Informesback

On April 26, 2018 the Brazilian National Monetary Council regulated the formation and operation of credit Fintechs by means of Resolution 4,656 (“Resolution 4,656”).

The new rule, which was awaited by the market, will allow Fintechs to operate without the necessity of an bank (or the utilization of a banking correspondent), and creates two new types of financial institutions, which operate exclusively by means of an electronic platform (website or app): (i) the direct credit company (DCC), and (ii) the peer-to-peer loan company (PPLC). The rule intends to increase competition in the credit market and reduce spreads.

Below, a brief of the main points of the resolution.

I. Direct Credit Companies (DCC)

The authorized purposes of a DCCs are limited to granting loans, financings and acquisition of receivables. These institutions may also provide credit analysis and collection services for third parties, act as agent in the distribution of insurances related to the companies’ operations and issue digital currency.

DCCs must operate exclusively with owned capital, may not raise funds with the public (except that shares issuances area allowed), and are authorized to assign credit to financial institutions, receivables investment funds (FIDC) and/or securitization companies.

II. Peer-to-peer Loan Companies (PPLC)

The authorized purposes of PPLCs are limited to intermediating loans and financings between individuals and legal entities (P2P). The role of the PPLCs is to make feasible transactions in which resources raised by creditors (investors) are directed to debtors. PPLCs may also provide clients and third parties with credit analysis and collection services, act as agent in the distribution of insurances related to the companies’ operations and issue digital currency.

Although a PPLC acts as an intermediary, raising funds from creditors (investors) and borrowing to debtors, the PPLC itself, or its related parties, must not take credit risk in the transaction; payment of the creditor must be conditioned upon effective payment of the loan by the relevant debtor.

Transactions between a certain creditor (investor) and debtor, performed by the same PPLC, are limited to R$ 15,000.00 (fifteen thousand reais), unless the creditor falls within the definition of qualified investor pursuant to the regulation of the Brazilian Securities and Exchange Commission – CVM.

PPLCs are prohibited from grating loans using their own capital. PPLC’s compensation shall come from fees charged, which should allow the convergence of the institutions’ and clients’ interests. There is no express prohibition to the charging of fees based on the transaction success, understood as the payment of the credit above a determined percentage, as currently practiced by certain players in this market.

III. Formation and Organization of DCC and PPLC

DCCs and PPLCs must be organized as corporations (sociedades anônimas) and comply permanently with a minimum net worth and paid-up capital of R$ 1,000,000.00 (one million reais). Their operation, as well a transfer of control and corporate restructurings, must be previously authorized by Central Bank, and appointment of directors must follow the applicable rules issued by the Central Bank. In addition, changes in qualified stock ownership must be informed to Central Bank.

For purpose of the authorization process, interested companies must provide several documents, including:

I. indication of the type of institution sought, corporate capital, services to be rendered, target public, address of headquarters and branches, market opportunities which justify the business, differentials, interest in opening a liquidation account from the beginning of operations and systems and technological recourses to be used;

II. documentation which identifies the economic group, controlling group and the holders of a qualified stock ownership (15% or above);

III. proof of origin of the funds;

IV. proof of the compatibility of the economic and financial capacity with the size, nature and goals sought.

The Central Bank may also request any additional documents or information, and call upon the controllers and directors for interviews.

Investment Funds

Investment funds can participate in the controlling group, however, in this case, the Central Bank may require net worth and paid-up capital values superior to those informed above, and in the authorization process the Central Bank must be informed about the type of fund, form of negotiation of its quotas, number of quotaholders, list of the six main quotaholders, in addition to other items identified in the resolution.

Furthermore, the administrator and the investment manager of the investment fund (or its directors, in the case it is a legal entity) which participate in the controlling group or hold a qualified stock ownership of the DCC or PPLC may not act as an officer of board member of the DCC or PPLC.

Foreign Capital

Holding of a indirect or indirect interest in a DCC or PPLC by non resident individuals or legal entities domiciled abroad is subject to a previous authorization of the Federal Executive Branch, to be granted by means of a Decree signed by the President of Brazil.

IV. Usury Law

One of the matters which arose during the discussions of the resolution was if the Usury Law, which limits interest rates above 12% per annum, would be applicable to the transactions performed by DCC and PPLC.

Considering that the Usury Law is not applicable to transactions performed by financial institutions, DCCs are not subject to the limit of 12% per annum above mentioned.

Specifically in the case of PPLCs, taking into account that the loan is peer-to-peer, it may be questioned if the Usury Law is applicable thereto. However, as mentioned above, although the loan is granted from and to a non-financial entity, formally it is the PPLC, which is a financial institution, who intermediates the transaction and, therefore, grants the credit to the debtor. For this reason, we understand that the 12% per annum limit is not applicable to PPLCs.