On August 30, the Central Bank of Brazil (Bacen) published Public Consultation Notice No. 55/2017 to receive comments on a proposed resolution on the establishment and operation of two new types of financial institutions specialized in loan transactions through the medium of an electronic platform: direct lending companies (SCD) and interpersonal lending companies (SEP). The new regulation is expected to be issued by early 2018.
The rule is part of the BC+ Agenda, the “Cheaper Credit" pillar, and aims to increase legal certainty in the industry, increase competition among financial institutions, and broaden opportunities for access to the credit market. In addition, it is aimed at financial startups that intensively employ technology in the credit market, known as credit fintechs. We will cover in this article the main characteristics and the most relevant activities that can be conducted by these two new types of financial institutions.
First of all, SCDs will have the purpose of lending exclusively through an electronic platform and with their own equity. Unlike banks, SCDs will not be able to raise funds from the public. However, they may be public companies and, thus, raise funds through the offering of shares in the capital markets.
SCDs may also provide the following services:
- credit analysis for third parties;
- acting as an agent of insurance brokers in the distribution of insurance related to loan transactions through electronic platforms, under the terms of the regulations in force (for this specific activity, it seems to us that the SCDs would act as insurance representatives rather than as agents, since, according to the Federal Insurance Commissioner (SUSEP) regulations, only individuals can act as brokers' agents); and
- issuance of electronic money, in accordance with the regulations in force. By allowing them to act as electronic money issuing payment institutions, the new rule seems to enable funds borrowed to be disbursed into payment accounts managed by the SCDs themselves.
SEPs, in turn, will have the purpose of conducting interpersonal loans between people through an electronic platform, while being forbidden from conducting transactions with their own resources or any type of retention of risks.
The notice defines interpersonal loans through electronic platforms as intermediation operations in which financial resources collected from creditors (individuals or legal entities, as well as investment funds) are directed to debtors (individuals or legal entities, resident or domiciled in Brazil) after negotiation on an electronic platform. It should be noted, therefore, that this is the legal framework that is intended to be given to companies that, through an electronic platform, enable the conducting of loans currently known as peer-to-peer, except that, in the manner set forth in the notice, the SEPs will grant or endorse the lending instrument (that is to say, it is not directly between creditor and borrower).
In addition to interpersonal lending transactions, SEPs may also provide the following services: (i) credit analysis for clients and third parties; (ii) collection relating to interpersonal lending transactions; (iii) acting as an agent of insurance brokers in the distribution of insurance related to their loan transactions, in accordance with the regulations in force; and (iv) issuance of electronic money, in accordance with the regulations in force.
Interpersonal lending transactions shall be processed in the following successive steps: (i) unequivocal manifestation of consent by potential creditors and debtors, in an electronic platform, to enter into the loan transaction; (ii) availability of funds by creditors; (iii) issuance or conclusion of the instrument evidencing the loan (which may be issued by SEPs or in in their name, or entered into with the SEP as a party); (iv) assignment or endorsement to the creditor of the instrument evidencing the loan (assignment or endorsement by SEPs without co-obligation or any type of guarantee and immediately after the issuance or conclusion of the instrument representing the loan) or the instrument evidencing it; and (v) transfer of the funds to the debtors by the SEP within one business day of their availability.
The notice also provides that SEPs should segregate their funds from the funds of creditors and debtors. In addition, SEPs must establish limits on amounts and quantities (for creditors and debtors) relating to interpersonal lending transactions.
In this sense, prior to finalization of the loan, SEPs shall ensure that the total exposure of a single creditor, considering the sum of the debt balances of the transactions carried out through SEPs, is a maximum of R$ 50,000 (creditors who are qualified investors, as defined in the regulations of the Brazilian Securities and Exchange Commission, will not be subject to this ceiling). This limit must be verified by SEPs through a formal declaration by the creditor and consultation of the Credit Information System of the Central Bank (SCR).
According to the notice, SEPs are obliged to provide information to their clients and users about the nature and complexity of the contractual transactions and services offered, in clear and objective language, in order to allow for full understanding of the flow of financial resources and risks incurred. This information must be disclosed and kept up to date in a visible place and legible format on the institution's website, accessible on the homepage, as well as in other channels of access to the electronic platform. It should also be included contracts, advertising, and publicity materials and other documents intended for customers and users. In addition, the information should include a warning, with emphasis, that interpersonal lending transactions constitute risky investments, without any guarantee from the Credit Guarantee Fund (FGC).
Both SCDs and the SEPs will not be able to raise funds from the public and must be formed as a corporation, publicly-held or privately-held, and must also permanently observe the minimum limit of R$ 1,000,000 for paid-in capital and liquid assets. In addition, the two types of institutions may be controlled by Brazilian or foreign investment funds.