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 (the 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:
- commercial: financial institutions whose main activities, inter alia, are receipt of time deposits, offering checking facilities, providing short-term lending, collecting trade acceptance bills and other credit documents, and accepting and processing utility bill payments;
- development: intended to foster the economic growth of specific regions or industrial sectors. Financing tends to be long term and related to specific projects;
- multi-service: aggregate of more than one type of banking activity, of which one must be either commercial or investment. Thus, a multi-service bank may, for instance, apply for one or more of the following:
- 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.
The 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, which was created by the Capital Markets Law,6 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 and custody of securities portfolios.
iii PRUDENTIAL REGULATION
i Relationship with the prudential regulator
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:
- elaboration of supervision agreements with foreign authorities;
- monitoring of activities of international organisations in matters related to supervision;
- exchange of information with foreign supervisory authorities;
- coordination, support and follow-up of missions by foreign supervisors in the country; and
- 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 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.
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:
- suspension of enforceability of matured obligations for the duration of the intervention;
- suspension of the flow or count of the term of maturity of the previously existing obligations;
- enforceability of all pre-intervention obligations is stayed for the duration of the intervention period; and
- 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 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:
- has its economic or financial conditions affected by relevant events, especially if it fails to punctually satisfy its commitments or could be declared bankrupt;
- seriously violates the legal rules and regulations; or
- 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:
- 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);
- automatic acceleration of the maturity of the obligations of the financial institution; and
- 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:
- when the Central Bank accepts that the necessary guarantees are in place to allow the institution to take back control;
- 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
- 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
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.
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 operating 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:
- a formal letter of application for authorisation of the intended transaction;
- a statement declaring the intent of the applicant to incorporate a financial institution;
- a statement of the non-existence of restrictions;
- a study of the financial and economic feasibility of the project, including a business plan;
- a definition of the corporate governance patterns;
- details of the controllers of the institution; and
- 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 2019 and early 2020 are summarised below.
i Open banking regulation guidelines
On 24 April 2019, the Central Bank enacted Notice No. 33,455, which defines the initial guidelines for open banking regulation in Brazil. Pursuant to the Notice, the open banking system represents the sharing of data and payment solutions by financial institutions and other authorised entities, subject to customer authorisation and through the integration of information systems.
Currently, financial institutions face several problems accessing customers' financial data kept by another financial institution. However, within the open banking environment, a financial institution will be able to process a customer's personal and transactional data held by another financial institution, at the customer's discretion.
Additionally, on 28 November 2019, the Central Bank enacted Public Consultation No. 73/2019, which disclosed proposals for normative acts providing for the implementation of the open banking system. Among other topics, the draft resolution establishes in detail the participating institutions (mandatory and voluntary), the data and services covered, the requirements and liabilities for sharing, the implementation schedule and the agreement to be entered into between participating institutions as a self-regulation arrangement, but with the guidance and review of the Central Bank, which will cover, among other items, technology standards, operational procedures, customer service channels and mechanisms for dispute resolution between the participating institutions.
According to the Central Bank, the main purpose of the open banking system is to foster innovation and competition in the financial market with the offering of a wider variety of products and services, at potentially lower costs or more favourable conditions. As a result, the banking industry should become more efficient and competitive.
ii Foreign investment in the SFN
On 22 January 2020, the Central Bank enacted Circular No. 3,977, which recognises the participation of natural or legal foreign entities in the capital stock of financial institutions headquartered in Brazil as being of interest to the Brazilian government. The Circular takes into account the understanding established by Presidential Decree No. 10,029 of 26 September 2019, regarding giving foreign investors the same treatment as domestic investors, and took effect on the date of its publication.
This is an important innovation for the SFN. Prior to the publication of both Circular No. 3,997 and Presidential Decree No. 10,029, natural or legal foreign entities intending to invest in Brazilian financial institutions needed a specific Presidential Decree authorising each investment. Therefore, with this change, the Brazilian financial system should become more attractive and accessible to foreign investors.
iii Foreign exchange market
On 7 October 2019, the Central Bank presented a bill to reformulate the Brazilian foreign exchange market (the New Foreign Exchange Bill). The Bill also deals with Brazilian capital abroad and foreign capital in the country.
Among other things, the New Foreign Exchange Bill:
- confirms at legal level that foreign exchange transactions may be carried out freely (through entities authorised to operate in this market and subject to applicable rules);
- grants both the CMN and the Central Bank broad powers to regulate the foreign exchange market and its transactions;
- expands the international activity of Brazilian banking institutions;
- authorises Brazilian banking institutions to invest and lend abroad funds raised in Brazil or abroad;
- deregulates small foreign currency transactions (up to US$1,000) carried out between individuals on a sporadic and non-professional basis;
- expands the use of foreign currency-denominated bank accounts in Brazil; and
- authorises the monetary authorities to establish situations in which the prohibition against private offsetting of credits between residents and non-residents, as well as the payment in foreign currency in Brazil, would not apply.
Moreover, the New Foreign Exchange Bill eliminates several sparse laws and regulations and is to become effective 365 days after its approval so that public and private entities affected by the new rules may have enough time to adapt. The Brazilian Congress is still reviewing the Bill, and it is not possible to estimate whether and when it will be approved, or what changes will be proposed. The initiative intends to modernise, simplify and reduce legal uncertainties related to the current scenario of Brazilian foreign exchange legislation and is expected to foster the Brazilian foreign exchange market.
iv Declaration of Economic Freedom Rights
On 20 September 2019, the Brazilian federal government sanctioned Federal Law No. 13,874 (the Economic Freedom Law), which converted Provisional Measure No. 881 of 30 April 2019 into law, establishing the Declaration of Economic Freedom Rights.
The Economic Freedom Law intends to reduce bureaucracy in economic activities and to simplify the incorporation and operation of companies, as well as to promote a cultural change in transactions between government authorities and private companies. In this regard, the new Law instituted the Declaration of Economic Freedom Rights, and established free market guarantees and the need for a regulatory impact analysis when issuing or changing regulations, among other relevant issues.
The Declaration encompasses free enterprise, free pricing, free competition and legal certainty regarding an administration's conduct, freedom to contract and good faith, and provides for elimination of rules that have become obsolete due to technological innovations, less bureaucracy due to the recognition of digital documents and tacit approval of clearance requests in the event of silence of the competent authority, among other things.
The Economic Freedom Law amended some articles of the Brazilian Civil Code to expand parties' freedom to establish contractual obligations and to allocate risks. As per the Brazilian Civil Code, the freedom to contract will be exercised on grounds and within the limits of the social function of the contract, 'subject to the provisions of the Declaration of Economic Freedom Rights', and, in private contractual relations, the principle of minimum state intervention will prevail (contractual revision by third parties being an exception to the rule).
Nevertheless, economic freedom shall not be exercised without limits. Economic activities shall remain subject to limitations based on environmental protection standards and on laws governing labour relations, anti-fraud, competition, consumer rights, national security and public health safety matters, among other issues protected by law.
v Regulatory Sandbox
On 28 November 2019, the Central Bank published a public consultation regarding the controlled testing environment for financial innovations (sandbox), which aims to allow institutions to test new financial and payment projects under specific conditions and during a specified period within a controlled 'safe space'.
The draft resolution disclosed by the Central Bank establishes the applicable conditions, among which are the specific rules of the first cycle, such as duration and number of participants, required documentation and the basis for the classification of institutions, as well as the schedule for registration, selection and authorisation processes of such institutions.
According to this new rule, the Central Bank will establish the duration of each regulatory sandbox cycle (limited to one year and extendable once for the same period). Moreover, the Central Bank shall also be responsible for defining the deadline for each participant to start operating its product or service after considering the aspects of the authorised project.
The Central Bank understands that the main strategic priorities for projects in 2020 are: (1) offering solutions for the foreign exchange market; (2) stimulating the capital market by creating synergies with the credit market; (3) offering credit for micro-entrepreneurs and small businesses; (4) creating solutions for the open banking system; and (5) increasing competition in the SFN and in the Brazilian Payments System.
Other regulatory entities, such as the Superintendence of Private Insurances and CVM, have also been working on their own regulatory sandbox drafts. The major purpose is for these entities to provide a communication channel between them to jointly address topics within their supervision areas.
The regulatory sandbox is one of the many initiatives undertaken by the Central Bank to advance technological developments and modernisation. The implementation is expected to translate into new financial products that could be otherwise harmed or even made unachievable by the current regulatory framework. The sandbox meets the Central Bank's initiative to increase competition in the financial market.
vi Instant payments
In May 2018, the Central Bank created a task force to contribute to the development of an instant payment ecosystem in Brazil, which has gathered more than 90 participants (e.g., payment institutions, payment arrangers, fintech companies, marketplaces, financial institutions, law firms and government entities). The Central Bank aims to put an instant payment ecosystem in effect by November 2020.
The Brazilian system for fund transfers between banks and bank accounts is already very efficient; however, the system only works during business hours and it is not accessible for those without a bank account. Banks also typically charge high fees for each transfer, which can make transactions very costly (especially when micro-deposits are taken into account).
The Central Bank plans to prepare a regulation and the infrastructure backbone for instant payment services that will enable users to carry out payment transactions at a very low cost and in real time, regardless of whether these are carried out during business hours and with a bank account or payment account.
Despite the fact that many issues have still not been addressed, the outlook is promising and may create opportunities for fintech companies to provide services to consumers on a par with traditional banks. This also means that traditional banking products such as cheques, cash and debit cards may suffer with the emergence of cheaper and faster products.
viii OUTLOOK and CONCLUSIONS
The new regulations are expected to bring relevant changes in the Brazilian financial system in the short term, attracting new investments in Brazil by:
- reducing bureaucracy, therefore making the banking industry more efficient and competitive;
- changing the way financial products are offered in the country;
- fostering technological developments and modernisation; and
- giving form and effectiveness to the principles of freedom in the exercise of economic activities.
Bearing in mind all of the updates implemented in 2019 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.
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 2018, Brazil had the ninth-largest economy in the world by gross domestic product according to data provided by the World Bank on its website (www.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 SFN. 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 of 15 December 1976.
8 Law No. 6,024 of 13 March 1974.
9 Complementary Law No. 105.