I INTRODUCTION

Brazil has a very sophisticated and solid banking system. As an extremely important component in fostering economic growth, the Brazilian banking industry and, consequently, Brazilian banking regulation, are constantly developing, providing local market participants with the tools required to enable them to structure complex and innovative products.

Banking regulation has played a crucial part in setting the limits and procedures that allow local players to operate in one of the most important markets in the international economy,2 ensuring a secure environment for investors and for the public in general. Local regulators do not limit their activities to the issuance of rules and guidelines for the banking industry; they also closely supervise market participants to verify whether regulatory requirements are being duly complied with.

An example of this practice is the extensive amount of information that must be provided by banks and other entities to the regulators, sometimes several times in one day. As a result of this constant verification, in the past few years the Brazilian banking industry has not seen any unpredictable failing of local banks, as the Central Bank of Brazil (Central Bank) has intervened prior to the severe deterioration of a local bank. Banco Azteca do Brasil SA in 2016, Banco BVA SA in 2014 and Banco Cruzeiro do Sul SA in 2012 are examples of intervention and subsequent extrajudicial liquidation of local banks, which, even though not completely eliminating them, did help to reduce the effects of insolvency on stakeholders and mitigate the systemic risk that could arise thereunder.

The Brazilian banking system also provides mechanisms for liquidity problems faced by financial institutions. For instance, the Credit Guarantor Fund, a private non-profit organisation authorised to be incorporated by the National Monetary Council (CMN) and composed of local banks, which was originally intended to protect investors of insolvent financial institutions, has provided assistance to financial institutions with liquidity problems on more than one occasion.

In addition to the precautionary and reactive measures adopted by local regulators to prevent insolvency scenarios, the applicable rules also enable Brazilian banks to issue several types of funding instruments in Brazil and abroad to finance their operations, thereby maintaining acceptable liquidity levels. This variety of instruments is a result of market demand and a positive response by regulators to the needs of market participants, which have recently resulted in new regulations permitting the issuance of new forms of funding instruments, as further addressed in Section V.

By doing business in such a regulated but rather secure financial environment, Brazilian banks have been able to succeed and, many times, foster results in the middle of the economic crises that Brazil has faced in the past.

ii THE REGULATORY REGIME APPLICABLE TO BANKS

i General aspects

An important aspect to consider when discussing banking regulation in Brazil is that there is no legal definition of bank under Brazilian law. The Banking Law,3 which sets forth the basis of the national financial system (SFN),4 defines in Article 17 the term financial institution as those public or private companies whose principal or secondary activity is the collection, intermediation or investment or custody of their own or third-party funds. It is therefore left to local regulators to determine the types of financial institutions and the activities that may be performed thereunder.

Banks are thus defined in terms of their permissible functions. The main categories of banks are:

  1. commercial: financial institutions whose main activities, inter alia, are receipt of time deposits, offering checking facilities, providing short-term lending, collection of trade acceptance bills and other credit documents, and accepting and processing utility bill payments;
  2. development: intended to foster the economic growth of specific regions or industrial sectors. Financing tends to be long-term and related to specific projects;
  3. multi-service:
    • commercial bank licence (if the entity was originally established as an investment bank);
    • investment bank licence (if the entity was established as a commercial bank);
    • real estate finance licence;
    • consumer credit licence;
    • leasing licence; and
    • foreign exchange authorisation; and
  • savings: federal and state-owned financial institutions very similar to commercial banks, which accept savings from individuals by means of deposits in checking accounts for a fixed term or in savings accounts, provide loans and perform various services in the public interest, such as the receipt of federal taxes and charges.

All such types of institutions are highly regulated. Different from individuals or corporations, which under Brazilian civil law are authorised to undertake any act that is not expressly forbidden, regulated entities may only perform activities that have been expressly authorised by law or regulation. As such, the role of regulators has become very important in relation to this type of activity.

ii Regulators

There are three entities primarily entrusted with the role of regulating and overseeing financial institutions in Brazil, including banks, are the CMN, the Central Bank and the Brazilian Securities Commission (CVM).5

The CMN was created by the Banking Law, and is the highest authority in the Brazilian financial system. Among the CMN's responsibilities are supervising the monetary and currency exchange policies for the purpose of the economic and social development of Brazil, as well as operating the Brazilian financial system.

Among its duties, the Central Bank has the obligation to assure the stability of the purchasing of the national currency and the solidity of the national financial system. The Banking Law granted powers to the Central Bank to implement monetary and credit policies issued by the CMN, and to regulate public and private financial institutions and payment arrangements, arrangers and institutions.

The Central Bank is responsible, inter alia, for exercising control over credit and foreign capital, receiving mandatory payments and voluntary demand deposits made by financial institutions, engaging rediscount transactions and providing funding to financial institutions, as well as exercising its function as the depository of national gold and foreign currency reserves. It is also responsible for controlling and approving the incorporation, functioning, transfer of control and corporate reorganisation of financial institutions and payment institutions.

The third regulator, the CVM, was created by the Capital Markets Law,6 which regulates the securities markets in Brazil. As securities activities are strictly connected with banking activities, especially investment banking, the CVM also has an important role as regulator of the banking industry.

Pursuant to the Capital Markets Law, the CVM shall implement policies pertaining to the organisation and operation of the securities industry. Accordingly, the CVM's responsibilities encompass the regulation and supervision of all securities activities, including issuance, distribution and trading of securities; the organisation and functioning of the stock exchanges; and practices in the management of securities portfolios and their custody.

iii PRUDENTIAL REGULATION

i Relationship with the prudential regulator

As indicated above, the Central Bank is the main regulator of banking activities, as it is responsible for supervising the banking activities of local banks and financial institutions. That supervision relies on the following principles: supervision focused on risk, continuous supervision and transparency.

Inspection is an essential element of the supervision process to assess the economic and financial situation of supervised entities, and their management and compliance with the applicable laws and regulations. It aims to identify the relevant risks of financial institutions and evaluate their respective controls.

As per the information made available by the Central Bank for the improvement of the processes of supervision of financial institutions and conglomerates whose businesses encompass subsidiary entities in other countries, various procedures are adopted, such as:

  1. elaboration of supervision agreements with foreign authorities;
  2. monitoring of activities of international organisations in matters related to supervision;
  3. exchange of information with foreign supervisory authorities;
  4. coordination, support and follow-up of missions by foreign supervisors in the country; and
  5. dissemination of the Brazilian supervision to the international context.

In addition to physical supervision, financial institutions are subject to regular reporting requirements to the Central Bank. Several types of detailed reports and financial information are submitted by local institutions to the Central Bank, enabling the authority to keep a very close eye daily on the financial situation of the market players.

In addition to the reporting and inspection requirements, the applicable rules are very restrictive on the management of banks. Prior to a final appointment as administrator of a financial institution, individuals must submit an exhaustive list of documents, information and declarations to the Central Bank, which may even prevent a person from being nominated if that person does not have a good reputation.

ii Management of banks

Pursuant to the organisation of a financial institution, it is important to highlight that with few exceptions, a financial institution, such as a bank, must be incorporated as a sociedade anônima, which is the corporate form that most closely resembles a joint-stock company or corporation. The legal requirements pertaining to joint-stock companies are governed by the Corporations Law.7

Joint-stock companies are managed by an executive committee and, if applicable, a board of directors. In addition, a board of auditors may be set up, either provisionally or permanently, to inspect the activities of the other management bodies. The executive committee and the board of auditors must be composed of individuals residing in Brazil and meeting the requirements prescribed by law. Members of the board of directors do not need to reside in Brazil.

Members of administrative bodies of financial institutions are subject to civil liability, similar to the potential liabilities to which administrators of any company are subject, in addition to further criminal and administrative liabilities applicable to managers of financial institutions.

Civil liability and exceptional rules

In the ordinary course of the transactions of financial institutions, the civil liability of administrators (including directors and officers) is regulated by the Corporations Law. Article 158 of the Law provides that an administrator will not be deemed personally responsible for the obligations incurred on behalf of the company and on account of a regular act of his or her administration. However, an administrator will be responsible under civil law for losses caused by acts carried out with guilt or malice, and in violation of the law.

An administrator will not be responsible for unlawful acts practised by other administrators except when, for connivance therewith, he or she fails to reveal them, or when, upon being aware thereof, he or she refrains from acting for the purpose of barring the practice thereof. There is joint liability of the administrators when the decisions are taken by collegiate bodies, such as the decisions taken by a board of directors. In this regard, any act or omission committed by a board is the personal responsibility of each of the members who form it, and to be exempt from any future responsibility, a dissident administrator should express his or her disagreement with the resolutions taken through a clear and express record in the minutes of the meeting of the relevant administrative body.

An administrator who agrees with the practice of acts in violation of the law or a company's by-laws will be deemed jointly liable for the losses resulting therefrom, and be compelled to provide indemnification for the losses caused.

The Corporations Law imposes the duty of diligence on administrators of institutions during the performance of their duties, providing that they shall be guided by the care and diligence that every active and honest person uses in the administration of his or her own business. Administrators are otherwise subject to the duty of loyalty to their company, and must maintain reserve and diligence when dealing with the company's affairs.

There are also some exceptional rules. Pursuant to the terms of Article 40 of the Bank Bankruptcy Law,8 administrators of financial institutions under a special administration regime, intervention or extrajudicial liquidation are jointly responsible for the obligations undertaken by the institution during their terms of office until those obligations are actually satisfied (that is, liquidated). Pursuant to the terms of the sole paragraph of the aforementioned provision, the administrators' joint responsibility referred to therein shall be limited to the amount of the losses caused during their term of office.

Administrative responsibility

Administrative responsibility is subject to the same principles as criminal responsibility (i.e., it does not admit an agent's strict responsibility). This means that a penalty shall only be imposed on a person in the event that the act – commission or omission – is described in the law or the normative rule issued by the applicable authority, in particular the Central Bank of Brazil, as being an administrative infringement.

In fact, in the opinion of jurists and case law, it is incontestable that administrative responsibility is always individual and subjective. Only those (the financial institution, administrators or controllers) who practice the punishable act (which may be an act or an omission) may be punished.

iii Regulatory capital and liquidity

In March and October 2013, the Central Bank published a set of resolutions and official letters relating to the adoption of the Basel III global standards of capital requirements. The new rules aim at increasing the capacity of financial institutions to absorb shocks, increasing the strength of the financial system and promoting sustainable economic growth.

By this set of rules, financial institutions may determine presumed credit based on the provisions made for doubtful receivables in each calendar year, whenever credits arise from temporary differences resulting from provisions for doubtful receivables existing in the preceding calendar year, and from the balance of the accrued fiscal losses of the preceding calendar year. New rules were also issued concerning financial bonds pursuant to which companies shall compose the prudential consolidated balance to be used in assessing the capital and requirements as well as the possibility for the Central Bank to limit payment of dividends by financial institutions in the event that the latter should disregard the prudential requirements defined by the CMN.

The implementation of the new capital structures in Brazil began on 1 October 2013, and shall follow the agreed international time frame until the conclusion of the process on 1 January 2022. Changes regarding the capital ascertainment for credit risk that do not result in additional capital and that can easily be implemented by the institutions became effective as of the issuance of the new rules.

iv Recovery and resolution

The Bank Bankruptcy Law specifically governs the insolvency regimes of financial institutions. It essentially provides for two different regimes, both administratively conducted by the Central Bank: the intervention regime and the extrajudicial liquidation regime.

Intervention

If a financial institution is unable to stabilise and resume operations while overcoming a financial crisis, or carry out an orderly liquidation, the intervention may be converted into an extrajudicial liquidation or bankruptcy liquidation, as applicable.

The Bank Bankruptcy Law stipulates that intervention may be decreed ex officio by the Central Bank for a period of six months (which may be postponed for an additional six months) when a financial institution suffers a loss due to mismanagement that generates risk for its creditors, or repeated breaches of banking laws are verified and not rectified after orders from the Central Bank. The intervention process is conducted by an individual appointed by the Central Bank.

After the intervention period, the Central Bank may decide to cease the intervention and allow the bank to return to its normal activities; to decree the extrajudicial liquidation of the bank; or to authorise the intervener to file for voluntary bankruptcy liquidation of the bank.

Intervention has the following effects on the obligations of a financial institution:

  1. suspension of enforceability of matured obligations for the duration of the intervention;
  2. suspension of the flow or count of the term of maturity of the previously existing obligations;
  3. enforceability of all pre-intervention obligations is stayed for the duration of the intervention period; and
  4. creditors are generally prohibited from enforcing and collecting their respective claims against the financial institution undergoing an intervention irrespective of the cause of the event of default and the nature of the claim.

Extrajudicial liquidation

Extrajudicial liquidation of financial institutions may be decreed by the Central Bank ex officio or at the request of the intervener, in the event that the relevant financial institution, inter alia:

  1. has its economic or financial conditions affected by relevant events, especially if it fails to punctually satisfy its commitments or could be declared bankrupt;
  2. seriously violates the legal rules and regulations; or
  3. suffers a loss that subjects its non-privileged creditors to an abnormal risk.

Extrajudicial liquidation is carried out by a liquidator appointed by the Central Bank, and may be defined as an administrative bankruptcy or liquidation proceeding.

The decree of extrajudicial liquidation will result in:

  1. the suspension of any action (for collection) or enforcement proceedings pending against a financial institution concerning its rights or interests (i.e., creditors will not be able to foreclose on respective collateral, since the assets of the financial institution will remain frozen until the end of the extrajudicial liquidation);
  2. automatic acceleration of the maturity of the obligations of the financial institution; and
  3. interruption of the satisfaction of any obligations assumed by the financial institution.

In addition, interest ceases to accrue on the obligations assumed by the financial institution.

The extrajudicial liquidation will cease:

  1. when the Central Bank accepts that the necessary guarantees are in place to allow the institution to take back control;
  2. with the approval of the final accounts of the liquidator and registration of those accounts in the appropriate registry to evidence the termination of the legal entity; or
  3. with the decree of the entity's bankruptcy when the assets of the entity are not sufficient to cover at least half of the non-preferred credits, or if there is evidence of bankruptcy crimes.

iv CONDUCT OF BUSINESS

As has previously been stated, banking activities are highly regulated, and require local financial institutions to comply with the extensive regulations issued by the CMN, the Central Bank and the CVM. An important aspect that local banks must observe is banking secrecy.

Banking secrecy and confidentiality have always been of major importance and are protected by the Brazilian Federal Constitution, which determines that intimacy and private life may not be violated. Exceptions to this constitutional right can be resorted to only in extreme cases, and as a rule require a judicial order.

Banking secrecy was regulated in 2001 by the Bank Secrecy Law,9 determining that financial institutions should maintain secrecy in all their passive and active transactions, as well as in any services rendered.

The Bank Secrecy Law, however, granted tax authorities a special authorisation to obtain banking information in the event that an administrative proceeding had been initiated. This exception was highly debated and discussed in a series of lawsuits contesting the constitutionality of referred permission, as it would, according to the arguments presented, result in a breach of the constitutional intimacy and privacy rights of individuals, among other things.

In February 2016, however, the Brazilian Supreme Court declared, under a majority of nine votes in favour and two votes against, the constitutionality of the authorisation for the Federal Revenue to access taxpayers' financial information under the Bank Secrecy Law. The Brazilian Supreme Court interpreted that the referred-to laws determined the sharing of information by the Central Bank and the Federal Revenue, but maintained secrecy obligations by both parties, which should not be considered a breach of individuals' rights.

Even in situations in which a financial institution is authorised to breach confidentiality, all measures required for the defence of the interests of individuals must be complied with. Thus, institutions must show sufficient duty of care in selecting the information to be disclosed and verifying whether the legal requirements for the disclosure have been met.

v FUNDING

Funding of Brazilian banks is traditionally composed of cash deposits and time deposits. Other alternatives, such as the issuance of bonds in the international markets or other forms of cross-border funding, have also been broadly adopted, as interest rates in foreign markets have been historically lower than local interest rates.

Nevertheless, to foster the funding of local banks, and especially in an effort to reduce banking interest rates in Brazil (which are among the highest in the world), local lawmakers and regulators have created new instruments to provide new funding alternatives to local banks.

In January 2015, Federal Law No. 13,097 was enacted, providing for the issuance of covered bonds (LIGs) in Brazil. The Law is a conversion of Provisional Measure 656, issued by the federal government in October 2014. Widely used in sophisticated markets (such as in Europe and the United States), LIGs have finally been regulated, having been eagerly anticipated by the local market for a number of years, and are expected to reduce funding costs for institutions acting in the real estate market and, by extension, expand the availability of real estate credit at a lower cost to consumers.

The main feature related to the LIG is the fact that the pool of assets (mainly real estate financing credits) backing the issuance of the LIG will be treated as a segregated pool of assets, by which the underlying credit rights as well as the other assets and rights relating to them will be kept separately from the issuer's own assets. Hence, in cases of default, intervention, extrajudicial reorganisation or bankruptcy of the issuer, the non-commingling pool of assets will not be affected and will thus be earmarked solely for settlement of the debts owed under the corresponding LIG. If the pool of assets is not sufficient to settle all debts owed to the relevant investors, these will be entitled to enrol their outstanding credits in the bankruptcy estate ranking pari passu with the other unsecured creditors of the issuer.

Another recently created funding alternative is the structured operations certificate (COE), which is similar to structured bonds negotiated in international markets. COEs are, pursuant to the applicable rules, certificates issued against an initial investment, and represent an indivisible group of rights and obligations with an income structure similar to derivative instruments.

In addition to the application of local indexes, COEs may have foreign indexes applied as references to their remuneration. Thus, financial institutions may issue COEs based on, inter alia, variations in foreign currencies, stock or commodities prices.

Although COEs were originally regulated in 2013, the rules relating to the public offerings of COEs were not enacted in their final form by the CVM until October 2015. As a result, we have seen an increasing offer of different types of COE in the local market since then.

vi CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS

As a prerequisite to operate in Brazil, a financial institution must apply to the Central Bank for a prior authorisation. The documents that must be presented to the Central Bank include:

  1. a formal letter of application for authorisation of the intended transaction;
  2. a statement declaring the intent of the applicant to incorporate a financial institution;
  3. a statement of the non-existence of restrictions;
  4. a study of the financial and economic feasibility of the project, including a business plan;
  5. a definition of the corporate governance patterns;
  6. details of the controllers of the institution; and
  7. evidence of financial and economic capability.

The acquisition of a controlling or significant interest in an existing bank also requires prior approval from the Central Bank and entails, basically, the same procedures.

In addition to the ordinary documentation indicated above, the incorporation or acquisition of financial institutions by foreign entities or individuals must be submitted to the Presidency of the Republic for the issuance of an executive decree acknowledging the national interest underlying the proposed transaction. As a result, whenever a foreign entity intends to set up a financial institution in Brazil, or to acquire an equity interest in a domestic financial institution, the transaction may only be closed after the granting of a presidential decree.

vii THE YEAR IN REVIEW

Local regulators have continued to push for modernisation of the applicable rules, especially to increase competition and reduce spreads to foster the Brazilian economy. In addition, some updates have been implemented to adjust local rules to international standards. Some of the most relevant regulations enacted in 2018 are summarised below.

i Limits of exposure per client within the SFN

On 31 July 2018, the CMN enacted Resolution No. 4,677, which sets a new regulatory regime that enhances the maximum limits of exposure per client and the maximum limit of concentrated exposures that must be observed by institutions that are part of the SFN. The Resolution introduces many significant changes, incorporating into the Brazilian legislation the recommendations disposed on the Supervisory Framework for Measuring and Controlling Large Exposures, published in April 2014 by the Basel Committee on Banking Supervision.

The regulation on large exposures aims to ensure the stability of the financial system, limiting the maximum loss that a financial institution could face in the event of default of a single customer or a group of connected customers. Therefore, the regulatory framework that controls large exposures works as a tool for the monetary authorities, establishing obligations and requirements to be accomplished by financial institutions, in a preventive way, to avoid unexpected losses adversely affecting the institutions and, consequently, the entire financial system.

The limits established by Resolution No. 4,677 must be complied with by financial institutions and other institutions authorised to operate by the Central Bank, except for the following entities: institutions not subject to the calculation of regulatory capital or simplified regulatory capital; consortium administrators; and payment institutions.

As per Resolution No. 4,677, the limits must be permanently observed in a consolidated way. If the limits are surpassed, new transactions are prohibited and, depending on the type of institution, a plan to reduce the excess may be required.

Resolution No. 4,677 shall become effective on 1 January 2019 or 1 January 2020, according to the segment of the institution.

ii Bilateral margin requirements for over-the-counter derivatives

On 25 May 2018, Resolution No. 4,662 was enacted by the CMN to regulate the bilateral margin requirements for derivatives transactions that are not settled through a central counterparty, held in Brazil or abroad by financial institutions and other institutions authorised to operate by the Central Bank.

Resolution No. 4,662 follows a trend of changes in the over-the-counter (OTC) derivatives market, which intends to increase the security and transparency of OTC derivative transactions. Such measures, among others, have been adopted by several countries since the global financial crisis between 2007 and 2008.

According to the new rules, derivative transactions that fulfil certain requirements provided for in Resolution No. 4,662 shall be guaranteed by two types of margins:

  1. the variation margin, which aims to protect from current exposures and must be determined according to the market value of the derivatives contracts; and
  2. the initial margin, which aims to protect from risks arising from respective potential future exposures, due to changes in the future prices of the underlying assets of such contracts.

Resolution No. 4,662 also provides that the financial instruments used as an initial guarantee margin must be segregated from the assets of the guarantor and guaranteed entities in order to ensure its availability in the events of insolvency or bankruptcy. In addition, it provides a prohibition on the disposal and reuse of financial instruments received in guarantee.

To allow market participants to adapt their systems and processes according to the new framework, the new rule exempts transactions carried out until 31 August 2019 from the margin requirements.

iii New technology financial institutions

On 26 April 2018, the CMN enacted Resolution No. 4,656, providing for the setup and operation of two new types of financial institutions specialised in lending through electronic platforms: direct credit companies (SCDs) and interpersonal lending companies (SEPs), which must be organised as joint-stock companies (sociedades anônimas) with a minimum paid-up capital and net worth of 1 million reais.

The objective of this new regulation is to give greater legal certainty to the activities of lending fintechs, technology-intensive entities that operate in the credit market. From now on, lending fintechs that apply for an SCD or SEP licence shall be considered financial institutions for regulatory purposes, and therefore will be allowed to make loans and offer other funding mechanisms. Previously, la ending fintech making a loan or offering a funding mechanism would have to depend on an association with a traditional financial institution.

According to the Central Bank, this new regulatory framework should foster innovation in the SFN, improve competitiveness and increase competition among financial institutions in the credit market, thus creating the conditions for a reduction in interest rates. This measure was among the set of actions disclosed by Central Bank in late 2016.

As a related matter, Presidential Decree No. 9,544/18 was published on 30 October 2018, through which the government has demonstrated its interest in the participation of foreign investors in the equity ownership of SCDs and SEPs (up to 100 per cent of the capital stock of SCDs and SEPs is authorised to be held by foreign investors). It is important to mention that according to the Brazilian regulation, foreign participation in the capital stock of financial institutions may only be authorised in Brazil if it is in the interest of the government.

iv Cyber risk management and cloud outsourcing regulations for financial services

Pursuant to Resolution No 4,658, which was enacted by the CMN on 26 April 2018, financial institutions must now comply with cyber risk management and cloud outsourcing regulations, being guidelines for designing or adapting their internal control.

According to this new Resolution, the related policies and action plans to prevent and respond to cybersecurity incidents must be in place before 6 May 2019, and fully compliant by 31 December 2021.

v New rules on prevented transactions with related parties

On 29 October 2018, the CMN enacted Resolution No. 4,693, which regulates the conditions and limits relating to credit transactions with related parties carried out by financial institutions and lease companies. Such transactions were known as prevented transactions.

This rule was eagerly anticipated by the local market, considering that Law No. 13,506, which was enacted on 13 November 2017, has significantly amended the legal framework about this type of transaction.

In this context, the new rule defines the meaning of credit transactions to conform with the rule's standard, as well as the exceptions and respective limits and conditions applicable to the performance of such transactions with related parties.

For example, among others, the following transactions are conspired credit transactions: loans and financing, advances, leasing operations and collateral. Additionally, Resolution No. 4,693 establishes transparency and control procedures that must be adopted by financial institutions in the execution of these transactions.

vi New rules on cards and payment arrangements in Brazil

Within the scope of Agenda BC+, the main goal of which is to pursue a more efficient financial system in Brazil, the Central Bank issued Circular No. 3,885, Circular No. 3,886 and Circular No. 3,887 on 26 March 2018. Among other subjects, these significantly change the current regulation on payment methods, and establish more flexible rules on supervisory requirements for payment arrangements and payment institutions, as well as on interchange fees charged by debit card issuers.

To reduce uncertainties, to facilitate the identification of sub-acquirers (participants in payment arrangements that enable the final recipient to accept a payment instrument issued by a payment institution or by a participating financial institution), Circular No. 3,886 establishes objective criteria to require the participation of sub-acquirers in centralised clearance. Considering that these entities are not settlors of payment transactions, the new rule establishes that they will only be obliged to adhere to the payments environment of the centralised clearing if, in the past 12 months, their accrued total transactions value is equal to or greater than 500 million reais.

Moreover, Circular 3,885 defines different models of payment institutions, and provides for the requirements and procedures for the organisation and authorisation of payment institutions that are part of the Brazilian payment system. Under the new rules, new companies that operate as issuers of electronic currencies, issuers of postpaid payments and accreditation companies do not need prior authorisation from the Central Bank. They will only be subject to advance authorisation to operate if they reach any of the following parameters: the payment transaction volume surpasses 500 million reais in a mobile window of 12 months; or the funds held in pre-paid accounts surpasses 50 million reais in a mobile window of 12 months.

On the other hand, Circular 3,887 establishes caps on interchange fees that can be charged for domestic payment agreements on purchase and cash deposit accounts: 0.5 per cent of the average interchange fee, weighted by the amount of transactions calculated on a quarterly basis; and 0.8 per cent as the maximum amount charged in any transaction.

viii OUTLOOK and CONCLUSIONS

Important trends in the financial market relate to the fintech industry, and its implementation in lieu of recent rules.

The new set of rules that formally regulates the fintech sector has brought greater legal certainty to the lending fintech industry by specifically regulating transactions in this incipient market segment and allowing it to detach from the traditional banking industry. It is expected that the setup and authorisation processes within this new sector will allow possibilities to develop at a reasonable pace so that lending fintechs may soon start doing business in the new formats created by the Brazilian monetary authorities. Moreover, the Brazilian market has received the new tools with enthusiasm, as they increase competition and innovation in the sector.

Further, it is important to mention that sub-acquirers have a relevant role in the growth and consolidation of the payment services industry. They:

  1. enable an increase in the number of transactions;
  2. prospect and affiliate commercial establishments in new segments;
  3. act in niches; and
  4. offer complementary solutions to those provided by the accreditors.

Within the scope of Agenda BC+, it is clear that the Central Bank intends to foster competition among market players.

Bearing in mind all of the updates implemented in 2018 and the general economic scenario, it is likely that local authorities will remain active, and further improvements and innovations may be expected.

It is clear that new technology and its adoption by the local market will continue to be one of the main focuses of discussion in the next few years.


Footnotes

1 Tiago A D Themudo Lessa is a partner and Rafael José Lopes Gaspar, Gustavo Ferrari Chauffaille and Vittoria Cervantes de Simoni are associates at Pinheiro Neto Advogados.

2 In 2017, Brazil had the eighth-largest economy in the world by gross domestic product according to data provided by the World Bank on its website (data.worldbank.org/data-catalog/GDP-ranking-table).

3 Federal Law No. 4,595, of 31 December 1964.

4 Government-owned and private financial institutions form the Sistema Financeiro Nacional. Private financial institutions include commercial banks, investment banks, universal banks, exchange banks, credit, financing and investment companies, securities dealerships, brokerage firms, credit unions and leasing companies.

5 If a bank opts to also have an investment banking department, it will be subject to CVM regulatory authority with respect to its investment banking activities.

6 Law No. 6,385, of 7 December 1976.

7 Law No. 6,404, dated 15 December 1976.

8 Law No. 6,024, of 13 March 1974.

9 Complementary Law 105.