on third-party relationships and risk management, particularly regarding BaaS models and bank-fintech partnerships.
This imposes new, significant, and onerous requirements on IDIs that offer custodial deposit accounts with transactional capabilities and, as a result, on fintechs, program managers, and others whose models rely on these accounts. new requirements that extend to third parties. IDIs and their third-party partners should consider reviewing their business models in light of the proposed rule and assess what steps they need to take to comply. This includes monitoring and testing procedures, subledgers with daily reconciliations, and even revisions. Create a contract that includes the necessary conditions. The costs of complying with the proposed rules could be significant, requiring banks and fintechs to invest in new record-keeping and reconciliation technologies and incur additional compliance costs.
Banks and fintechs should review the proposed rule and consider submitting comments to address concerns about the proposed requirements, particularly compliance cost concerns. The FDIC is accepting public comments on the proposed rule until December 2, 2024.
1 The proposed rule excludes custodial deposit accounts. (i) Hold only trust deposits. (ii) hold deposits established by government depositors; (iii) established by broker-dealers and investment advisers; (iv) established by an attorney or law firm on behalf of a client; (v) maintained in connection with employee benefit plans and retirement plans; (vi) Maintained by a real estate broker, real estate agent, title company, and qualified intermediary under the Internal Revenue Code; (vii) maintained by a mortgage servicer; (viii) federal or state law prohibits disclosure of the beneficiary of a deposit; (ix) maintained in connection with a deposit placement network or mutual network (unless the purpose of the network is to enable Clients to conduct payment transactions using funds in Network IDI’s custodial deposit accounts); , or (x) owners of homeownership, condominium, or other similar housing associations subject to state law that maintain security deposits associated with property, and security deposits associated with residential or commercial leasehold interests; An account that holds.
