Dive Brief:
- Edward Jones last week withdrew its applications with federal and Utah regulators to establish an industrial loan charter (ILC) company, the investment firm said in a Securities and Exchange Commission (SEC) filing.
- The company cited “the current environment” and “recent conversations” with the Federal Deposit Insurance Corp. (FDIC) as its reasons for abandoning the effort.
- Edward Jones is “actively pursuing additional strategies, products, structures and relationships to meet clients' saving, spending and borrowing needs and help clients achieve financially what is most important to them,” the company said.
Dive Insight:
Edward Jones was one of a host of nonbanks, including automotive giants GM and Ford, Japanese e-commerce company Rakuten and the fintech Brex, to apply for the charter after the FDIC approved applications from payments firm Square (now Block) and student loan servicer Nelnet in 2020.
Those approvals marked a pathway for the first new ILCs in more than a decade. But the charter has drawn pushback because it exempts ILCs from the definition of a “bank” under the Bank Holding Act. Opponents, such as banking trade groups and some lawmakers and regulators, argue that creates a loophole that allows ILCs to sidestep Federal Reserve oversight.
Ford in July pitched its ILC concept as a way to focus on auto-related lending and help it promote adoption of electric vehicles in the U.S. But four consumer groups called that effort disingenuous, adding it leaves consumers open to privacy violations.
“Ford Motor EVs are connected devices that can download and upload” consumer data, which would be shared between Ford Motor and Ford Credit, the National Community Reinvestment Coalition, the National Consumer Law Center, Americans for Financial Reform Education Fund and the Center for Responsible Lending wrote in August. Then, they added, “information is sold to third parties.”
The Independent Community Bankers of America (ICBA), meanwhile, said it would “continue calling on Congress to close” the ILC loophole.
“Any company that wishes to own a full-service bank should be subject to the same restrictions and supervision that apply to any other bank holding company,” ICBA CEO Rebeca Romero Rainey said in an August statement.
Sen. John Kennedy, R-LA, in 2019 introduced a bill that aimed to close that loophole. “The Rakutens and the Googles of the world shouldn’t be able to circumvent the Fed,” he said at the time. “If they’re allowed to handle your banking services, they’re going to turn into continents.”
Opposition wasn’t contained to the Republican Party. Sen. Sherrod Brown, D-OH, accused the FDIC, in approving Square and Nelnet’s charters, of shuffling corporate favors “through the side door” at the start of the COVID-19 pandemic.
“Just before the [2007-08] crisis, regulators gutted financial rules and even considered letting megacorporations like Walmart own banks — and here we go again,” Brown said in a statement in March 2020.
Not every member of the FDIC board voted in favor of the Square and Nelnet moves. Martin Gruenberg, in 2020, said Square had “yet to demonstrate its viability during a downturn in the economic cycle … In fact, it has failed to demonstrate its viability during the upside of an economic cycle.”
Gruenberg now serves as the regulator’s acting chair — a prospect that may have left Edward Jones less apt to press on with its own ILC effort.
Edward Jones is not the first ILC applicant to drop its bid for a charter. Rakuten has withdrawn two applications before submitting a third. Brex withdrew its application in August 2021. GM and Ford’s applications are still pending.
The FDIC in late 2020 issued a final rule requiring ILC parent companies to agree with the agency on capital and liquidity levels, and pledge to maintain them. The rule, however, arguably softened restriction on parent company representation on the board of the ILC and a clause requiring FDIC approval of board members’ departures or replacements. Gruenberg dissented with the rule at the time but was outnumbered.
