Fintech
Regulators issue joint warning on banking and fintech risks
In a joint statement, the Federal Deposit Insurance Corp., the Federal Reserve Board and the Office of the Comptroller of the Currency warned that end users could “reasonably” confuse certain “non-bank third parties” with FDIC-insured banks.
Bloomberg
WASHINGTON — Federal banking regulators on Thursday issued a joint warning and request for information about the potential risks of partnerships between banks and fintechs.
The joint statement, issued by the Federal Deposit Insurance Corp., the Federal Reserve Board and the Office of the Comptroller of the Currency, warned banks of the risks associated with relying on third parties, particularly for deposit-related services.
“A bank’s use of third parties to perform certain activities does not diminish its responsibility to comply with all applicable laws and regulations,” the statement read.
The joint statement notes that banks sometimes “rely on one or more third parties to manage the system for recording deposits and transactions,” “process payments,” “perform regulatory compliance functions,” “provide customer service,” and more.
Regulators have suggested that banks carefully vet third-party partners for trustworthiness and establish clear contracts that define the roles and responsibilities of each party. They also suggested that banks continuously monitor management information systems used by third parties and have contingency plans in place in the event of operational disruptions.
While the statement provides a roadmap for how banks might manage risk, it does not change existing regulations or supervisory expectations. The statement noted that relying on third parties to handle critical operations, including deposits, can generally weaken banks’ oversight of those functions and hinder their ability to monitor risk.
Fragmented recordkeeping among third parties could confuse banks’ understanding of outstanding obligations and delay depositors’ access to funds. The agencies also highlighted concerns about outsourcing compliance functions and the risk of failing to meet consumer protection obligations.
Additionally, the statement cited the risk that unclear third-party relationships could mislead consumers about the extent to which their funds are covered by FDIC deposit insurance, which generally does not apply to nonbanks.
“Certain non-bank third parties could be reasonably mistaken for insured depository institutions by end users, particularly when they reference FDIC deposit insurance in marketing and other public-facing materials,” the statement reads.
“End users may not be aware that access to their funds may be dependent on third parties and that deposit insurance does not protect against losses resulting from the failure of third parties.”
Regulators have been working to better understand partnerships between banks and fintechs, in particular in the wake of the bankruptcy of middleware vendor Synapse Financial in April.
That situation left tens of millions of dollars in consumer deposits frozenIt also led to more Regulatory oversight of banks in similar partnerships. In June, the Federal Reserve issued a cease-and-desist order against Synapse partner Evolve Bank relating to deficiencies in its anti-money laundering, risk management and consumer protection programmes.
Just a few weeks ago, FDIC Board members Jonathan McKernan and Rohit Chopra, the latter director of the Consumer Financial Protection Bureau, suggested that regulators consider issuing more specific guidance on third-party risks.
Thursday’s release provides some guidance for banks, but closely follows the agencies’ current policies. The banking agencies are also seeking input from the public and stakeholders about the risks involved in bank-fintech partnerships.
Federal Reserve Governor Michelle Bowman said Thursday that she welcomed the move to collect information, given the risks that third-party relationships can pose to consumers and the financial system.
“We have seen that these relationships can pose significant risks to banks and their customers, including retail deposit customers who reasonably expect their deposits to be insured and that their banking service provider will comply with all applicable laws, including consumer protection laws,” he said in prepared remarks. “It is important that the agencies fully understand the range of practices and different bank-fintech arrangements in the industry before issuing additional guidance.”
But Bowman, a former banker, also said she is generally skeptical of any attempt to impose new regulations on banks over these partnerships.
“I remain concerned both about the risk of driving innovation out of the regulated banking system and about the sheer volume of new guidance and rules for banks of all sizes,” she said. “My hope is that this RFI and the process that follows it do not lead to duplicative or contradictory guidance, or that unnecessarily constrain innovation in the banking system.”