Though the FDIC is well-known for protecting consumer deposits, misleading information about it exists in the banking world that could have serious effects. Now, the Consumer Financial Protection Bureau is taking a stand with updated FDIC guidelines for all financial institutions.
By Mary Thorson Wright
Trust and confidence are central to the relationship between a community bank and its customers. One cornerstone of the trust relationship is Federal Deposit Insurance Corporation (FDIC) deposit insurance, which enables consumers to confidently place their money at FDIC-insured institutions across the country. It also promotes confidence in the banking system as a whole.
Errors, omissions or misleading statements or images regarding FDIC deposit insurance harms customers, puts them at significant risk of unexpected losses, erodes or destroys trust and confidence, and could expose the bank to violations of law or regulation. The Consumer Financial Protection Act (CFPA), Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, prohibits deceptive acts and practices, including deceptive representations involving the name or logo of the FDIC or deposit insurance, by covered firms.
On May 17, the Consumer Financial Protection Bureau (CFPB) published a Consumer Financial Protection Circular that addresses prohibited practices on claims about FDIC insurance. The circular notes that covered persons or service providers likely violate the CFPA’s prohibition on deception if they:
- Misuse the name or logo of the FDIC
- Engage in false advertising
- Make misrepresentations to consumers about deposit insurance, whether knowingly or unknowingly
According to the circular, such violations will typically be treated as material.
This issue has taken on renewed importance with the emergence of financial technologies—such as crypto assets, including stablecoins—and the risks posed to consumers if they are lured to these or other financial products or services through misrepresentations or false advertising. The circular specifies that firms cannot misuse the name or logo of the FDIC or make deceptive representations about deposit insurance.
It also stresses that covered persons and service providers are required to comply with the CFPA with respect to representations to consumers involving the name or logo of the FDIC and representations about deposit insurance.
It describes certain misrepresentations to consumers that can violate the CFPA’s prohibition on deceptive acts or practices in connection with a transaction with a consumer for a consumer financial product or service or the offering of a consumer financial product or service.
Part 328 of the FDIC Rules and Regulations, Advertisement of Membership, illustrates the official sign of the FDIC and prescribes its use by insured depository institutions. It also specifies the official advertising statement insured depository institutions must include when promoting either deposit products or certain non-specific banking products and services. Special rules and an exception apply to uninsured, non-deposit investment products.
Today’s financial marketplace provides consumers with a wide array of choices. The products offer opportunities for consumers to diversify financial portfolios and offer beneficial competition among financial service providers. Banks, because of their facility to offer both insured and uninsured products, must ensure clear and conspicuous disclosures are made to help customers distinguish between insured products and uninsured investment products (see sidebar).
In support of that requirement, the federal bank regulatory agencies issued joint guidance in February 1994—the Interagency Statement on Retail Sales of Nondeposit Investment Products. The interagency statement addresses: 1. How the location of uninsured nondeposit products sales activities should be distinguished from other retail banking services within a financial institution; 2. Training of nondeposit investment products sales representatives; 3. How sales representatives should assess the suitability of uninsured investment products for your customers; 4. Compensation arrangements for bank employees for direct or indirect sales activities; 5. Use of depositor information in nondeposit investment product sales programs; 6. What must be disclosed about the uninsured investment products you are selling; and 7. When the required disclosures must be made.
The interagency statement covers practical matters such as presentation of nondeposit investment account information on periodic statements and, if brochures, signs or other written material contain information about both FDIC-insured deposits and nondeposit investment products, that these materials should clearly segregate information about nondeposit investment products from the information about deposits.
Now is a good time to shore up FDIC insurance disclosures and their use. Community banks should check that the form of statements and images is accurate, that they are used as required and that they are separate and distinguishable from those used for nondeposit investment products or uninsured cryptocurrencies. Consistent, accurate use of disclosures helps build the trust between the bank and its customers.
What does FDIC insurance cover?
Covered by FDIC insurance
- Checking accounts
- Negotiable order of withdrawal (NOW) accounts
- Savings accounts
- Money market deposit accounts (MMDA)
- Certificates of deposit (CD)
- Cashier’s checks
- Money orders
- Other official items issued by the bank
Not covered by FDIC insurance
- Stock investments
- Bond investments
- Mutual funds
- Life insurance policies
- Municipal securities
- Safe deposit boxes or their contents
- U.S. Treasury bills, bonds or notes
- Bitcoin and many other cryptocurrency exchanges
Mary Thorson Wright is a writer in Virginia.