In Win for FinTech, New FDIC Rule Clarifies Industrial Bank Application Process – Corporate / Commercial Law
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Synopsis of Seyfarth: The Federal Deposit Insurance Corporation (“FDIC”) has released a new rule codifying and clarifying its expectations of industrial banks and their parent companies with respect to federal deposit insurance approval. As industrial banks are state regulated and not subject to certain federal restrictions on non-banking activities by ownership, the new rule is particularly beneficial for FinTech companies looking to enter the banking space. While the new rule does not significantly alter the already existing application process, by formalizing the process into a written rule, the FDIC has made this process easier to navigate.
On Tuesday, December 15, 2020, the FDIC, an independent agency created by Congress that, among other things, insures bank deposits in the United States, released a final rule that came into effect on April 1, 2021 codifying and clarifying the conditions for banks companies and their parent companies to receive the approval of the deposit insurance application (as well as the non-objection to the notice of change of control and the approval of the merger application) (the “Final Rule” ).1 The final rule is of particular importance to FinTech companies because it provides a way forward for these companies to provide federally insured banking services.
In particular, the final rule affects industrial banks and industrial loan companies (“ILCs”), a type of financial institution primarily regulated by state authorities and eligible for federal deposit insurance from the FDIC.2 The parent companies of ILCs are generally not subject to the federal government restrictions on non-bank business activities faced by owners of more traditional banks,3 making ILCs an attractive option for FinTech companies that want to do banking business without sacrificing other business efforts.4 Indeed, in her statement supporting the Final Rule, FDIC President Jelena McWilliams noted “continued interest” in ILC charters, citing FDIC approvals in March 2020 of two requests for deposit insurance,5 both involved companies operating in the FinTech space.
It is important to note that the final rule does not represent any drastic change in the way the FDIC approaches deposit insurance claims. Rather, as McWilliams explains, the final rule serves to “codify and clarify” and provides “transparency to market participants regarding the FDIC’s minimum expectations for parent companies of industrial banks”.6 Among other things, the final rule requires that the non-bank parent company of the applicant (the “Target”):
- Submit an annually updated list of its subsidiaries;
- Consent to FDIC Review (of Covered Company and Affiliates);
- Submit an annual report to the FDIC on the financial situation of the Covered Company, financial and operational risk control systems, transactions with its subsidiaries and compliance with laws and regulations;
- Obtain an independent annual audit of each of the industrial banks that are subsidiaries of the Covered Company;
- Limit the direct and indirect representation of the Target on the board of directors of each subsidiary industrial bank to less than 50%;
Maintain certain capital and liquidity requirements of subsidiaries of industrial banks; and,
- Execute a tax distribution agreement with the subsidiary industrial banks.seven
In addition, the final rule places restrictions on certain activities that an industrial bank controlled by a covered company cannot do without the written approval of the FDIC, such as making a material change in the business plan after becoming a company. subsidiary of a covered company, add or replace a member of the board of directors or executive officer during the first three years following its creation as a subsidiary of a target company.8
Key points to remember
As of April 1, 2021, the final rule does not significantly change the FDIC’s expectations for FinTech companies seeking to form an FDIC-insured industrial bank. But it codifies and clarifies those expectations and provides a clearer path for more FinTech companies to move forward with their banking goals.
1 12 CFR Part 354, RIN 3064-AF31. The text of the Final Rule, as well as additional information from the FDIC providing additional historical information, comments and a summary of the Final Rule (“Additional Information”), can be viewed here: https: // www .fdic. gov / news / board / 2020 / 2020-12-15-notice-dis-b-fr.pdf.
2 Additional information at 6-7.
3 Identifier. to 7-8.
4 See Oney, Cinar, Industrial FinTech Banks and Beyond: How Banking Innovations Affect the Federal Safety Net, 23 Fordham Journal of Corporate & Financial Law 549-550 (2018) (“[U]In the current banking framework, an industrial banking charter is one of the few ways for a commercial enterprise to control an institution with lending and depositary powers, making it an attractive place for FinTech companies looking for an alternative to national or state banking regimes. “).
5 Statement by FDIC President Jelena McWilliams on Final Rule for Parent Companies of Industrial Banks and Industrial Lending Companies at FDIC Board of Directors Meeting (December 15, 2020), https: / /www.fdic.gov/news/speeches/spdec1520c. html.
7 Final rule § 354.4.
8 Identifier. § 354.5.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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