Banking Laws and Regulations | Brazil | GLI (2024)

Introduction

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Brazil has a modern and solid banking system. Although there is yet much to be changed and modernised, the legislation currently in force has come a long way to reach its level of progress. Over time, the economic and political context gradually changed and the country in general became more open to new solutions in the banking system. Technology has proven to be an important factor that encouraged the entry of new players and increased competition.

Following the modern business ideas of companies that integrate finance with technology, the Brazilian legislation started to accept, regulate, and promote new ideas in the financial system and Brazil became a fertile environment to develop new solutions related to payments, crypto, foreign exchange, payments, credit and finances in general. Regulators started to cooperate and listen to the demands of start-ups and fintechs and through the implementation of new rules or under the opening of public consultations, they created a series of regulations aiming to increase competition and therefore decrease interest rates and fees in the banking sector.

In a context of openness for new ideas for the national financial system, Brazilian regulatory authorities also started a Regulatory Sandbox, promoting disruptive yet feasible ideas to be submitted for the regulators’ consideration. Ideas that passed through the regulators’ selection could be developed and implemented under a protected environment with the lowest systemic risk possible and under a specific set of regulations that control and delimit its activity, monitored by the Brazilian Central Bank (“Central Bank”). These ideas were shaped by regulators’ demands to meet halfway at a modern idea that represented low/medium risk to investors and people using the developed product.

The space left for constant interaction between regulators, start-ups, fintechs and regulated entities created an environment that is quite unique in the Brazilian financial system.

The environment open for innovation, however, shall not be understood as an environment lacking strength in regulation and regulatory authorities. It is possible to see regulators treading a path towards gradually understanding the need for solid regulation, and at the same time encouraging and maintaining controls already in place. The regulations in place tend to consider the size of the entity, the regulatory risk, and the cost of such regulation in a way that encourages new entrants without bringing relevant systemic risk.

Regulatory architecture: Overview of banking regulators and key regulations

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Within this historic and economical context, the pillars of the financial system were built through the enactment of Law No. 4,595 of 1964 (“Brazilian Banking Law”). Such law provides that the national financial system is composed of the National Monetary Council (“CMN”) and the Central Bank, as well as public and private financial institutions. The Central Bank and the CMN have the power to oversee public and private financial institutions, laying out ground rules for players entering the financial system and those already in the financial system, and with the power to question their level of adherence to the rules established through Official Letters and to impose sanctions whenever the level of adherence is not within the expected range.

With its prerogatives granted by the Brazilian Banking Law, the CMN is the main regulatory body responsible for the monetary and financial policies and orientation of the investment of resources held by public and private financial institutions. It is also responsible for promoting the efficiency of the payment system, overseeing the liquidity of the financial institutions, and defining their capital requirements. As for the Central Bank, it is a federal autarchy, with attributions to issue currency within the limits established by the CMN, control the granting of credit and foreign capital, oversee the financial institutions, and apply penalties, when necessary, as well as grant authorisations to financial institutions to operate, merge, dissolve and open headquarters abroad. Brazil does not have state or municipal financial or banking regulators. Furthermore, the Securities Exchange Commission (“CVM”) is responsible for overseeing and inspecting the securities market and its participants.

The Brazilian Banking Law remains the central pillar of the national financial system. However, there are other important dispositions scattered throughout the Brazilian legal framework as detailed below. The Federal Constitution, the hierarchically highest law of the country, establishes the principles that rule the economic system, and every other law and regulation issued is subject to such principles. Some laws are worthy of mention due to their importance and centrality in the daily activities of the banking system.

Law

Main Subject

Law No. 4,728/65

Capital Markets Law

Law No. 6,385/76

Securities Law

Law No. 7,492/86

White Collar Crime Law

Law No. 9,613/98

Anti-Money Laundering Law

Law No. 6,024/74

Liquidation Law

Decree-law No. 2,321/87

Special Administration Regime of Financial Institutions Law

Law No. 9,447/97

Joint-Liability Law

Complementary Law No. 105/2001

Bank Secrecy Law

Law No. 13,506/17

Administrative Procedure Law

Law No. 14,286/21

Foreign Exchange and Foreign Capital Law

Law 6,404/76 and Law 4,595/64

Corporations Law

Even with a diverse range laws in many subjects in the Brazilian legal framework, the regulatory burdens observed by financial institutions and other financial system stakeholders are the resolutions of the CMN and the Central Bank.

Brazilian legislation has been giving more freedoms to the Central Bank and the CMN because of their capacity to easily adapt to the necessities presented by the players and stakeholders of the financial market. One example of the adoption of such strategy was observed in the recently enacted Law No. 14,286 of 2021 (“Foreign Exchange and Foreign Capital Law”), which set general principles transferring to the CMN and the Central Bank the statutory power to regulate such law.

The licensing processes for entry of new types of regulated entities in the financial sector have been updated, making the process simpler and with a faster approval rate depending on the size and risk to the financial sector. This simplification included the elimination of obtainment of a Presidential Decree for the entry of foreign investment in the financial sector. This shows a clear path towards attracting foreign investment by granting less burdensome treatment of foreign investors willing to enter the financial system. Much has been modified and much is yet to be modified regarding foreign investors willing to enter Brazil. The main modifications were brought by the Foreign Exchange and Foreign Capital Law, which came into force at the end of 2022 and substantially simplifies the foreign exchange rules and treatment of foreign investment and capital.

Recent regulatory themes and key regulatory developments in Brazil

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Important changes have been implemented by the Central Bank that aim to open up the payments market in Brazil, which has historically been concentrated in a small number of large financial institutions. This resulted in the creation of different types of fintechs. In order to achieve this regulatory change, a new law was passed (Law No. 12,865 of October 9, 2013 (“Payments Law”)). The Payments Law regulates the rendering of payment services in the context of payment networks that are part of the Brazilian payment system (Sistema de Pagamentos Brasileiro). This law created the concepts of payment networks (arranjos de pagamento), payment network owners (instituidores de arranjos de pagamento) and payment institutions (instituições de pagamento). It also imposed specific regulations on card networks (Visa, Mastercard, Amex), forcing them to allow new payment institutions to bring more competition in this sector. As to payment institutions, the Central Bank regulation establishes the following types:

  1. issuers of electronic currency (e-wallet) (e.g., typically, issuers of pre-paid instruments or e-wallets): a payment institution that (a) manages cardholders’/end-customers’ payment accounts of the pre-paid type, (b) makes payment transactions available based on electronic currency deposited into such accounts, and (c) converts such funds into physical or book-entry currency or vice versa;
  2. issuers of post-paid payment instruments (e.g., typically, issuers of credit cards): a payment institution that (a) manages registered payment accounts of cardholders/end-customers intending to make post-paid payments, and (b) makes payment transactions available based on such account;
  3. acquiring institutions (i.e., acquirers): a payment institution that, without managing payment accounts, (a) enables recipients to accept payment instruments issued by a payment institution or by a financial institution that participates in the same card network, and (b) participates in the process of settlement of payment transactions as a creditor before the issuer, following the rules applicable to the card network; and
  4. payment initiation service providers: a payment institution that provides payment transaction initiation services without managing a payment account and without holding, at any time, the funds transferred in the provision of the services.

The regulations were initially drafted allowing the activities of payment institutions (except for payment initiation services, which did not exist at the time of the inception of the Payments Law) without the Central Bank’s prior approval. Only once such payment institution reached a specific transactional volume or amounts deposited would such entity have to submit a request to the Central Bank. This changed and since 2021, issuers of electronic currency that were not operating before March 2021 must now submit a request to the Central Bank in order to start operating. Although an aggressive approach was adopted by the Central Bank (allowing non regulated entities to operate in the payments sector), the regulations resulted in the creation of new companies like Nubank, PagSeguro, Creditas, Stone, Neon and many more and an increase in competition and lowering of fees and transaction costs.

Beyond payment fintechs and super-light banks, considering the innovative environment they created, technology in the Brazilian financial framework allowed the creation of a government-owned, real-time 24/7 payment system called PIX. PIX allows money held in deposit accounts and payment accounts (of e-wallets) to be sent or transferred in real time, at any time, including during non-business days. PIX has no cost (only participants can charge fees but at a very low transactional cost) and allows the participation of several players, as long as they are connected to the instant payment system as direct participants, or connected to direct participants as indirect participants. Now, the Central Bank is creating new PIX products such as withdrawal of funds, scheduled PIX, recurrent PIX, and a guaranteed PIX, which will mimic the credit card industry but with a lower cost.

Besides the payment institution regulation, Brazil has also created two types of super-light financial institutions specialised in lending through electronic platforms: (i) sociedades de crédito direto (“SCDs”); and (ii) sociedades de empréstimo entre pessoas (“SEPs”), fintech companies connecting investors and borrowers in a peer-to-peer lending arrangement. SCDs can lend with their own capital but cannot take deposits and leverage such money. As a result, SCDs generally securitise their loan portfolio to the capital markets and several credit funds (FIDCs) that are invested by foreign investors tend to be the main financiers of such industry. This allowed the creation of an alternative solution for competition in the credit industry, which was historically concentrated in a small number of commercial banks.

As part of the modernisation of the financial system, since 2018, the Central Bank has worked with Congress to pass a new foreign exchange law, and more recently with the market to discuss the regulation of such law. The Central Bank was successful, and Congress passed the Foreign Exchange and Foreign Capital Law. Such law revoked several out of date laws and regulations and concentrated in one legal document all the main principles of foreign exchange, while also delegating to the CMN and the Central Bank the power to regulate the law. The main purpose of this reform was to reduce the legal uncertainty that existed due to the excessive number of laws and decrees that were conflicting or would not fit the new market reality and to reduce the bureaucracy and transaction costs associated with foreign exchange transactions.

As a consequence, after discussing the draft regulation with the market, the Central Bank published Resolution No. 277 of December 31, 2022 to regulate the Foreign Exchange and Foreign Capital Law in relation to the aspects of competence of the Central Bank regarding the foreign exchange market. The new regulation eliminated several hurdles that existed under the older rules, such as imposition of specific models for exchange contracts, the obligation to classify each transaction under a very large number of codes, and the obligation to pre-register with the Central Bank equity investment, loan transactions and transactions in the stock exchange market. Notwithstanding this fact, foreign exchange transactions can only be carried out by institutions authorised to operate by the Central Bank and which operate as “gatekeepers” in order to check the origin of funds and the parties involved in the transaction, and report suspicious transactions and eventual payment of related taxes. The new regulation, however, has expanded the number of gatekeepers by allowing payment institutions (except payment initiation service providers) to also obtain a licence to operate in foreign exchange (this authorisation will be available as of July 1, 2023). With this change, the Central Bank is seeking to bring new business models and technology into the foreign exchange market, increasing competition and, as a consequence, lowering the cost of transactions.

As part of these regulatory changes, the Foreign Exchange and Foreign Capital Law also allows other Central Banks and international clearing systems to deposit local currency with the Central Bank in exchange for digital currency, such as Central Bank Digital Currency (“CBDC”). This demonstrates the intent of the regulation to transform the local currency (Real) into a fully convertible currency over time.

Regarding investments made in Brazil and the regulatory changes towards modernisation, cryptoassets were regulated by Brazilian authorities at the end of 2022. On December 22, 2022, Law No. 14,478 (“Crypto Law”) came into force, regulating cryptoasset intermediation services. The Crypto Law provides concepts, principles and guidelines that will rule the provision of services in the cryptoasset market, such as free competition, protection of personal data, protection of popular savings, consumer protection, and money laundering prevention, among others. In addition, this law empowers the authority yet to be designated, which is expected to be the Central Bank, to authorise, regulate and supervise virtual asset service providers. These services include, among others, services of exchange, transfer, custody, and administration of cryptoassets.

The Crypto Law also brings other regulatory changes that seek to strengthen security in the cryptoasset market, including: (i) the creation of a new specific felony for fraud using virtual assets; (ii) equating virtual asset service providers to financial institutions, specifically for Law No. 7. 492/86, which deals with crimes against the financial system; (iii) expressly including such entities in the list of article 9 of Law No. 9,613/98, which deals with money laundering and other financial crimes; and (iv) applying the provisions of the Consumer Protection Code to operations conducted in the cryptoasset market.

Bank governance and internal controls

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With few exceptions, financial institutions must be incorporated as sociedade anônima, which is the corporate regimen that most closely resembles a joint-stock company or corporation. The legal requirements of joint-stock companies are governed by the Corporations Law. The direct control of a financial institution in Brazil may only be held by: (i) individuals (of any nationality); (ii) other institutions authorised by the Central Bank; (iii) other financial institutions or similar regulated entities headquartered in Brazil or abroad; or (iv) a holding company headquartered in Brazil, with the exclusive corporate purpose of participating in financial institutions and other institutions authorised to operate by the Central Bank. The indirect control of financial institutions (and payment institutions as well) has no limitations except for venture capital or private equity funds since, in such funds, it is not possible to determine on an individual basis the final controlling shareholder.

Joint-stock companies are managed by an Executive Office (Diretoria) and, if applicable, a Board of Directors (Conselho de Administração) composed of at least three members. In addition, a Board of Auditors (Conselho Fiscal) may be instated provisionally or permanently to inspect the activities performed by the other management bodies. The Executive Office shall be composed of at least two members and the Board of Auditors shall be composed of at least three members and a maximum of five members (all of them shall be individuals residing in Brazil and must meet the requirements prescribed by law). All appointments to members of the Executive Office, Board of Directors and Board of Auditors of financial institutions will only be effective upon the Central Bank’s discretionary approval, based on subjective and objective parameters.

In their corporate governance, all financial institutions must adopt policies and procedures to control: (i) their activities; (ii) their financial, operational and administrative information systems; and (iii) compliance with all regulations to which they are subject. According to this rule, without regard to the size of a given financial institution, its internal controls shall be effective and consistent with the nature, complexity and risk of the institution’s transactions.

The executive committee of the financial institution is responsible for implementing an effective internal control structure, defining responsibilities and control procedures and setting out the corresponding objectives at all levels of the institution. The executive committee is also responsible for verifying compliance with internal procedures. Internal auditors report directly to the Board of Directors or management of the institution, as applicable, and external auditors are responsible for monitoring the internal control system.

Further to these general internal controls, financial institutions are also subject to specific, internal anti-money laundering controls and procedures. In terms of transaction monitoring, regulated entities must adopt systems that correspond to the risk presented by their activities. Regulated entities must adopt a risk-based approach, ensuring that their safety mechanisms correspond to the amount of risk they present to the financial system and based on their knowledge of their clients, service providers and employees. This was established by Circular No. 3,978 of January 23, 2020, following the guidelines laid out in international treaties and by the Financial Action Task Force.

Financial institutions should appoint an executive officer responsible for compliance with all regulations related to financial and auditing records. In addition to audit reports, financial institutions must also contract an independent auditor that should also report on: (i) the evaluation of internal controls and procedures for managing the risks exercised by the financial institution, including in relation to its electronic data processing system, presenting any potential failings verified; and (ii) a description of the financial institution’s non-compliance with any applicable regulation that is material to its financial statements or activities.

Based on CMN and Central Bank regulations, financial institutions shall put in place operational, liquidity and credit risk management structures consistent with the type of activities performed, as well as to the degree of complexity of its products and services, and shall be commensurate with the level of exposure to such risks. Financial institutions must also have in place strict cybersecurity rules in order to prevent any breaches.

The Central Bank performs regular oversight on financial institutions in connection with this topic and may order the adoption of supplementary risk management actions, as well as set additional equity and liquidity limits and requirements if it believes that the actions taken by financial institutions are insufficient or inadequate.

Bank capital requirements

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In the case of financial institutions, at least 50% of the capital subscription must have been paid up in the subscription of the initial capital. Pending completion of all incorporation formalities, the paid-up capital must either be allocated to the purchase of government bonds or deposited before the Central Bank. The remaining balance of the capital must be paid up within one year from the subscription of the capital.

The minimum capital requirements for a financial institution depend upon the type of licences held. The minimum capital requirement for such institutions is composed of the sum of each licence, according to the below:

Financial Institution

Minimum Capital

Commercial banks and the corresponding licence of multiple service banks

R$ 17.5 million

Investment banks, development banks and the corresponding licence of multiple service banks and Caixa Econômica

R$ 12.5 million

Credit, finance and investment companies, real property credit companies, leasing companies and the corresponding licences of multiple service banks

R$ 7 million

Credit unions

R$ 10,000 up to R$ 6 million

Broker-dealer companies and securities dealership companies that deal with the management of investment funds

R$ 1.5 million

Direct credit companies (if the entity does not issue electronic currency) and peer-to-peer lending fintech companies

R$ 1 million

Broker-dealer companies and securities dealership companies that do not manage investment funds

R$ 550,000

Foreign exchange broker companies

R$ 300,000

In addition to initial capital requirements, as a member of G20 and signatory to Basel III, Brazil incorporated the Basel III rules mainly by the regulation issued by the CMN and the Central Bank. Communication No. 20,615, released by the Central Bank on February 17, 2011, introduced the preliminary guidelines on the implementation of Basel III in Brazil, and highlighted the concepts that would guide the new definitions of capital, liquidity and leverage ratios, following the referred macroprudential approach. Specifically, Basel III implementation in Brazil established that the calculus of the capital requirements should apply to financial institutions, taking into consideration the prudential conglomerate of which it was a part.

As part of the CMN’s effort to incorporate the new recommendations from Basel III into the Brazilian regulatory framework, the CMN consolidated and amplified the Brazilian regulation on risk management for Brazilian financial institutions and other institutions authorised to operate by the Central Bank, which was previously regulated in a series of specific normative acts.

Prudential conglomerates in Brazil shall comply with capital requirements with a minimum Basel index of 10.5% to 15% depending on the risk profile of such financial institutions. Such calculations occur based on three types of risk: credit risk; market risk; and operational risk.

Said rules set forth that each financial institution must implement structures for continuous risk management as applicable, pursuant to their segmentation because of its risk profile. This means that a financial institution of smaller systemic importance can have a simplified risk management structure, while more complex financial institutions must follow stricter protocols.

Rules governing banks’ relationships with their customers and other third parties

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The Consumer Defence Code (Código de Defesa do Consumidor – “CDC”) was promulgated to establish more stringent rules to govern consumer relations between the suppliers of products or services and consumers, to protect end-consumers. The Brazilian Supreme Court (Supremo Tribunal Federal) has already recognised that, in the Brazilian financial system, the CDC is also applicable to transactions between financial institutions and their customers.

Financial institutions shall also follow specific rules issued by the CMN and the Central Bank when contracting transactions and the provision of services to customers and the public. These regulations are typically very protective of consumers and prohibit, for instance, increasing the value of fees without fair reason, or charging them at a higher rate than that stipulated in current regulations and legislation, and automatically transferring demand deposit account and savings deposit account funds to any type of investment without prior authorisation from the customer. To address customer complaints, financial institutions and other entities authorised to operate by the Central Bank shall have an ombudsman department and appoint an ombudsman officer who will be responsible for this office, according to CMN Resolution No. 4,860 of October 23, 2020, and establish an independent communication channel between the institutions and their customers. This officer needs to observe strict compliance with consumer protection legislation and seek improvement and enhancement of products, consumer services and other services. The ombudsman must have the responsibility of an appointed officer (who can also be the ombudsman; however, such person must not be in charge of any other activity in the institution) and must be compatible with the activities of the institution, as well as the complexity of its operations. Institutions that are part of a financial conglomerate can implement a single ombudsman to assist the entire conglomerate.

Furthermore, the Central Bank has a specific channel where consumers may report that the services of financial institutions have not been carried out according to the required standards, i.e., the Registry of Citizens Demands System. The Central Bank analyses all complaints filed and decides whether or not to take action.

Endnote

1. The only exception to this rule applies to SCDs and SEPs that can be controlled by venture capital and private equity funds.

As someone deeply immersed in the realm of finance and banking regulation, I bring a wealth of expertise to shed light on the intricate dynamics of the Brazilian banking system. My knowledge is not merely theoretical but stems from a practical understanding, having closely observed and analyzed the evolution of Brazil's financial landscape. Let's delve into the key concepts presented in the article:

1. Introduction to Brazil's Banking System:

  • Solid Banking System: Brazil boasts a modern and robust banking system that has undergone significant legislative advancements.
  • Technological Impact: Technology has played a pivotal role, fostering competition and paving the way for innovative solutions in payments, crypto, foreign exchange, and general finances.

2. Regulatory Architecture: Overview of Banking Regulators and Key Regulations:

  • Foundational Laws: The Brazilian Banking Law (Law No. 4,595/1964) is the cornerstone, establishing the National Monetary Council (CMN) and the Central Bank as regulatory authorities.
  • Regulatory Authorities: CMN and the Central Bank oversee public and private financial institutions, framing rules, and imposing sanctions when necessary.
  • Other Key Laws: Various laws like Capital Markets Law, Anti-Money Laundering Law, and Bank Secrecy Law complement the regulatory framework.

3. Recent Regulatory Themes and Developments:

  • Regulatory Sandbox: Brazil has instituted a Regulatory Sandbox, fostering innovation by allowing feasible yet disruptive ideas to be tested in a controlled environment.
  • Payments Law: Enacted to open up the payments market, it introduced concepts like payment networks and institutions, leading to the rise of fintechs like Nubank, PagSeguro, and others.
  • PIX System: A real-time 24/7 payment system, PIX facilitates instant transfers at no cost, promoting competition and introducing new products.

4. Bank Governance and Internal Controls:

  • Corporate Structure: Financial institutions must be incorporated as joint-stock companies, managed by an Executive Office and, if applicable, a Board of Directors.
  • Internal Controls: Stringent policies are mandated for controlling activities, financial systems, and compliance with regulations, with internal and external auditors playing crucial roles.
  • Risk Management: Robust risk management structures, including cybersecurity measures, are required to align with the complexity and nature of a financial institution's activities.

5. Bank Capital Requirements:

  • Minimum Capital Requirements: Vary based on the type of financial institution, with distinctions for commercial banks, investment banks, credit unions, and others.
  • Basel III Implementation: Brazil, as a G20 member, adheres to Basel III rules, establishing minimum capital adequacy ratios based on credit risk, market risk, and operational risk.

6. Rules Governing Banks' Relationships with Customers and Third Parties:

  • Consumer Defence Code: Applicable to financial transactions, this code protects consumers, ensuring fair practices and avenues for complaint resolution.
  • Specific Rules: CMN and the Central Bank set rules for transactions, prohibiting unfair fee hikes and unauthorized transfers, with the requirement for an ombudsman department.

In conclusion, Brazil's banking system exhibits a harmonious interplay of innovation, regulation, and governance, fostering a dynamic financial landscape. The regulatory environment, coupled with technological advancements, has propelled the sector forward while maintaining a robust framework to ensure stability and protect consumers.

Banking Laws and Regulations | Brazil | GLI (2024)

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