September 7, 2018 at 5:00 am ET
Federal regulations are essential for protecting consumers and ensuring an efficient marketplace, but new realities necessitate revisiting and modernizing rules to ensure their stated goals continue to be achieved.
At times, federal regulators will attempt to explain how legacy regulations can be applied to the present by publishing Frequently Asked Questions, allowing agencies to provide guidance and clarification without a new rulemaking process. But this can sometimes have unintended consequences.
A prime example is when the Federal Deposit Insurance Corporation issued FAQs on brokered deposits in 2015. These FAQs miscategorized prepaid deposits made via retail locations as brokered deposits. Not only did this change not fully grasp the way an innovative payment sector has evolved, but it is also inconsistent with the FDIC’s own statutory authority.
Congress gave the FDIC the ability to regulate brokered deposits when it drafted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. At the time, Congress was concerned about deposit brokers who moved large numbers of accounts from one bank to another. These accounts were considered “hot money” and unstable. In order to set boundaries on what counts as brokered, FIRREA contains an exception to the definition of deposit broker which, in essence, says that if you are not in the business of being a deposit broker then the results of your relationship should not be considered brokered. This rightfully kept prepaid accounts from being treated as brokered.
Without the “primary purpose exception,” it is conceivable that any third-party relationship which results in a deposit could be considered brokered – which is an untenable outcome. The FDIC’s definition has implications beyond traditional prepaid products because many different payment products not considered prepaid (P2P, mobile wallets, wearables) rely on a prepaid platform, which means that all payment products not issued directly by a bank could potentially be considered “brokered.” Such a broad classification may stifle or slow down the robust innovation that has taken place in the payments sector in the last 10 years, ultimately reducing consumer choices.
The reality is prepaid deposits are the opposite of “hot money,” as they are Consumer Financial Protection Bureau-regulated bank accounts with Regulation E protections. As an innovative payment tool, prepaid accounts provide consumers with the ability to manage their money and make payments on a daily basis, especially for those that don’t have access to or who do not want a traditional bank account. Consumers from all income levels view prepaid as a safe and innovative way to avoid debt, reduce banking costs, and participate in the modern economy.
U.S. Representatives Blaine Luetkemeyer (R-Mo.) and Scott Tipton (R-Colo.) recently called on the FDIC to review the FAQ because the agency “maintains an overly broad classification of what deposits should be considered brokered.” We applaud them for bringing attention to this issue.
There was no way Congress could have known in 1989 how the payments industry would have changed by 2018. A second look at the FAQs may serve as an opportunity for the FDIC to learn more about the payments community’s role in helping people. Prepaid products exist to serve customers with a low-cost, convenient alternative to traditional banking services, enabling them to accept disbursements and make payments. Including them within FIRREA’s definition of brokered deposits is inconsistent with how prepaid products are brought to market and used by consumers.
Brian Tate is the president and CEO of the Network Branded Prepaid Card Association, which will rebrand as Innovative Payments Association in January 2019.
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