Banking Challenges: Former FDIC Chair Raises Concerns on Regulatory Guidance and Consent Orders

Former Chair of the Federal Deposit Insurance Corp., Jelena McWilliams, expressed apprehension regarding the recent third-party guidance released by bank regulators over the summer, reports BankingDive. She voiced concerns that the updated guidance might deter bank-fintech partnerships, suggesting that regulators are indirectly discouraging the growth of banking-as-a-service and third-party collaborations. McWilliams, speaking at the American Fintech Council’s Policy Summit in Washington, D.C., emphasized that while regulators cannot explicitly prohibit such partnerships, they appear to be making it more challenging for banks to engage in them.

In June, regulatory bodies including the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve issued guidance on how financial institutions should navigate third-party relationships, particularly with fintech firms. McWilliams, who left her role at the FDIC in 2021 and is now a partner at Cravath, Swaine & Moore, noted that the guidance lacks sufficient information and clarity on the parameters surrounding third-party partnerships. She emphasized the need for clear guidelines, stating that without well-defined rules, banks may hesitate to enter into partnerships due to uncertainty about compliance.

The lack of clarity in the guidance received criticism from Fed Governor Michelle Bowman, who opposed its finalization. Bowman highlighted the absence of clear guidance, especially for smaller institutions, stating that it does not offer the necessary clarity or tools for smaller banks to implement the recommendations effectively.

McWilliams raised concerns that the ambiguity in the guidance could lead banks to avoid partnerships with fintechs or shy away from pursuing the banking-as-a-service model. This lack of clarity, she argued, may have a chilling effect on the willingness of banks, particularly smaller community banks, to engage in such partnerships.

Additionally, McWilliams commented on recent consent orders issued by regulators to prominent banking-as-a-service players. She noted that these orders, such as the one to Blue Ridge Bank and Cross River, send a message that every move is under scrutiny. McWilliams empathized with banks trying to balance compliance and risk management with efforts to serve unbanked and underbanked consumers. She highlighted the challenge of onboarding consumers with limited financial histories and called for regulatory programs that support banks and fintechs in this endeavor.