On April 26, 2018, the National Monetary Council issued Resolution No. 4,656 providing for the setup and operation of two new types of financial institutions specialized in lending through electronic platforms: the sociedade de crédito direto (SCD) and the sociedade de empréstimo entre pessoas (SEP).
This new regulation is aimed to give greater legal certainty to the activities of the so-called lending fintechs, technology-intensive entities that operate in the credit market. Based on the new regulatory framework, lending fintechs that apply for a SCD or SEP license shall be considered a financial institution for regulatory purposes, thus being allowed to make loans and offer other funding mechanisms without depending on an association with traditional financial institutions, as currently required.
According to the Central Bank of Brazil (BACEN), this new regulatory framework seeks to foster innovation at the National Financial System (SFN) as well as to improve competitiveness and increase competition among financial institutions in the credit market, thus creating the conditions for a reduction in interest rates. This measure is among the set of actions disclosed by BACEN in late 2016 (within the context of the Crédito Mais Barato pillar of Agenda BC+), and was widely discussed with market players through Public Consultation No. 55 carried out in late 2017.
Below are some highlights of the new regulation:
Sociedade de Crédito Direto (SCD)
The business model of an SCD is characterized by lending, financing and acquisition of receivables exclusively through an electronic platform, using financial resources that originate solely from its own capital. This means that an SCD is prohibited from raising funds from the public or collecting deposits to be used in its financial activities.
The regulatory framework for SCDs is far simpler and more straightforward, considering that such institutions have a limited and less complex scope of activity (focusing exclusively on the extension of loans and financing, as well as on the acquisition of receivables, without leverage).
It should be pointed out, however, that Resolution 4,656 of 2018 allows SCDs to sell the loans they originate (i) to other financial institutions; (ii) to receivables investment funds (FIDCs) whose quotas are exclusively offered to qualified investors, as defined by Brazilian Securities Commission ("CVM")¹; and (iii) to securitization companies that distribute securitized assets solely to qualified investors, as defined by CVM. As a result, credit securitization structures are expressly available to SCDs as a funding alternative.
Sociedade de Empréstimo Entre Pessoas (SEP)
An SEP stands for a financial institution that, exclusively through an electronic platform, brings creditors and borrowers together in a peer-to-peer lending arrangement. By so doing, SEPs will intermediate the borrower-creditor relations, thus engaging – in the words of BACEN – in a 'typical financial intermediation activity'.
Resolution 4,656 of 2018 has set a more robust regulatory framework for SEPs (on account of their specificities) by regulating how the financial intermediation shall take place and determining specific mechanisms for managing the credit risks in such transactions, among other issues.
The regulation makes it clear that, unlike SCDs, SEPs cannot carry out lending or financing transactions using their own funds (thus underscoring the peer-to-peer nature of such activity).
Further, as a rule, neither the SEPs nor their controlling persons and affiliates can directly or indirectly hold the credit risk inherent to loan transactions originated. It should be pointed out, however, that the regulatory authority, heeding the concerns and requests of industry players, made an exception whereby SEPs are allowed to hold a small portion of risks inherent to their transactions, provided that certain conditions stated in the resolution are satisfied.
It is also worth noting that only individuals or legal entities resident and domiciled in Brazil may act as borrowers in transactions intermediated by SEPs. On the other side, creditors may comprise (i) individuals, (ii) financial institutions, (iii) FIDCs whose quotas are exclusively offered to qualified investors, as defined by CVM, (iv) securitization companies that distribute securitized assets solely to qualified investors, as defined by CVM, and (v) non-financial legal entities. Nevertheless, creditors other than qualified investors² cannot enter into transactions above a R$ 15 thousand cap with one same borrower, at one same SEP.
Provisions common to SCDs and SEPs
SCDs and SEPs must be organized as joint-stock companies (sociedades anônimas), with a minimum paid-up capital and net worth of R$ 1 million.
As financial institutions, SCDs and SEPs: (i) are free to charge any compensatory interest rates, without caps or limitations, being excluded from the restrictions imposed by the Brazilian usury law, (ii) will have direct access to the Credit Risk Data System of the BACEN (Sistema de Informação de Crédito – SRC) for credit purposes analysis, and (iii) may opt to have direct access to the Brazilian Payment System (Sistema de Pagamento Brasileiro), which allow the performance of domestic wire transfers and issuance of payment slips (boletos) without the intervention of a traditional financial institution
Both SCDs and SEPs are authorized to provide ancillary credit services, limited to an exhaustive list set forth in the regulation, encompassing: (i) credit analysis for clients and third parties; (ii) collection of debts owed by clients and third parties; (iii) acting as insurance representative in distribution of insurance related to credit transactions; and (iv) issuance of electronic currency.
Both companies are subject to licensing from BACEN, following the procedure spelled out in this new resolution. Licensing requirements are slightly simpler (the business plan, for instance, is replaced by a statement of reasons), but are generally similar to those already in place for financial institutions and payment institutions, such as: identifying the controlling group; proving financial and economic capacity, expertise and know-how; and showing evidence of approval from the applicant's board members. Similarly, in case of participation of foreign capital, a Presidential Decree is also necessary.
In terms of composition of the controlling group for SCDs and SEPs, the major breakthrough for the SFN is that Brazilian or foreign investment funds were allowed to take part in the controlling ownership structure of such entities.
As the new resolution came into force on the date of its publication, interested parties may already start up the application process.
Finally, SCDs and SEPs must meet operating and prudential requirements that are commensurate and consistent with their size and profile, and in keeping with the SFN segmentation recently defined by BACEN. Those having a simple risk profile may opt for falling into the S5 segment to qualify for proportional enforcement of prudential rules, whose criteria were adapted by Resolution No. 4,657 issued by CMN on April 26, 2018 as well.
The new resolution 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 hoped that the setup and authorization processes develop at a reasonable pace so that lending fintechs may soon start doing business in the new format proposed by the Brazilian monetary authorities.
 According to CVM rules, ‘qualified
investors’ are the individuals or legal entities that hold financial
investments above R$ 1 million, among others.
 According to CVM rules, ‘qualified investors’ are the individuals or legal
entities that hold financial investments above R$ 1 million, among others.