In April 2018 the National Monetary Council issued Resolution 4,656, regulating credit fintech companies. According to the resolution, two new types of entity are now recognised as financial institutions:
- direct credit companies (SCDs); and
- interpersonal loan companies (SEPs).
SCDs and SEPs will be entitled to conduct loan and financial operations through electronic platforms.
The Central Bank also issued Circular 3,898 in May 2018, which set out the procedural rules for establishing such entities.
The Central Bank has introduced these rules in order to continue the modernisation of Brazil's financial sector – something which has been ongoing since 2013, with more intensive actions being taken since 2016. The main goals of the rules are to:
- incentivise innovation;
- increase legal certainty;
- enable the entrance of new players in the market;
- increase competition; and
- reduce interest rates.
According to Central Bank President Ilan Goldfajn, the institution should allow new players to enter and compete in the market and regulate it only when necessary. In order to draft the new rules, the Central Bank consulted with the public, particularly with fintech associations.
The Central Bank's need to recognise new types of fintech company (ie, SCDs and SEPs) arose from the strict restrictions applicable to financial institutions' activities in Brazil. Under Brazilian law, only financial institutions authorised to operate by the Central Bank may collect, intermediate or invest third-party funds. Moreover, Brazilian usury law limits the interests on loans offered by entities which are not financial institutions to 12% per year, which restricts the participation of non-financial institutions in the personal loan industry.
SCDs can participate in loan and financing transactions and in the acquisition of receivables through electronic platforms using their own funds, but may not seek funds from the public in the market (except to raise capital by issuing shares) or hold interests in other financial institutions. SCDs can transfer receivables arising from transactions originated by the SCD to:
- financial institutions;
- receivables investment funds (FIDC) directed exclusively to qualified investors; and
- securitisation companies that distribute securitised assets exclusively to qualified investors.
On the other hand, SEPs can intermediate loan and financial transactions between individuals (peer-to-peer) exclusively through electronic platforms. In other words, SEPs can provide financial intermediation only for transactions in which funds from certain creditors will be directed to certain borrowers after a negotiation process on the electronic platform and without the SEP (or any of its controlled or related companies) retaining any credit risk. The creditor will advance the funds to the fintech company; only after receiving the credit can the SEP pass it along to the borrower.
The creditors in transactions intermediated by a SEP may be:
- natural persons;
- financial institutions;
- credit rights investment funds (FIDC), which have units exclusively destined to qualified investors;
- securitisation companies which distribute securitised assets exclusively to qualified investors; and
- other non-financial companies (except securitisation companies not falling under the above).
The debtors in such transactions may be natural persons or companies which are resident and domiciled in Brazil. The rules provide no nationality restriction for creditors in a peer-to-peer lending transaction intermediated by a SEP, but it is still unclear how a loan from a foreign creditor within a SEP platform would be operationalised and registered with the Central Bank.
A creditor that is not a qualified investor (as defined by the Brazilian securities commission, the CVM) will be unable to contract with the same debtor and SEP on transactions totalling more than Rs15,000. Other limits may be established by each SEP at its discretion.
Among other things, SEPs may not:
- perform loan or financial transactions using their own funds;
- hold interests in other financial institutions;
- assume any co-obligation or provide any type of guarantee or security in loan and financial transactions; or
- link performance of the financing transaction to efforts by third parties or the borrower in the capacity of the sponsor.
However, the SEPs may acquire – directly or indirectly, including by means of controlled or related companies – subordinated units of investment funds that invest exclusively in receivables originating in operations intermediated by the SEP itself, as long as the acquisition:
- represents no more than 5% of the net assets of the fund; and
- does not result in the SEP assuming or retaining a substantial portion of the credit risks and benefits.
SEPs also have information and transparency duties and must warn users about the nature and complexity of offered transactions. In order to allow appropriate risk assessment, the SEPs must make available information relating to:
- default rates;
- expected return rates; and
- any collateral or guarantee provided in connection with each transaction.
Both SCDs and SEPs will be allowed to provide credit analysis and debt collection services and act as insurance representative for insurance services offered in connection with transactions conducted through their electronic platforms. They may also issue electronic currencies, pursuant to applicable regulations.
Resolution 4,656 and Circular 3,898 also establish the requirements for obtaining authorisation from the Central Bank to operate as an SCD or SEP. This process can take up to 12 months (estimate based on current timing average for financial institution charter). The requirements include a minimum amount of fully paid-in capital and net equity of Rs1 million. The Central Bank may require additional capital stock and net equity if an investment fund holds a controlling interest in the SCD or SEP. Fintech companies must be organised as Brazilian corporations and, as with any financial institution, the holding of interest in a SEP or SCD by a foreign shareholder will require presidential approval (by decree).
Although it is still uncertain how the market will react to the new rules, the industry is optimistic, considering the significant developments in this area that have been observed in other markets, such as China and India. Moreover, the new rules create opportunities for new national and international players to enter into the highly concentrated Brazilian financial sector (over three-quarters of all credit and deposits are held by the four largest banks in the country – Itaú, Bradesco, Banco do Brasil and Caixa).
In a country with a vast population connected to the Internet and in need of credit, the fintech market has great potential. However, it remains to be seen whether (and how fast) Brazilians will move from trusted and consolidated banking conglomerates to innovative, but still somewhat uncertain, credit fintech companies.
For further information on this topic please contact Camila Goldberg Cavalcanti at BMA Barbosa Müssnich Aragão by telephone (+55 21 3824 5800) or email (email@example.com). The BMA Barbosa Müssnich Aragão website can be accessed at www.bmalaw.com.br.
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