OPEN BANKING REGULATION GUIDELINES
The Brazilian Central Bank announced the initial guidelines for open banking regulation in Brazil through Notice No. 33,455 on April 25, 2019. Open Banking consists in the sharing of data and payment solutions by financial institutions and other authorized entities, upon customer's authorization and via integration of information systems. The Brazilian Central Bank has looked at open banking as an important tool for innovation in the financial market to make the banking industry more efficient and competitive.
The Brazilian open banking model will comprise financial institutions, payment institutions and other Brazilian Central Bank-licensed entities by making it possible to share, in a phased-in approach, data on products and services, customer record data and customer transaction data. Open banking will eventually cover the provision of payment initiation services.
On November 28, 2019, the Brazilian Central Bank launched Public Consultation No. 73/2019, which disclosed the draft resolution for public implementation of open banking in Brazil. Among other topics, the draft resolution sets forth in detail the participating institutions (mandatory and voluntary), the data and services covered, the requirements for sharing, the responsibilities 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 Brazilian Central Bank, which will cover, among other items, technology standards, operational procedures, customer service channels, and mechanisms for dispute resolution between the participating institutions.
Why is this important?
Open banking is expected to bring important changes to the Brazilian financial system in the short term by reducing bureaucracy and changing the way financial products are offered in the country. It will foster the cooperation between entities, new solutions, and a collaborative ecosystem, to the benefit of clients. Indirectly, it will also help distribute banking services, which are currently concentrated among large banks.
In May 2018, the Brazilian Central Bank created a working group to contribute to the development of an instant payment ecosystem in Brazil, which assembled more than 90 participants (e.g., payment institutions, payment arrangers, fintechs, marketplaces, financial institutions, law firms, and government entities). The Brazilian Central Bank plans to implement an instant payment ecosystem by November 2020, and is taking steps to launch the ecosystem ahead of schedule.
Brazil already has a very efficient system for fund transfers between banks and bank accounts, but this system only operates during business hours and is only accessible to those with a bank account. Also, banks typically charge high fees for each transfer, which can make these transactions very expensive (especially when microtransfers are taken into account).
The Brazilian Central Bank plans to provide a regulation and the infrastructure backbone for instant payment services, which will enable users to carry out payment transactions at a very low cost and in real time – 24 hours a day, 365 days a year – with a bank account or a payment account. Initially, the working group is devising a model that allows a wide range of payment transactions – person to business; business to person; business to business; business to government; and government to person – among other combinations that the new regulation will contemplate.
Although many issues are yet to be addressed, the outlook is promising and may create opportunities for fintechs to provide services to consumers on a par with traditional big players. This also means that traditional banking products such as checks, cash and debit cards may suffer with the emergence of cheaper and faster products.
Why is this important?
The instant payment ecosystem is likely to increase market competitiveness and efficiency; bring costs down; and enhance customer experience. It also represents an opportunity for the development of a whole range of new products in the Brazilian financial and banking markets.
On November 28, 2019, the Brazilian Central Bank published a public consultation regarding the Controlled Testing Environment for Financial Innovations (Sandbox), which is intended to enable institutions to test innovative financial and payment projects during a specified period.
The draft resolution released by the Brazilian 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, criteria for the classification of institutions, and the schedule for registration, selection and authorization processes of such entities.
As per this new rule, the Brazilian Central Bank will determine the duration of each regulatory sandbox cycle, being limited to one year and extendable only once, for the same period. It will also be on the Brazilian Central Bank to define the deadline for each participant to start operating its product and/or service after considering the characteristics of the authorized project.
The strategic priorities for projects in 2020 are: (i) offering solutions for the foreign exchange market; (ii) stimulating the capital market by creating synergies with the credit market; (iii) fostering credit for microentrepreneurs and small businesses; (iv) devising solutions for the open banking system; and (v) increasing competition in the National Financial System and in the Brazilian Payments System.
In addition to the Brazilian Central Bank's initiative, other regulatory entities, such as the Superintendence of Private Insurances (SUSEP) and the Securities and Exchange Commission (CVM) have also been working on their own regulatory sandbox drafts. The main objective is for these entities to establish a communication channel between them to jointly address topics within their supervision areas.
Why is this important?
The Regulatory Sandbox is one of the many initiatives the Brazilian Central Bank has taken to foster technology developments and modernization. The implementation is expected to translate into innovative financial products that could be otherwise harmed or even made unfeasible by the current regulatory framework. The sandbox meets the Brazilian Central Bank's initiative to increase competition in the financial market.
FOREIGN EXCHANGE MARKET
On October 7, 2019, the Brazilian Central Bank presented a bill to reformulate the Brazilian foreign exchange market (New Foreign Exchange Bill). The bill also deals with Brazilian capital abroad and foreign capital in the country. The initiative aims to modernize, simplify and reduce legal uncertainties associated with the current scenario of Brazilian foreign exchange legislation.
Among other aspects, the New Foreign Exchange Bill: (i) confirms at legal level that foreign exchange transactions may be carried out freely (through entities authorized to operate in this market and subject to applicable rules); (ii) grants both the National Monetary Council and the Brazilian Central Bank broad powers to regulate the foreign exchange market and its operations; (iii) expands the international activity of Brazilian banking institutions; (iv) authorizes Brazilian banking institutions to invest and lend abroad funds raised in Brazil or abroad; (v) deregulates small foreign currency transactions (up to USD 1,000) carried out between individuals on a sporadic and non-professional basis; (vi) expands the use of foreign currency-denominated bank accounts in Brazil; and (vii) authorizes the monetary authorities to establish situations in which the prohibition against private offsetting of credits between residents and nonresidents, as well as the payment in foreign currency in Brazil, would not apply.
The New Foreign Exchange Bill cancels 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 to have sufficient 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.
Why is this important?
The New Foreign Exchange Bill reduces legal uncertainty associated with foreign exchange transactions. It establishes rules that are more in line with international practices and is expected to boost the Brazilian foreign exchange market.
FOREIGN INVESTMENT IN THE BRAZILIAN FINANCIAL SYSTEM
On January 22nd, 2020, the Brazilian Central Bank issued Circular No. 3,977, which recognizes as of interest to the Brazilian government the participation of natural or legal entities resident or domiciled abroad in the corporate capital of financial institutions headquartered in Brazil. This circular takes into account the understanding established by Presidential Decree No. 10,029, of September 26, 2019 and takes effect on the date of its publication.
Why is this important?
Until the publication of both Circular No.3,997 and Presidential Decree No. 10,029, in order for natural or legal entities resident or domiciled abroad to invest in Brazilian financial institutions, it was necessary to have an specific Presidential Decree authorizing it for each investment. With this change, Brazilian financial system should become more attractive and accessible for foreign investors.
DECLARATION OF THE RIGHTS OF ECONOMIC FREEDOM
On September 20, 2019, President Bolsonaro sanctioned Law No. 13,874 (Economic Freedom Law), as result of conversion of Provisional Measure No. 881 of April 30, 2019 (MP on Economic Freedom). The purpose of the new law is to reduce bureaucracy in economic activities and to facilitate the incorporation and operation of companies.
More than a change of law, the Economic Freedom Law aims at promoting a cultural change in interactions between government authorities and private agents. It 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 of economic freedom rights includes free enterprise, free pricing, free competition and legal certainty regarding the administration's conduct, freedom to contract and good faith, the use of technology innovations despite the obsolescence of existing rules, less bureaucracy with recognition of digital documents, tacit approval of clearance requests in the event of silence of the competent authority, among others.
The changes in the Civil Code expand the parties' freedom to establish contractual obligations and to allocate risks. According the 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 the Rights of Economic Freedom," and, in private contractual relations, the principle of minimum state intervention will prevail (contractual revision by third parties being an exception to the rule).
The economic freedom, however, will not be exercised without limits. Economic activities will remain subject to limitations based on environmental protection standards and on laws governing labor relations, anti-fraud, competition, consumer rights, national security, public or health safety or public health matters, among other issues protected by law.
Why is this important?
The Economic Freedom Law seeks to give form and effectiveness to the principles of freedom in the exercise of economic activities, presumption of good faith, and minimal, exceptional, subsidiary intervention by the State in economic activities. With these changes, the Brazilian market should become more attractive for both foreign and local businesspersons.