After extensive discussion with market participants by means of the Public Consultation No. 55/2017, published by the Central Bank of Brazil (Bacen) on August 30, 2017, the Brazilian National Monetary Council (CMN) issued Resolution No. 4,656 on April 26, which created two new types of financial institutions specialized in loan transactions using electronic platforms: direct lending companies (SCD) and peer-to-peer lending companies (SEP).
Such rule also regulated the granting of loans and financing transactions among individuals using electronic platforms, and set forth the requirements and procedures that must be complied with for purposes of obtaining authorization, license to operate, proceed with corporate reorganization, transfer of control, and, finally, rendering of the license to operate of such new financial institutions.
This regulation is part of the “Cheapest Credit” milestone of the BC+ Agenda and, according to Bacen itself[1], it provides greater legal certainty to the transactions performed by companies that intensively use technology for the supply of financial products and provision of services in the credit market (i.e., credit fintechs). The idea is to provide conditions to reduce the cost of credit, promote the incorporation of innovation in the National Financial System, and stimulate the participation of new lending institutions. Prior to the issuance of this new resolution, fintechs were allowed to perform their activities only by means of a partnership with a fronting authorized financial institution,.
Direct Lending Company (SCD)
The main purpose of SCDs is to enter into lending and financing transactions, as well as acquisition of credit rights exclusively by means of electronic platforms, using their own equity as financial resource. Unlike banks, SCDs are not allowed to raise funds from the public (by means of deposits, for instance). However, they may be publicly-held companies, thus raising funds through public offering of shares in the capital markets.
SCDs may also provide the following services: (i) credit analysis for third parties; (ii) debt collection for third parties; (iii) acting as an agent in the distribution of insurance products related to the loan/financing transactions by means of electronic platforms, in accordance with the applicable regulations currently in force; and (iv) issuance of electronic currency, in accordance with the applicable regulations currently in force. By allowing them to act as electronic money issuer, this new regulation seems to enable funds borrowed to be deposited into payment accounts managed by the SCDs themselves.
In addition, SCDs may carry out sale/assignment of credits resulting from their transactions solely to: (i) financial institutions; (ii) Credit Rights Investment Funds (FIDCs) whose quotas are intended exclusively for qualified investors; and (iii) securitization companies that distribute securitized assets exclusively to qualified investors.
Peer-to-Peer Lending Company (SEP)
On the other hand, SEPs have as main purpose enabling individuals to enter into lending and financing transactions among themselves, exclusively by means of electronic platforms. Granting of loans with their own funds, as well as any type of risk retention, either directly or indirectly, both by the SEP or by related companies (including by means of co-obligation or provision of guarantees) are not allowed. However, as requested by the market during a public hearing, the resolution provides that SEPs and their subsidiaries or affiliates may acquire subordinated quotas of FIDCs that exclusively invest in credit rights arising from transactions carried out by the SEP itself, provided that such acquisition represents a maximum of 5% of the assets of the fund, and does not constitute the assumption or retention of substantial risks or benefits, according to the applicable regulations currently in force.
This rule defines peer-to-peer lending and financing transactions as financial intermediation transactions, in which funds collected from lenders are destined to debtors after negotiation on an electronic platform. According to the resolution, creditors of such transactions may be: (i) individuals; (ii) financial institutions; (iii) FIDCs whose quotas are intended exclusively for qualified investors; (iv) securitization companies that distribute the securitized assets exclusively to qualified investors; and (v) non-financial entities (other than securitization companies that do not fall within the scope of item “iv” above). In turn, debtors may be individuals or legal entities, as long as they are resident and domiciled in Brazil.
In addition to peer-to-peer lending and financing transactions, SEPs may also provide the following services: (i) credit analysis for clients and third parties; (ii) collection of debts on behalf of clients and third parties; (iii) acting as insurance agents for the distribution of insurance related to their lending and financing transactions, according to the applicable regulations currently in force; and (iv) issuance of electronic money, according to the applicable regulations currently in force.
Peer-to-peer lending transactions must be processed according to the following steps: (i) unequivocal consent by potential creditors and debtors, by means of electronic platforms, to enter into the lending and/or financing transaction; (ii) availability of funds by creditors to the SEP; (iii) issuance or execution, together with debtors, of the instrument evidencing the debt; (iv) issuance or execution together with creditors of an instrument linked to the the instrument representing the debt; and (v) transfer of funds by the SEP to the debtors (within five business days from receipt of funds by the SEP). The instruments mentioned in items “iii” and "iv" above must be issued by or on behalf of the SEP, or must be entered into by the SEP as a party to such instrument.
This is the legal framework that is intended for companies that, by means of electronic platforms, enable the granting of loans currently known as peer-to-peer; except that, pursuant to Resolution No. 4,656, SEPs must intermediate the credit transaction (i.e., it is not a direct relationship between creditor and debtor). In addition, the transaction will have characteristics of a linked asset transaction, in which there is a link between the funds raised from the creditors, and the corresponding transaction (entered into with the debtor), with the respective subordination of the liabilities of the funds delivered by the creditors to the payment flows by the debtors of the credit transaction.
Resolution No. 4,656 also provides that SEPs must segregate their funds from the funds of creditors and debtors of the lending and financing transactions. ,Besides that, this resolution also sets forth that the creditor of the lending and/or financing transaction may not enter into agreements with a single debtor, in the same company, with respect to transactions in which nominal value exceeds the maximum limit of R$ 15,000 (maximum exposure of a creditor to one debtor). This limit does not apply to qualified investors, according to the definitions set forth in the regulations issued by the CVM.
Resolution No. 4,656 also created obligations for SEPs to provide information to their clients and users with respect to the nature and complexity of the contractual transactions and services offered, which must be done in a clear and objective language, in order to allow 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 in the institution's website, accessible at their homepage, as well as in other channels, by means of which individuals may have access to their electronic platform, and must also be included in the contracts, marketing and promotional materials, and other documents intended for clients and users. In addition, information must include an emphasized warning disclosing that peer-to-peer lending and financing transactions represent risky investments, without any guarantee from the Credit Guarantee Fund (FGC).
The resolution also sets forth that SEPs must use a credit analysis model capable of providing potential creditors with benchmarks that impartially reflect the risk of potential borrowers and lending and financing transactions, as well as monitor their respective transactions, and provide information to the creditors and debtors with respect to such transactions.
From an economic standpoint, the rule also allows for the collection of fees by SEPs in return for the implementation of the loan and financing transactions, and for the provision of related services (as mentioned above), provided that it is set forth in the agreement entered into between the SEP and its clients and users.
Other rules applicable to both types of institutions
Both SCDs and SEPs must be incorporated as corporations, and have paid-up stock capital and shareholders' equity in the amount of R$ 1,000,000. In addition, these institutions may be controlled by investment funds, provided that the respective controlling group is also comprised by individuals or groups of individuals.
Finally, as mentioned by the regulating authority itself[2], SCDs and SEPs must comply with proportional operational and prudential requirements consistent with their size and profile. According to Bacen, if SCDs and SEPs have a plain risk profile, they may choose to be qualified in the S5 segment, for purposes of the proportional application of prudential rules, which had their criteria adapted by Resolution No. 4,657 in order to allow such companies to expose themselves to securitization instruments (provided that they have a low risk nature), and to carry out activities related to the custody and bookkeeping of securities issued by the institution itself.
Resolution No. 4,656 is immediately applied. Companies that are interested may already start the license to operate process (which is necessary in order for such institution to operate without intermediation of banks). While such proceeding is not finalized, fintechs may continue to act as banking correspondents, just as they are currently operating.
