The Federal Deposit Insurance Corporation (FDIC) has proposed a significant overhaul of its brokered deposits rules. This move, announced on July 30, 2024, could reshape the landscape for banks, neobanks, fintechs, and other financial industry players.
The proposal addresses concerns since the 2020 Final Rule, which modernized the regulatory framework for brokered deposits. As the financial sector grapples with the aftermath of recent bank failures and evolving partnerships between banks and fintechs, the FDIC’s proposal seeks to recalibrate the balance between innovation and risk management.
Elimination of Exclusive Deposit Arrangement Carveout
One of the most notable changes in the FDIC’s proposal is the elimination of the exclusive deposit arrangement carveout. This provision, introduced in the 2020 Final Rule, allowed entities partnering exclusively with one insured depository institution (IDI) to avoid classification as deposit brokers. The FDIC now seeks to reinstate the applicability of brokered deposit regulations to any third party meeting the definition of a deposit broker, regardless of exclusivity. This change could significantly impact partnerships between banks and fintechs, potentially altering their operational structures and regulatory compliance strategies.
Revised Definition of “Deposit Broker”
The proposal introduces a new prong to the definition of “deposit broker,” focusing on fees paid to third parties. Under this revised definition, any person receiving fees or remuneration from an IDI or customer in exchange for deposit placement would be considered a deposit broker. This change could affect standard bank marketing practices and necessitate a reassessment of fee structures in deposit-related partnerships. Financial institutions may need to review and potentially restructure their agreements with third-party service providers to ensure compliance with the new rules.
Changes to the Primary Purpose Exception
The FDIC proposes revising the analysis to determine when an agent or nominee qualifies for the primary purpose exception. The new approach would align more closely with the FDIC’s pre-2020 interpretation, focusing on whether the primary purpose of placing customer deposits is for a substantial purpose other than providing deposit placement services or FDIC insurance. This shift could require many entities relying on the primary purpose exception to reassess their status and potentially submit new exempt applications.
Elimination of Enabling Transactions Exception
In a move that could significantly impact neobanks and fintechs, the FDIC proposes to eliminate the exception of enabling transactions. This exception, introduced in the 2020 Final Rule, allowed certain third parties to place deposits to facilitate customer transactions without being classified as deposit brokers. Removing this exception could force many institutions to reevaluate their deposit-taking models and potentially seek alternative regulatory accommodations.
Implications for Compliance and Risk Management Roles
The proposed changes to the brokered deposit rules will likely create increased demand for compliance and risk management professionals within financial institutions. Compliance officers with expertise in deposit regulations will be crucial as banks and their partners navigate the new regulatory landscape.
Risk managers will need to reassess the impact of these changes on institutional liquidity and funding strategies. Additionally, internal auditors will be in high demand to ensure that new processes and controls are effectively implemented to comply with the revised rules.
The proposed changes’ complexity and potential impact on various business models will require skilled professionals to interpret and apply the new regulations across different organizational contexts.
