Financial regulation

Regulatory bodies

Which bodies regulate the provision of fintech products and services?

Fintech products and services involving payment (the issuance of pre-paid cards and credit cards, acquiring services, etc) and lending are subject to the rules issued by the National Monetary Council (CMN) and the Central Bank of Brazil (BCB), whereas those regarding securities, such as crowdfunding, are subject to the regulatory framework issued by the Securities and Exchange Commission (CVM).

Regulated activities

Which activities trigger a licensing requirement in your jurisdiction?

The legal framework for financial institutions in Brazil is set by Law No. 4,595 of 31 December 1964, while Law No. 6,385 of 7 December 1976 regulates securities offerings and trading. Several activities trigger a licensing requirement in Brazil pursuant to applicable regulations, including:

  • conducting banking business (ie, performing financial intermediation on a regular and professional basis through the raising of funds from the public in general, as well the custody of values on behalf of third parties: this requires authorisation from the BCB;
  • rendering certain types of payment services: this requires authorisation from the BCB upon reaching the thresholds set forth in applicable regulations;
  • dealing in securities transactions in regulated markets as principal or agent (ie, securities brokerage services): this requires authorisation from the BCB and the CVM;
  • rendering investment advisory services: this requires authorisation from the CVM; and
  • operating in the foreign exchange market: this requires authorisation from the BCB.
Consumer lending

Is consumer lending regulated in your jurisdiction?

Yes. The provision of consumer lending in Brazil (eg, overdraft, credit card invoice financing and consumer loans) is restricted to financial institutions duly authorised to operate by the BCB and subject to certain specific rules.

Interest rates vary depending on the institution and are not subject to specific limits (except for overdraft interests, which were recently limited to 8 per cent per month).

However, when extending credit to individuals, micro-companies and small companies, financial institutions must disclose to the client, prior to the execution of the credit transaction, the total effective cost, expressed as an annual percentage rate, which evidences the sum of all the costs related to the transaction (including taxes and fees). This allows consumers to compare the total cost of the loans offered by different institutions.

Individuals, micro-companies and small companies are also entitled to prepay their debts, in whole or in part, without having to pay any additional fees in connection thereof.

Furthermore, when entering into transactions with, or rendering services to, consumers, financial institutions are also subject to the Consumer Defence Code.

Secondary market loan trading

Are there restrictions on trading loans in the secondary market in your jurisdiction?

In general, no, provided that the loans do not have a securities nature in accordance with applicable laws and regulations. Certain exceptions apply, such as in respect of direct lending companies, which may only assign credit to financial institutions, receivables investment funds and securitisation companies.

To be effective towards the debtor, the debtor must be notified of the credit assignment.

Collective investment schemes

Describe the regulatory regime for collective investment schemes and whether fintech companies providing alternative finance products or services would fall within its scope.

In Brazil, the types of special condominium (pool of assets) directed to investment purposes, of which the portfolio is indirectly owned by their investors (quota holders) proportionally to the amounts invested by each of them (investment funds) and their permitted investments, are subject to the rules and regulatory oversight of the CVM.

Investment funds are divided into two main groups:

  • ‘traditional’ investment funds, which may invest in several different types of financial assets (eg, equity, fixed income, real estate and derivatives); and
  • structured funds, such as:
    • private equity funds, which may invest mainly in securities (eg, shares and subscription bonuses) and convertible notes; and
    • credit receivables investment funds, which may invest in credit rights arising from different sectors of the economy, such as financial, industrial and commercial ones.

 

Fintech companies, such as peer-to-peer lending and crowdfunding platforms, are subject to a different regulatory regime.

Peer-to-peer lending platforms are operated by peer-to-peer lending companies (SEPs), which are a type of financial institution (and not an investment fund), the main purpose of which is to enable individuals to enter into a lending and financing transaction among themselves, exclusively by means of electronic platforms.

Crowdfunding platforms (and the offer of securities in connection thereof) are subject to a specific rule issued by the CVM and may only be operated by a legal entity duly authorised by the CVM to do so.

Alternative investment funds

Are managers of alternative investment funds regulated?

Administrators of any investment fund, which are responsible for a group of services related to the maintenance and proper operation of the fund, such as treasury, bookkeeping, custody of financial assets and portfolio management, are regulated by the CVM and are required to obtain a licence before commencing their activities.

Administrators may delegate certain responsibilities to third parties, such as portfolio management activities. Portfolio managers (either individuals or legal entities) are also regulated by the CVM and are required to obtain a specific licence.

Peer-to-peer and marketplace lending

Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.

SEPs are financial institutions of which the main purpose is to enable individuals to enter into lending and financing transactions among themselves exclusively by means of electronic platforms. Transactions intermediated by SEPs will have the characteristics of a linked credit transaction, in which there is a link between the funds raised from the creditors and the corresponding loan transaction entered into with the debtor, with the respective subordination of the repayment of the funds delivered by the creditors to the payment of the loan transaction by the debtors. Granting of loans with their own funds, as well as any type of risk retention, either directly or indirectly, is not allowed for SEPs.

SEPs may also provide certain ancillary services in connection with their main activity, such as credit analysis for clients and third parties, collection of debts on behalf of clients and third parties and issuance of electronic money, according to applicable regulations.

Finally, SEPs must:

  • be incorporated as corporations and have paid-up stock capital and shareholders’ equity of 1 million reais;
  • segregate their funds from the funds of creditors and debtors;
  • provide information to their clients and users in respect of the nature and complexity of the transactions and services offered;
  • use a proper credit analysis model; and
  • comply with proportional operational and prudential requirements consistent with their size and profile.
Crowdfunding

Describe any specific regulation of crowdfunding in your jurisdiction.

Crowdfunding in Brazil is regulated by the CVM and defined as the raising of funds through public offers for the distribution of securities issued by small businesses conducted with exemption from registration through an electronic investment platform.

The rule expressly excludes peer-to-peer loans from its activities (which are regulated by the BCB). However, the regulation does not limit the type of security to be offered; therefore, small businesses may issue shares, debentures or other securities as long as they are legally available.

The public offering (which is limited to 5 million reais) must take place through an electronic platform managed by a company duly incorporated in Brazil and registered with the CVM, which is responsible for verifying compliance by the issuer and the offering with applicable regulatory requirements.

The offers are intended for any type of investor, subject to a 10,000 reais investment limit per calendar year (exceptions apply to certain investors, such as qualified investors).

The grouping of investors supporting a lead investor in ‘participatory investment syndicates’ is expressly allowed, as is the incorporation of an investment vehicle for those purposes (subject to certain requirements).

Invoice trading

Describe any specific regulation of invoice trading in your jurisdiction.

Trade notes are regulated by Law No. 5,474 of 18 July 1968 as well as by Decree No. 57,663 of 24 January 1966, which also governs the endorsement of trade notes, jointly with the Civil Code.

Furthermore, in May 2020, the CMN and the BCB issued two rules governing the use of book-entry trade notes. Following the trend of dematerialisation of financial assets and securities seen in the Brazilian market in recent decades, the new rules regulate:

  • financial transactions guaranteed by book-entry trade notes and the discounting or sale of those receivables; and
  • the bookkeeping activity of those securities.

 

The rules aim to provide greater security for issuance, registration, settlement and trading in respect of those transactions. The main change introduced by the rules is the mandatory use of registered book-entry trade notes. Financial institutions should, therefore, require their counterparts, in particular sellers who wish to discount their receivables, to issue and register the respective book-entry trade notes.

Payment services

Are payment services regulated in your jurisdiction?

The legal framework for payment services in Brazil is set by Law No. 12,865 of 9 October 2013. A licence is required upon reaching specific operational thresholds if the fintech company executes the following types of payment services:

  • issuance of electronic money and associated services, such as issuance of prepaid instruments, management of prepaid payment accounts and provision of payment transactions based on electronic money deposited into those accounts;
  • issuance of post-paid payment instruments (such as credit cards); and
  • acquiring services.

 

Fintech companies providing the payment services mentioned above are defined by applicable legislation as payment institutions.

Owners of card networks (ie, the legal entities in charge of managing the rules, procedures and the use of the brand associated with a card network) must request authorisation for the card network that they operate (upon reaching certain triggers). Card networks are defined by applicable regulations as the set of rules governing the use of payment instruments accepted by more than one recipient entity.

Open banking

Are there any laws or regulations introduced to promote competition that require financial institutions to make customer or product data available to third parties?

The BCB recently issued baseline regulations for open banking (via application programming interfaces) based on the UK model, the implementation of which is expected to start in November 2020.

Only financial institutions belonging to segments S1 and S2 of the Brazilian financial system (which mainly comprises major banks), according to segmentation rules set forth in Brazil, will be required to join open banking at its inception. Other institutions, such as payment institutions, are allowed to participate on a voluntary basis, but only those licensed by the BCB may take part in the open banking directly.

Non-licensed institutions may participate through partnerships with authorised participant institutions. Any participation must follow the principle of reciprocity (ie, the recipient must also share information). All regulated institutions offering payment accounts, on-demand deposit accounts and savings accounts will also be required to join open banking in its third phase (August 2021) in respect of payments initiation services and the sharing of data related to those services.

The new regulation is based on the principle that registration data and information on the products and services provided belong to the customer, and it is up to him or her to decide whether to share them with third parties. Therefore, consent will always be required before any customer data sharing.

Self-regulatory provisions will play an important role in the implementation of open banking in Brazil. Participants will be required to discuss, prepare and execute a convention regulating operational aspects of the ecosystem, such as technological standardisation, communications and security protocols, reimbursements among participants, disputes resolution and standardisation of data and service layouts, among others. This convention will be subject to approval by the BCB.

Insurance products

Do fintech companies that sell or market insurance products in your jurisdiction need to be regulated?

Insurance companies and the marketing of insurance products in Brazil are subject to regulation and supervision by different authorities: the Superintendence of Private Insurance and the National Council of Private Insurance. Only duly licensed insurance companies may provide insurance coverage in Brazil. The solicitation and intermediation of insurance contracts may be carried out only by licensed insurance brokers.

Pursuant to applicable regulations, legal entities may promote and market insurance products for and on behalf of insurance companies, acting as their representatives. Insurance representatives do not need to be regulated or obtain any type of authorisation, but they must act within the powers established in the relevant agreement executed with the relevant insurance company.

Insurance representatives may not act as brokers; therefore, any sales of insurance products carried out by the representative are considered direct sales by the insurance company if not intermediated by a duly licensed broker.

Only certain lines of insurance may be sold through this channel, namely the simpler insurance, such as all risks, travel, extended warranty, life, unemployment and consumer credit.

Not all licensed fintech companies may act as insurance representatives. Payment institutions (direct lending companies and peer-to-peer lending companies) are authorised to act as insurance representatives for the distribution of insurance products that are related to their lending activities.

Credit references

Are there any restrictions on providing credit references or credit information services in your jurisdiction?

Yes. Credit references and credit information services are regulated under the Positive Register Law (Law No. 12,414 of 9 June 2011) and the Positive Register Decree (Decree No. 9,936 of 24 July 2019). A licence from the CVM is required when carrying out credit-rating operations regarding securities in Brazil.

Any company providing such information on natural persons must comply with the Brazilian General Data Protection Law (Law No. 13,709/2018).

Law stated date

Correct on:

Give the date on which the above content is accurate.

22 June 2020.