New powers for Brazil’s Central Bank
July 2013 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
A new law has just been passed in Brazil granting the Central Bank new powers to regulate e-money, mobile payments, prepaid card and gift cards (among other technologies). The new law aims to target a large portion of the population who do not have a bank account but who have access to the internet or a cell phone. It will treat these entities similar to financial institutions and consequently subject to Central Bank rules and possibly full liability for the controlling shareholders of such entities in the event of intervention, liquidation or bankruptcy.
In recent years, the need to regulate credit card companies, acquirers and any entity responsible for providing payment services to the public in general has been widely discussed in Brazil.
These discussions raised the issue of whether it was necessary to include all participants of payment service schemes, such as card associations, issuing bank and acquirers, regardless of whether they were a financial institution or not, under the supervision of the Central Bank of Brasil (BACEN).
Ultimately, by means of the Provisional Measure No. 615 dated 17 May 2013 (‘MP 615’), the Brazilian government presented the first set of rules that are part of the government’s intention to regulate payment services to the public, such as credit cards, prepaid cards and gift cards, available physically as well as through mobile systems and other technologies.
In Brazil, approximately 55 million people (representing approximately 4 out of 10 adults) do not have a bank account and do not use the banking system for carrying out transfers or payments. This portion of the population is referred to as ‘non bank users’ and does not have direct access to the banking system. Conversely, a large majority of the adult population has at least one mobile phone. With that in mind, the Brazilian government is trying to regulate this market by accessing the non bank population through the technology they use on a daily basis.
MP 615 does not provide details on how payment service schemes will actually be regulated in Brazil. This task will be carried out by the Brazilian Monetary Council (the financial system senior regulatory entity) and BACEN, through legal and administrative measures.
MP 615 establishes, however, that BACEN will extend its regulatory and supervision power to include entities responsible for payment services schemes, regardless of whether they are regarded as financial institutions or not, such as card associations, financial or non financial issuing entities, acquirers, and financial or non financial entities responsible for payment services schemes. Non financial entities responsible for payment services schemes, nonetheless, will not be allowed to perform activities regarded as private and restricted to financial institutions, such as granting loans or taking deposits, restricting them to payment services scheme activities.
MP 615 indicated that BACEN will adopt the same rationale utilised for supervising financial institutions. This means that payment services entities will need BACEN’s prior authorisation in order to be created, operate, transfer their ownership control, appoint statutory officers, change their corporate purpose, or undertake any kind of corporate reorganisation.
BACEN will be also responsible for establishing minimum operational limits, risk control management policies and corporate governance rules to payment service entities activities, and will be allowed to rule on specific issues such as fees charged, restriction and suspension of product sales and delivery of services, cancellation of operational licences, and outsourcing payment service schemes to third parties.
Notwithstanding the indication that BACEN will apply to payment services entities the same rationale adopted for supervising financial institutions, we expect that some type of differentiation, compared to the existing financial activities supervision requirements, will be adopted for payment services entities, since they are not considered financial institutions and are not allowed to carry out the private and restricted activities of financial institutions.
MP 615 also establishes that payment service entities will be subject to the same laws that currently provide for the intervention, temporary regulatory receivership and liquidation of financial institutions. This is a relevant point since under Brazilian law, once one of these special regimes is imposed by BACEN, the person or legal entity with a controlling stake, including joint control, of the financial institution will be held fully liable for the financial institution’s uncovered liabilities, along with the financial institution’s managers, whether or not wilful conduct or negligence is evidenced. We will need to wait for BACEN to regulate this specific issue in order to assess the full liability of those who control payment services entities.
Another relevant point raised by MP 615 is that once payment services are provided, the funds maintained in the client’s registry account are regarded as separate assets from the payment services entity’s own assets. This implies that clients’ registry account funds will not be subject to any type of collection, enforcement or bankruptcy proceeding against a payment services entity’s liabilities. They will be considered an out of bankruptcy asset. In addition, these funds may not be used as security for payment services entities’ debts. One issue that the market may raise to BACEN is if payment services entities will be allowed to invest client funds in Brazilian risk free government short term debts.
BACEN will be also allowed to impose sanctions, already laid out in financial institutions regulations, for violations of the new regulations. Since MP 615 only provides general principles on the forthcoming payment services activities regulation, we must wait for BACEN to define how these sanctions will be imposed, taking into account that these sanctions were originally devised for financial institutions violations.
According to MP 615, BACEN will provide, within 180 days from the date of publication of MP 615, the minimum requirements for payment services activities and will also grant an additional period for payment services entities already in operation to adapt themselves to the new set of rules.
The overall perception is that regulation of payment services activities in Brazil was inevitable. Nonetheless, it remains to be seen how the Brazilian Monetary Council and BACEN will define the breadth of their regulatory power and how they will actually carry out supervision. We hope BACEN is able to provide suitable rules and requirements to payment services activities, to avoid burdening or abating this important and thriving area of Brazil’s payment system.
Bruno Balduccini is a partner and Marcus Firmato is an associate at Pinheiro Neto. Mr Balduccini can be contacted on +55 11 3247 8681 or by email: firstname.lastname@example.org. Mr Firmato can be contacted on +55 11 3247 8432 or by email: email@example.com.
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Bruno Balduccini and Marcus Firmato