First-step analysis: fintech regulation in Brazil

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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 and payment institutions in Brazil is set by Law No. 4,595 of 31 December 1964 and by Law No. 12,865 of 9 October 2013, while Law No. 6,385 of 7 December 1976 and Law No. 4,728, of 14 July 1965 regulate 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, which in certain cases is required solely 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 type of product and are not subject to specific limits (except for overdraft interests, which were limited in 2020 to 8 per cent per month).

Furthermore, 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 therewith.

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 (SCD), 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 specific regulations 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 for carrying out such activity.

Peer-to-peer and marketplace lending

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

SEPs are financial institutions whose 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 credit-linked 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 re
spective 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 capital stock and shareholders’ equity of at least 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…

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