FDIC proposes rule to crack down on misrepresentations, adopts new arbitration guidelines

WASHINGTON — The Federal Deposit Insurance Corp. issued a proposed rule Tuesday to crack down on misrepresentations of FDIC-insured accounts by crypto companies and other bank partners while simultaneously adopting final guidelines for its internal arbitration structure. 

The rule proposed Tuesday provides updates to Part 328 of the FDIC's regulations regarding representation of the FDIC name and logo to keep pace with advances in digital banking. Under the proposal, depository institutions would be required to display a new digital FDIC sign to customers across all online channels just as they have long been required to display at a physical branch.

The rules also state that depository institutions must provide signs that distinguish insured deposits from nondeposit products and inform consumers that "certain financial products are not insured by the FDIC, are not deposits, and may lose value" where applicable. Institutions will also be required to establish internal policies to comply with Part 328.

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In addition, the proposed rules would give clear examples of when companies misrepresent their products or their institution's relationship with FDIC. Specifically, institutions are barred from using FDIC- associated terms or images in a way that suggests any uninsured product or entity is insured by the agency.  It also declares that companies may not "make statements regarding deposit insurance in a context that involves both deposits and non-deposit products without disclosing that non-deposit products: are not insured by the FDIC; are not deposits; and may lose value."

"There should be no shortcuts to building trust, especially when it comes to safekeeping people's deposits," Michael Hsu, the acting comptroller of the currency, said during the board meeting. "Recent trends and events have shown a high degree of trust that FDIC logo instills in public and regulating use as banking and finance digitalize, will protect consumers and keep companies honest." 

Despite a clear consensus around the benefits of the proposed rules, some regulators signaled there are still aspects that need shoring up.  

FDIC calls out FTX US, other crypto firms over insurance claims

Consumer Financial Protection Bureau Director Rohit Chopra expressed concern that scammers could still harm consumers without faking FDIC coverage, saying that "consumer harm may exist also where there's no representation made at all related to the FDIC. But there's a net impression that it may be insured or that it is otherwise safe."

Notably, the proposal would assign "non-deposit product" and "uninsured financial product" definitions to crypto assets. This comes after various crypto outfits, including the crypto exchanges Voyager and FTX, misrepresented their products and institutions as being backed by FDIC insurance. Tuesday's proposal — which was issued the morning after FTX US founder Sam Bankman-Fried was arrested for fraud — suggests lawmakers and regulators alike are increasingly concerned about risks posed by cryptocurrency. The proposal will be open for comment for 60 days after its publication in the Federal Register.

Along with the proposed rule, on Tuesday the FDIC adopted revised Guidelines for Appeals of Material Supervisory Determinations that expand and clarify the role of the agency's ombudsman. According to the guidelines, the ombudsman will oversee the Supervision Appeals Review Committee as a nonvoting member.  Earlier this year, acting FDIC Chairman Martin Gruenberg installed the FDIC board-controlled SARC to replace a defunct understaffed Trump administration office at the FDIC, much to the chagrin of the banking industry.  

The ombudsman will manage the oversight process for bank supervisory appeals, make regular reports on it to the Board, and oversee the sharing of materials considered by the review committee with all parties involved. Institutions under the new guidelines will also be allowed to request a stay of supervision during a pending appeal, subject to the division director's written determination. The revised guidelines take effect immediately.