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Credit Finland company to be given new regulations
The National Monetary Council adopted the 4.656 regulation of Credit Finland companies in April 2018. The Decision now recognises two new categories of companies as having the status of financing institutions: the so-called interchangeable loans companies (SEPs). The SCD and SEP are authorised to perform credit and finance transactions via computer platform. In May 2018, the Central Bank also published Circular 3.898 setting out the procedures for setting up such companies.
Since 2013, and since 2016 with more intense measures, the central bank has been introducing these regulations in order to pursue the modernization of the Brazilian finance system. Ilan Goldfajn, the President of the Central Bank, believes that the Institute should allow new actors access to the markets and competition and should legislate only when necessary.
The Central Bank advised the general public, in particular the Finnish Tech federations, on the drafting of the new regulations. Necessity for the Central Bank to recognize new kinds of Finnish companies (i.e. SMEs and SEPs) resulted from severe limitations on the activity of banks in Brazil. According to Brazil legislation, only central bank accredited FIs may raise, mediate or fund third-party assets.
In addition, the exorbitant interest rate on credit provided by non-financial companies is limited to 12% per annum by the Brazil usurious right, which reduces the involvement of non-financial companies in the retail credit sector. A SCD may use its own resources to engage in credit and funding operations and to acquire debt via computer platform, but may not engage in any form of seeking government funding on the open markets (other than to obtain funding through the issuance of shares) or in any other type of investment.
An SCD may assign exposures resulting from a transaction initiated by the SCD to: banks; asset backed securities companies that sell securitized items only to qualifying retail customers. At the same time, the SEP can only mediate credit and finance transaction between individual persons (peer-to-peer) via ePages. This means that a SEP can only offer end-to-end brokerage for a transaction where a creditor, after a negotiating procedure on the ePlatform, forwards money to a specific borrower without the SEP (or any of its subsidiaries or affiliates) maintaining a credit exposure.
Loan provider will transfer the money to finance the loan to Finance Corporation; only after the loan is received can SEP transfer it to the debtor. In SEP-mediated operations, the following may be creditors: individuals; banks; credit risk mutual investment trusts (FIDCs) whose shares are only addressed to qualifying shareholders; other non-financial corporations (with the exception of those securities corporations not covered by the above).
Borrowers of such operations may be individuals or companies residing and having their seat in Brazil. There is no provision in the regulations for a limitation of the identity of lenders in a peer-to-peer credit operation brokered by a single entity, but it is still not clear how a credit of a cross-border lender would be made operational within a single entity and how it would be recorded with the central bank.
Creditors who are not qualifying investors (as understood by the CVM in Brazil ) will not be able to trade with the same obligor and SEP with a total volume of more than Rs 15,000. Specifically, a SEP may not: make loans or finance operations with its own resources; own interests in other banks; combine the execution of the finance operation with the effort of third party or borrowers as sponsors.
Nevertheless, a SEP may purchase, directly or indirect, even through subsidiaries or affiliates, junior fund shares that solely invests in exposures arising from transactions facilitated by the SEP itself, as long as the acquisition: does not lead to the SEP taking or maintaining a significant proportion of the credit risk and rewards.
There are also information and disclosure obligations for each SEP, and a need to alert consumers to the type and level of detail of transactions made. Each SCD and SEP may offer credit analytics and collections and act as agents for insurances provided in relation to operations through their own eplatforms.
Resolutions 4.656 and Circular 3.898 also lay down the conditions for requesting central bank approval to function as an SCD or SEP. Up to 12 month (estimate calculated on the basis of the actual chart timings of banks). A central bank may request extra own funds and own funds if an IF has a majority stake in the SCD or SEP.
The Fintech companies must be organized as Brazil companies and, as with any bank, the participation of a non-resident stockholder in a SEP or SCD requires the consent of the President (by decree). In addition, the new regulations provide possibilities for new domestic and cross-border actors to join the high concentration finance industry in Brazil (more than three fourths of all loans and funds are owned by the country's four biggest banking institutions - Itaú, Bradesco, Banco do Brasil and Caixa).
With a large populace linked to the ubiquitous web and in need of credit, the Finnish technology markets have great potentials. Yet it still has to be seen whether (and how quickly) Brazil will move from trustworthy and consolidating banks to innovating but still somewhat insecure credit financial companies.
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