In an effort to protect its reputation and the public’s trust, the Federal Deposit Insurance Corporation (FDIC) Board of Directors recently voted for a final rule to update the regulations concerning its signs and advertising requirements. This move also aims to address misrepresentations related to federal deposit insurance.
This decision comes in the wake of an increasing convergence of nonbanks, banks, and deposit-style products in the market. Nonbanks are progressively offering deposit-style products in collaboration with banks, often claiming that consumer funds benefit from FDIC insurance on a pass-through basis. This practice leverages the FDIC’s credibility, but the reality is more complex than it seems.
The process of depositing funds with a nonbank differs significantly from a deposit with an insured bank, even if the funds are eligible for pass-through insurance. Pass-through insurance coverage is neither automatic nor guaranteed. Additionally, it doesn’t shield the public from certain risks associated with the failure of the nonbank, such as the potential freezing of funds.
Nonbanks like Venmo, Cash App, and PayPal also offer standalone products that resemble deposits. In the event of a nonbank entity’s failure, consumers with funds stored in these general balance products risk losing their money.
To address these issues, the FDIC has taken steps to modernize its sign and advertising rules, last updated in 2006. The new rules include fresh sign and disclosure requirements for digital banking channels, requirements for segregating deposit and non-deposit areas within branches, and disclosures clarifying that non-deposit products offered by banks are not insured by the FDIC, are not deposits, and may lose value.
Despite these measures, there remains a real possibility of confusion. To mitigate this, federal and state consumer protection agencies will need to utilize their broader authorities to prevent unfair, deceptive, or abusive acts or practices.
The Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra stated they are closely examining these schemes and products. In 2022, the CFPB reminded market participants that misuse of the FDIC’s name or logo or false advertising about deposit insurance likely violates the Consumer Financial Protection Act’s prohibition on deception. The CFPB has also proposed subjecting nonbank payment companies to the same supervisory exam process as banks to determine if they are misrepresenting federal deposit insurance coverage or implying they are banks.
Recognizing the critical role of the FDIC’s logo and the standard “Member FDIC” disclaimer in building public trust in the banking system, the CFPB supports the FDIC’s final rule. This move marks a significant step towards curbing misrepresentations and exploitations of the public’s confidence in the FDIC.
For the latest news on everything happening in Chester County and the surrounding area, be sure to follow MyChesCo on Google News and Microsoft Start.