Fintechs Face Heightened Hurdles to Gain and Retain Fed Access

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The Board of Governors of the Federal Reserve System recently issued and invited public comment on proposed guidelines to be used by Federal Reserve Banks to evaluate requests for master accounts and/or access to Federal Reserve Bank (Fed) financial services, in order to support a more “transparent and consistent” approach to such requests.

Access to Fed services is sought by fintechs and other non-traditional financial services companies because a Fed account, and direct access to Fed financial services, would dispense with the need for the non-bank to use a traditional bank as an intermediary with the Fed. A Fed account and/or Fed access enables more efficient provision of services to customers and participation in the Fed’s nationwide network, including settlement services, electronic transfers of funds through a variety of channels, electronic and paper check processing, and the ability to borrow from the Fed’s discount window, among other benefits.

The proposed guidelines would apply to access requests from all legally eligible institutions, but the issuance was triggered by the Fed’s recognition that a growing number of fintechs, and other non-traditional and/or non-insured financial services companies, are seeking Fed access:

“The payments landscape is evolving rapidly as technological progress and other factors are leading to both the introduction of new financial products and services and to different ways of providing traditional banking services (i.e., payments, deposit-taking, and lending). Relatedly, there has been a recent uptick in novel charter types being authorized or considered across the country and, as a result, the Reserve Banks are receiving an increasing number of inquiries and requests for access to accounts and services from novel institutions.

Although the Reserve Banks have received such inquiries on an exceptional basis in the past, the Board now believes, given the increase in the number and novelty of such inquiries, that a more transparent and consistent approach to such requests should be adopted by the Reserve Banks. Given that access decisions made by individual Reserve Banks can have implications for a wide array of Federal Reserve System (Federal Reserve) policies and objectives, a structured, transparent, and detailed framework for evaluating access requests would benefit the financial system broadly.”

The Supplementary Information provided with the proposal indicated a desire to ensure uniform decision-making on granting Fed access by the various Federal Reserve Banks:

“Such a framework would also help foster consistent evaluation of access requests, from both risk and policy perspectives, across all twelve Reserve Banks…Accordingly, the proposed guidelines would reduce the potential for forum shopping across Reserve Banks and mitigate the risk that individual decisions by Reserve Banks could create de facto System policy for a particular business model or risk profile.”

The Fed’s proposed guidelines contain six principles that the Fed stated “would support consistency in approach and decision-making across Reserve Banks while maintaining Reserve Bank discretionary authority to grant or deny requests.” The guidelines aim to manage and mitigate the risks that may arise when an institution gains access to Fed accounts and services, which, as explained in the Supplementary Information, “…include, among others, risks to the Reserve Banks, to the payment system, to the financial system, and to the effective implementation of monetary policy.”

The first principle specifies that only institutions legally eligible for Fed accounts and services should have Fed access. The Fed indicates that it is “considering whether it may in the future be useful to clarify the interpretation of legal eligibility under the Federal Reserve Act for a Federal Reserve account and services.”

However, fintechs and other firms seeking Fed access by virtue of having obtained a “novel” charter should take note of the Fed’s statement that “The Board believes it is important to make clear that legal eligibility does not bestow a right to obtain an account and services.”

The rest of the principles each begin with broad initial statements, including that a Reserve Bank’s decision to permit access should not create undue credit, operational, settlement, cyber or other risks to the Reserve Bank or the overall payment system; create undue risk to the stability of the U.S. financial system; create undue risk to the overall economy by facilitating money laundering, fraud, or other illicit activities; or adversely affect the Fed’s ability to implement monetary policy.

Each principle is followed by detailed subsections that use familiar terminology, substantially similar to that used by financial regulators to establish expectations for the conduct of financial institutions. Requirements include “an effective risk management framework and governance arrangements to ensure that the institution operates in a safe and sound manner”, that the applicant be “in sound financial condition, including maintaining adequate capital…and sufficient liquid resources”, and that the applicant have “a business continuity plan” to “ensure the institution can resume services in a reasonable timeframe.”

The principles indicate Reserve Banks are expected to assess the consistency of the applicant’s activities and services with applicable laws and regulations, such as the EFTA, BSA/AML/OFAC requirements and consumer protection laws, and confirm that the applicant has sufficient compliance programs in place.

The proposed guidelines indicate Reserve Banks remain responsible to evaluate each applicant and each request on a case-by-case basis, and retain discretion to impose additional risk management controls on accounts and services for a particular institution.

It is clear that under these guidelines, if finalized, fintechs and other non-bank companies wishing to pursue and maintain Fed access will be held to standards substantially similar to those imposed by supervisory authorities on traditional financial institutions in numerous respects. As acknowledged in the proposal, “The identified factors are commonly used in the regulation and supervision of federally-insured institutions. As a result, the Board anticipates the application of the account access guidelines to access requests by federally-insured institutions will be fairly straightforward in most cases. However, Reserve Bank assessments of access requests from non-federally insured institutions may require more extensive due diligence.”

Fintechs and other companies with “novel” charters that already have Fed access must take note of the proposal as well. As set forth in the Supplementary Information, “…while the guidelines are designed primarily for new access requests, Reserve Banks should also apply the guidelines to existing account and services relationships when a Reserve Bank becomes aware of a significant change in the risks that the account holder presents due to changes in the nature of its principal business activities, condition, etc.”

As of this writing, this proposal has not been published in the Federal Register. Comments will be due 60 days after the date of publication in the Federal Register.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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