On August 30 2017, the Brazilian Central Bank released Public Consultation 55/2017, which proposes the regulation of certain types of credit transactions carried out exclusively via electronic lending platforms. The proposed regulation fits in with the trend for the Brazilian authorities to stimulate financial inclusion through the regulation of mobile payment tools, credit unions and equity crowdfunding. It also follows the regulatory template of other markets such as the UK – a regulatory sandbox safe house, where rules become more stringent as the entity grows.
Recent estimates indicate that electronic platform transactions worldwide will grow at an annual rate of 53% until 2020 and generate a volume of over $1 trillion by 2025, driven by markets such as China, the US and the UK.
Under prevailing Brazilian Central Bank rules, electronic lending platforms are not allowed to directly intermediate loans between borrowers and lenders – an activity restricted to financial institutions. This restriction has fostered some creative solutions to implement electronic lending platforms in Brazil, the most notable practice being to bring a financial institution into the process to be the original lender and fulfil all the regulatory banking requirements.
The proposed regulation, in particular, grants autonomy to electronic lending platforms authorised to operate by the Brazilian Central Bank to carry out loan transactions directly by introducing two new categories of financial institutions: (i) peer-to-peer lending (P2P) companies – whose core corporate object is to enable the performance of loan transactions among peers; and (ii) direct credit companies – whose core corporate object is to perform loan transactions where its own capital is the sole origin of the funds. Payment activities in connection with the loan transactions (such as collection and credit review) may also be carried out directly by electronic lending platforms.
Under the proposed regulation, P2P companies will be subject to governance standards and must refrain from performing transactions that generate financial exposure or imply the provision of any warranty. The regulation also provides maximum limits for P2P transactions and exposure of lenders, which may not exceed BRL 50,000 (about $15,000), taking into account all relevant credit transactions performed in the Brazilian financial system (those limits do not apply to qualified investors, that is, those that hold existing financial investments of at least BRL 1 million. Further, funds connected with P2P lending transactions must be held in separate accounts from those belonging to the P2P company.
As regards direct credit companies, they are prohibited from performing public fundraising – the regulation restricts those companies to their own capital – and they may be controlled by investment funds (domestic or foreign).
The proposed regulation also provides minimum capital requirements for both electronic lending platform models – BRL 1 million for both capital stock and shareholders' equity.
The bankarisation phenomenon is a reality in Brazil and the enactment of new regulations as a result of joint efforts between Brazilian authorities and the market is needed to take into account new technology and bigger demands.
|Mauricio Santos and|
Alexandre Trejos Vargas
Brigard & Urrutia