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The Banking Regulation Review Law Business Research Seventh Edition Editor Jan Putnis
The Banking Regulation ReviewThe Banking Regulation
Review
Law Business Research
Seventh Edition
Editor
Jan Putnis
The Banking Regulation Review
The Banking Regulation ReviewReproduced with permission from Law Business Research Ltd.
This article was first published in The Banking Regulation Review, 7th edition(published in May 2016 – editor Jan Putnis).
For further information please [email protected]
The Banking Regulation
Review
Seventh Edition
EditorJan Putnis
Law Business Research Ltd
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Acknowledgements
ii
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Editor’s Preface ..................................................................................................viiJan Putnis
Chapter 1 INTERNATIONAL INITIATIVES ......................................... 1Jan Putnis and Kristina Locmele
Chapter 2 ARGENTINA .......................................................................... 27Santiago Carregal and Diego A Chighizola
Chapter 3 AUSTRALIA ............................................................................ 40Hanh Chau, Adam D’Andreti, Peter Feros, Paula Gilardoni, Deborah Johns, Louise McCoach, Duncan McGrath and Peter Reeves
Chapter 4 BARBADOS ............................................................................ 60Sir Trevor Carmichael QC
Chapter 5 BELGIUM ............................................................................... 69Anne Fontaine and Pierre De Pauw
Chapter 6 BRAZIL ................................................................................... 83Tiago A D Themudo Lessa, Rafael José Lopes Gaspar and Gustavo Ferrari Chauffaille
Chapter 7 CAMBODIA ........................................................................... 94Bun Youdy
Chapter 8 CANADA .............................................................................. 111Scott Hyman, Carol Pennycook, Derek Vesey and Nicholas Williams
Chapter 9 COLOMBIA.......................................................................... 127Luis Humberto Ustáriz González
CONTENTS
iv
Contents
Chapter 10 DENMARK ........................................................................... 142Morten Nybom Bethe
Chapter 11 EUROPEAN UNION ........................................................... 152Jan Putnis, Timothy Fosh and Helen McGrath
Chapter 12 FINLAND ............................................................................. 177Janne Lauha and Hannu Huotilainen
Chapter 13 FRANCE ............................................................................... 188Olivier Saba, Samuel Pariente, Mathieu Françon, Jessica Chartier and Béna Mara
Chapter 14 GERMANY ........................................................................... 209Thomas Paul, Sven H Schneider and Jan L Steffen
Chapter 15 HONG KONG ..................................................................... 222Peter Lake
Chapter 16 HUNGARY ........................................................................... 239Péter Köves and Szabolcs Mestyán
Chapter 17 INDIA ................................................................................... 247Cyril Shroff and Ipsita Dutta
Chapter 18 INDONESIA ......................................................................... 263Yanny M Suryaretina
Chapter 19 IRELAND.............................................................................. 286William Johnston, Robert Cain and Sarah Lee
Chapter 20 ITALY .................................................................................... 301Giuseppe Rumi and Andrea Savigliano
Chapter 21 JAPAN ................................................................................... 316Hirohito Akagami and Wataru Ishii
v
Contents
Chapter 22 LATVIA ................................................................................. 326Armands Skudra
Chapter 23 LUXEMBOURG ................................................................... 336Josée Weydert, Jad Nader and Milos Vulevic
Chapter 24 MALAYSIA ............................................................................ 355Rodney Gerard D’Cruz
Chapter 25 MEXICO ............................................................................... 374Federico De Noriega Olea and Juan Carlos Galicia Orozco
Chapter 26 NETHERLANDS ................................................................. 385Mariken van Loopik and Maurits ter Haar
Chapter 27 NEW ZEALAND .................................................................. 400Guy Lethbridge and Debbie Booth
Chapter 28 NORWAY .............................................................................. 414Terje Sommer, Richard Sjøqvist, Markus Nilssen and Steffen Rogstad
Chapter 29 PANAMA ............................................................................... 426Mario Adolfo Rognoni
Chapter 30 PHILIPPINES ....................................................................... 437Rafael A Morales
Chapter 31 POLAND .............................................................................. 452Tomasz Gizbert-Studnicki, Tomasz Spyra and Michał Torończak
Chapter 32 PORTUGAL .......................................................................... 471Pedro Ferreira Malaquias and Hélder Frias
Chapter 33 SINGAPORE ........................................................................ 484Francis Mok and Wong Sook Ping
Contents
vi
Chapter 34 SLOVENIA............................................................................ 495Simon Žgavec
Chapter 35 SOUTH AFRICA .................................................................. 514Ina Meiring
Chapter 36 SPAIN .................................................................................... 525Juan Carlos Machuca and Joaquín García-Cazorla
Chapter 37 SWEDEN .............................................................................. 545Fredrik Wilkens and Helena Håkansson
Chapter 38 SWITZERLAND .................................................................. 554Shelby R du Pasquier, Patrick Hünerwadel, Marcel Tranchet, Maria Chiriaeva and Valérie Menoud
Chapter 39 UNITED ARAB EMIRATES ................................................ 575Amjad Ali Khan and Stuart Walker
Chapter 40 UNITED KINGDOM .......................................................... 584Jan Putnis, Nick Bonsall and Edward Burrows
Chapter 41 UNITED STATES ................................................................ 607Luigi L De Ghenghi
Appendix 1 ABOUT THE AUTHORS ...................................................... 659
Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS ....... 683
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EDITOR’S PREFACE
Nearly eight years after the collapse of Lehman Brothers it might have been expected that fundamental questions about the business models, governance and territorial scope of large banks would have been answered clearly, but that is not yet truly the case. Debates rage on in many countries about ‘too big to fail’, management accountability in banks, resolution planning and conduct issues in the banking sector. What is the ‘safest’ form of international banking and what might shareholders in banks reasonably expect as a long-term rate of return on their investment? When is all this uncertainty going to end? Perhaps it never will for so long as large banks remain as important to the global economy as they are and the political classes throughout the world remain divided on whether this is a good thing. It is also worth remembering that the reform agenda that was born in the financial crisis of 2007–2009 established a very long implementation period – to 2019 and beyond – for many of the regulatory changes agreed upon by the G20 and the Basel Committee. So we are still in the midst of what will no doubt be seen in decades to come as the ‘post-crisis’ period in banking regulation.
Looking forward then, what can we see beyond the implementation of the post-crisis reforms? That depends, of course, in part on whether there is another cross-border banking crisis. It is worth noting in this context that localised banking failures remain commonplace, and with more countries around the world introducing specialised bank resolution regimes there will be further opportunities to test the uses and pitfalls of bail-in and other resolution powers.
The continuing debate about the impact of technology on banks has increased significantly in volume in much of the world in the past year. Forecasts of the eventual eclipse of banks by technology firms seem wide of the mark in the short to medium term, although there is clearly an ‘adapt or die’ threat to many banks in the longer term. One adaptation of sorts that we may well see more of in the next few years is banks acquiring technology firms (or otherwise entering into strategic partnerships with them).
The most obvious benefits of new technology in the banking sector concern the customer interface and market infrastructure. However, some important but less immediately obvious ways in which technology will continue to revolutionise banking arise in the context of the safety and soundness of banks. For example, some banks are looking at how innovative
Editor’s Preface
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uses of technology can improve their risk management, and ultimately the credibility of their recovery and resolution plans through, for example, more precise classification and management of derivative positions and counterparty relationships.
Many of the largest cross-border regulatory investigations into past conduct in the banking sector have drawn to a close over the past year. While for some that signalled the close of a painful and costly chapter in the post-crisis development of the banking sector, it remains difficult to conclude that the threat of further such investigations has gone away.
As an English lawyer it would be odd if I did not mention the June 2016 referendum in the UK on membership of the European Union, parochial though that may seem to some readers outside Europe. The legal and regulatory regime that will apply to business that banks undertake in and from London is, however, of global interest, and the result of the referendum, and its aftermath, will therefore be of very considerable importance to all large banks and many smaller ones.
This seventh edition of The Banking Regulation Review contains chapters provided by authors in 39 countries and territories in March and April 2016, as well as chapters on International Initiatives and the European Union. My sincere thanks, as in previous years, go to the authors who have made time to contribute their chapters despite their heavy workload.
The team at Law Business Research have, once again, tolerated the hectic schedules and frequent absences on business of many of the authors, and I would like to thank them for doing so with such good humour and understanding. Thank you also to the partners and staff of Slaughter and May in London and Hong Kong for continuing to encourage projects such as this book, and in particular to Ben Kingsley, Peter Lake, Nick Bonsall, Edward Burrows, Tim Fosh, Kristina Locmele and Helen McGrath.
Jan PutnisSlaughter and MayLondonMay 2016
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Chapter 6
BRAZIL
Tiago A D Themudo Lessa, Rafael José Lopes Gaspar and Gustavo Ferrari Chauffaille1
I INTRODUCTION
Brazil has a very sophisticated and solid banking system. Being a very important component to foster economic growth, the Brazilian banking industry, and, consequently, Brazilian banking regulation, is in constant development, providing local market participants with the required tools to enable the structuring of complex and innovative products.
Banking regulation has played a crucial role in setting the limits and procedures that allow local players to operate in one of the most important markets in the international economy,2 ensuring a secure environment for investors and for the public in general. On this topic, it is worth mentioning that the local regulators do not limit their activities to the issuance of rules and guidelines for the banking industry – they also closely supervise market participants to verify whether regulatory requirements are being duly complied with.
An example of this practice is the extensive amount of information that must be provided by banks and other entities to the regulators, sometimes on an intra-daily basis. As a result of this constant verification, in the past few years the Brazilian banking industry has not seen any unpredictable failing of local banks, as prior to the severe deterioration of a local bank the Central Bank of Brazil (the Central Bank) has intervened. Banco Azteca do Brasil SA, in 2016, Banco BVA SA, in 2014, and Banco Cruzeiro do Sul SA, in 2012, are recent examples of intervention and subsequent extrajudicial liquidation of local banks, which, even though it did not completely eliminate, did help to reduce the impact of insolvency on stakeholders and mitigate systemic risk that could arise thereunder.
1 Tiago A D Themudo Lessa is a partner, and Rafael José Lopes Gaspar and Gustavo Ferrari Chauffaille are associates at Pinheiro Neto Advogados.
2 In 2014, Brazil had seventh-largest economy in the world by gross domestic product (GDP), according to data provided by the World Bank on its website (http://data.worldbank.org/data-catalog/GDP-ranking-table).
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The Brazilian banking system also provides mechanisms for liquidity problems faced by financial institutions. For instance, in the last quarter of 2015, Banco BTG Pactual SA (BTG Pactual), the eighth largest Brazilian bank by total assets,3 was assisted by the Credit Guarantor Fund (FGC), a private non-profit organisation authorised to be incorporated by the National Monetary Council (CMN) and composed by local banks which was originally intended to protect investors of insolvent financial institutions. At the time, FGC made a credit facility of 6 billion reais4 available to BTG Pactual, which, among other measures taken by the bank, helped the institution to overcome such liquidity crisis.
In addition to the precautionary and reactive measures adopted by local regulators to prevent insolvency scenarios, the applicable rules also enable Brazilian banks to issue several types of funding instruments in Brazil and abroad to finance their operations, maintaining acceptable liquidity levels. Such variety of instruments is a result of market demand and a positive response of regulators to the needs of market participants, which have recently resulted in new regulations permitting the issuance of new forms of funding instruments, as further addressed in the Section V, infra.
By doing business in such a regulated, but rather secure, financial environment, Brazilian banks have been able to succeed and, in many times, foster results in the midst of the economic crisis that Brazil has faced in the last year. We address below some relevant matters involving the regulation of banks doing business in Brazil.
II THE REGULATORY REGIME APPLICABLE TO BANKS
i General aspects
An important aspect to consider when discussing banking regulation in Brazil is that there is no legal definition of ‘bank’ under Brazilian law. Federal Law No. 4,595, of 31 December 1964 (the Banking Law), which sets forth the basis of the National Financial System (SFN),5 defines in Article 17 the term ‘financial institution’ as those public or private companies whose principal or secondary activity is the collection, intermediation or investment or custody of their own or third-party funds. It is therefore left to local regulators to determine the types of financial institutions and the activities that may be performed thereunder.
Banks are, thus, defined in terms of their permissible functions. The main categories of banks in Brazil are:a commercial banks – financial institutions whose main activities are receipt time
deposits, offering checking facilities, providing short-term lending, collection of trade acceptance bills and other credit documents, accepting and processing utility bill payments, among others.
3 Pursuant to 2014’s financial data made available by the Central Bank.4 Approximately US$1.7 billion, considering the official USD/BRL rate published by the
Central Bank of Brazil on 31 March 2016.5 Government-owned and private financial institutions form the SFN. Private financial
institutions include commercial banks; investment banks; universal banks; exchange banks; credit, financing and investment companies; securities dealerships; brokerage firms; credit unions; leasing companies; among others.
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b development banks – intended to foster the economic growth of specific regions or industrial sectors. Financing tends to be long-term and related to specific projects;
c multi-service banks – aggregate more than one type of banking activity, of which one must be either a commercial or investment. Thus, a multi-service bank may, for instance, apply for one or more of the following: (1) commercial bank licence (if the entity was originally established as an investment bank); (2) investment bank licence (if the entity was established as a commercial bank); (3) real estate finance licence; (4) consumer credit licence; (5) leasing licence; and (6) foreign exchange authorisation; and
d savings banks – federal and state-owned financial institutions very similar to commercial banks, which accept savings from individuals, by means of deposits in checking accounts for a fixed term or in savings accounts, provide loans and perform various services in the public interest, such as the receipt of federal taxes and charges.
All of such types of institutions are highly regulated entities. Different from individuals or corporations, which under Brazilian civil law are authorised to practise any act that is not expressly forbidden, regulated entities may only perform activities that have been expressly authorised by law or regulations. As such, the role of regulators has become very important in relation to this type of activity.
We describe below the main regulators and their roles in the Brazilian banking system.
ii Regulators
There are three entities primarily entrusted with the role of regulating and overseeing of financial institutions in Brazil, including banks: the CMN, the Central Bank and the Brazilian Securities Commission (CVM).6
The CMN was created by the Banking Law and is the highest authority in the Brazilian financial system. Among the CMN’s responsibilities are supervising the monetary and currency exchange policies for the purpose of economic and social development of Brazil, as well as operating the Brazilian financial system.
The Central Bank has, among its duties, the obligation to assure the purchasing power stability of the national currency and the solidity of the national financial system. The Banking Law granted powers to the Central Bank to implement monetary and credit policies issued by the CMN, as well as to regulate public and private financial institutions and payment arrangements, arrangers and institutions.
The Central Bank is also responsible, inter alia, for exercising control over credit and foreign capital, receiving mandatory payments and voluntary demand deposits made by financial institutions, engaging rediscount transactions and providing funding to financial institutions, as well as exercising its function as depository of national gold and foreign currency reserves. It is also Central Bank’s responsibility to control and approve the incorporation, functioning, transfer of control and corporate reorganisation of financial institutions and payment institutions.
6 If a bank opts to also have an investment banking department, it will be subject to CVM regulatory authority with respect to its investment banking activities.
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The third regulator, the CVM, was created by Law No. 6,385, of 7 December 1976 (the Capital Markets Law), which regulates the securities markets in Brazil. As securities activities are strictly connected with banking activities, especially investment banking, the CVM also has an important role as regulator of the banking industry.
Pursuant to the Capital Markets Law, the CVM shall implement policies pertaining to the organisation and operation of the securities industry. Accordingly, the CVM’s responsibilities encompass the regulation and the supervision of all securities activities, including issuance, distribution and trading of securities; organisation and functioning of stock exchanges; and practices in the management of securities portfolios and their custody.
III PRUDENTIAL REGULATION
i Relationship with the Central Bank
As indicated above, the Central Bank is the main regulator of banking activities, as it is responsible for supervising local banks’ and financial institutions’ banking activities. The supervision by the Central Bank relies on the following principles: supervision focused on risk, continuous supervision and transparency.
Inspection is an essential element of the supervision process to assess the economic and financial situation, management and compliance with laws and regulations applicable to the supervised entities. It aims to identify the relevant risks of the financial institutions and evaluate their respective controls.
As per the information made available by the Central Bank for the improvement of the processes of supervision of financial institutions and conglomerates, whose businesses encompass subsidiary entities in other countries, various procedures are adopted, such as:a elaboration of supervision agreements with foreign authorities;b monitoring of activities of international organisations in matters related to supervision; c exchange of information with foreign supervisory authorities;d coordination, support and follow-up of missions by foreign supervisors in the country;
ande dissemination of the Brazilian supervision to the international context.
In addition to the physical supervision mentioned above, financial institutions are subject to regular reporting requirements to the Central Bank. Several types of detailed reports and financial information are submitted by local institutions to the Central Bank, enabling the authority to keep a very close eye on the financial situation of the market players on a daily basis.
In addition to the reporting and inspection requirements, the applicable rules are very restrictive on the management of the banks. Prior to a final appointment as administrator of a financial institution, individuals must submit an exhaustive list of documents, information and declarations to the Central Bank, which may even prevent a person from being nominated if that person does not have a good reputation. We further address below some additional details relating to the management of Brazilian banks.
ii Management of banks
Pursuant to the organisation of a financial institution, it is important to highlight that with few exceptions, a financial institution – such as a bank – must be incorporated as a sociedade
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anônima, which is the corporate form that most closely resembles a joint-stock company or corporation. The legal requirements pertaining to joint-stock companies are governed by Law No. 6,404, dated of 15 December 1976 (the Corporations Law).
Joint-stock companies are managed by an executive committee and, if applicable, a board of directors. In addition, a board of auditors may be instated in a provisional or permanent manner to inspect the activities performed by the other management bodies. The executive committee and the board of auditors must be composed of individuals residing in Brazil and meeting the requirements prescribed by law. Members of the board of directors do not need to reside in Brazil.
Members of administrative bodies of financial institutions are subject to civil liability, similar to the potential liabilities administrators of any company are subject to, in addition to further criminal and administrative liabilities applicable to managers of financial institutions.
Civil liability and exceptional rulesIn the ordinary course of the transactions of financial institutions, the administrators’ (including directors and officers) civil liability is regulated by the Corporations Law. Article 158 of the Law provides that the administrator will not be deemed personally responsible for the obligations incurred on behalf of the company and on account of a regular act of his or her administration. However, the administrator will be responsible under civil law for losses caused by acts carried out (1) with guilt or malice, and (2) in violation of the law.
The administrator will not be responsible for unlawful acts practised by other administrators, except when, for connivance therewith, he or she fails to reveal them or when, upon being aware thereof, he or she refrains from acting for the purpose of barring the practice thereof. There is joint liability of the administrators when the decisions are taken by collegiate bodies, such as the decisions taken by the board of directors. In this regard, any act or omission committed by the board is the personal responsibility of each of the members who form it, and the dissident administrator should express his or her disagreement with the resolutions taken through a clear and express record in the minutes of the meeting of the relevant administrative body, in order to be exempt from any future responsibility.
The administrator who agrees with the practice of acts in violation of the law or the by-laws will be deemed jointly liable for the losses resulting therefrom, and also be compelled to provide indemnification for the losses caused.
The Corporations Law imposes the duty of diligence on the administrator of the institution during the performance of his or her duties, providing that the administrator shall be guided by the care and diligence that every active and honest person uses in the administration of his or her own business. The administrator is otherwise subject to the duty of loyalty to the company, and must maintain reserve and diligence when dealing with the company affairs.
On the other hand, there are also some exceptional rules. Pursuant to the terms of Article 40 of Law No. 6,024, of 13 March 1974 (the Bank Bankruptcy Law), the administrators of financial institutions under a special administration regime, intervention or extrajudicial liquidation, are jointly responsible for the obligations undertaken by the institution during their terms of office, until such obligations are actually satisfied (that is, liquidated). Pursuant to the terms of the sole paragraph of the mentioned provision, the administrators’ joint responsibility referred to therein shall be limited to the amount of the losses caused during their term of office.
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Administrative responsibilityAdministrative responsibility is subject to the same principles as criminal responsibility, that is, it does not admit the agent’s strict responsibility. This means that a penalty shall only be imposed on the person in the event that the act – commission or omission – committed is described in the law or the normative rule issued by the applicable authority, in particular the Central Bank of Brazil, as being an administrative infringement.
In fact, it is incontestable, in the opinion of jurists and case law, that the administrative responsibility is always individual and subjective. Only those (the financial institution, administrators or controllers) who practise the punishable act (which may be an act or an omission) may be punished.
iii Regulatory capital and liquidity
In March and October 2013, the Central Bank published a set of resolutions and circulars relating to the adoption of the Basel III global standards of capital requirements. The new rules aim at increasing the capacity of financial institutions to absorb shocks, increasing the strength of the financial system and promoting sustainable economic growth.
By this set of rules, financial institutions may determine presumed credit based on the provisions made for doubtful receivables in each calendar year, whenever credits arise from temporary differences resulting from provisions for doubtful receivables existing in the preceding calendar year, and from the balance of the accrued fiscal losses of the preceding calendar year. New rules were also issued concerning financial bonds, pursuant to which companies shall compose the prudential consolidated balance, to be used in assessing the capital and requirements as well as the possibility for the Central Bank to limit payment of dividends by financial institutions in the event the latter should disregard the prudential requirements defined by the CMN.
The implementation of the new capital structures in Brazil began on 1 October 2013 and shall follow the agreed international time frame until conclusion of the process, on 1 January 2022. Changes regarding the capital ascertainment for credit risk that do not result in additional capital and that can easily be implemented by the institutions became effective as of the issuance of the new rules.
iv Recovery and resolution
The Bank Bankruptcy Law specifically governs the insolvency regimes of financial institutions. It essentially provides for two different regimes: the intervention regime and the extrajudicial liquidation regime, both administratively conducted by the Central Bank.
InterventionIf the financial institution is unable to stabilise and resume operations overcoming its financial crisis, or carry out an orderly liquidation, the intervention may be converted into an extrajudicial liquidation or bankruptcy liquidation, as applicable.
The Bank Bankruptcy Law stipulates that intervention may be decreed ex officio by the Central Bank for a period of six months (which may be postponed for an additional six months), when the financial institution suffers a loss due to mismanagement that generates risk for its creditors; or repeated breaches of banking laws are verified and not rectified after orders from the Central Bank. The intervention process is conducted by an individual appointed by the Central Bank.
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After the intervention period, the Central Bank may decide among the following measures: (1) to cease the intervention and allow the bank to return to its normal activities; (2) to decree the extrajudicial liquidation of the bank; or (3) to authorise the intervener to file for voluntary bankruptcy liquidation of the bank.
Intervention has the following effects on the obligations of a financial institution: (1) suspension of enforceability of matured obligations for the duration of the intervention; (2) suspension of the flow or count of the term of maturity of the previously existing obligations; (3) enforceability of all pre-intervention obligations is stayed for the duration of the intervention period; and (4) creditors are generally prohibited from enforcing and collecting their respective claims against the financial institution undergoing an intervention, irrespective of the cause of the event of default and nature of the claim.
Extrajudicial liquidationExtrajudicial liquidation of financial institutions may be decreed by the Central Bank ex officio or at the request of the intervener, in the event the relevant financial institution, inter alia, (1) has its economic or financial conditions affected by relevant events, especially if it fails to punctually satisfy its commitments or could be declared bankrupt; (2) seriously violates legal rules and regulations; or (3) suffers a loss that subjects its non-privileged creditors to an abnormal risk. Extrajudicial liquidation is carried out by a liquidator appointed by the Central Bank and may be defined as an administrative bankruptcy or liquidation proceeding.
The decree of extrajudicial liquidation will result in (1) the suspension of any action (for collection) or enforcement proceedings pending against the financial institution concerning its rights or interests (i.e., creditors will not be able to foreclose on respective collateral, since the assets of the financial institution will remain frozen until the end of the extrajudicial liquidation); (2) automatic acceleration of the maturity of the obligations of the financial institution; and (3) the interruption of the satisfaction of any obligations assumed by the financial institution. In addition, interest ceases to accrue on the obligations assumed by the financial institution.
The extrajudicial liquidation will cease (1) when the Central Bank accepts that the necessary guarantees are in place to allow the institution to take back control; (2) with the approval of the final accounts of the liquidator and registration of such accounts in the appropriate registry to evidence the termination of the legal entity; or (3) with the decree of the entity’s bankruptcy when the assets of the entity are not sufficient to cover at least half of the non-preferred credits, or if there is evidence of bankruptcy crimes.
IV CONDUCT OF BUSINESS
As stated above, banking activities are highly regulated and require local financial institutions to comply with the extensive regulation issued by the CMN, the Central Bank and the CVM. An important aspect that local banks must observe is banking secrecy.
Banking secrecy and confidentiality have always been of major importance and are protected by the Brazilian Federal Constitution, which determines that intimacy and private life may not be violated. Exceptions to such constitutional right can only be resorted to in extreme cases and, as a rule, require a judicial order.
Banking secrecy was regulated in 2001 by Complementary Law 105 (the Bank Secrecy Law), determining that financial institutions should maintain secrecy in all of their passive and active transactions, as well as in any services rendered.
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The Bank Secrecy Law, however, granted tax authorities a special authorisation to obtain banking information in the event an administrative proceeding had been initiated. Such exception was highly debated and discussed in a series of lawsuits contesting the constitutionality of referred permission, as it would, according to the arguments presented, result in a breach of the constitutional intimacy and privacy rights of individuals, among others.
In February 2016, however, the Brazilian Supreme Court declared, under a majority of nine votes in favour and two votes against, the constitutionality of the authorisation for the Federal Revenue to access taxpayers’ financial information under the Bank Secrecy Law. The Brazilian Supreme Court interpreted that the referred to laws determined the sharing of information by the Central Bank and the Federal Revenue, but maintained secrecy obligations by both parties, which should not be considered a breach of the individual’s rights.
Even in situations in which a financial institution is authorised to breach confidentiality, all measures required for the defence of the interests of individuals must be complied with. Thus, institutions must show sufficient duty of care in selecting the information to be disclosed and verifying whether the legal requirements for such disclosure have been met.
V FUNDING
Funding of Brazilian banks is traditionally composed of cash deposits and time deposits. Other alternatives, such as the issuance of bonds in the international markets or other forms of cross-border funding have also been broadly adopted, as interest rates in foreign markets have been historically lower than local interest rates.
Nevertheless, in order to foster the funding of local banks and, especially, in an effort to reduce banking interest rates in Brazil (which are among the highest of the world), local lawmakers and regulators have created new instruments to provide new funding alternatives to local banks.
In January 2015 Federal Law No. 13,097 was enacted, providing for the issuance of covered bonds in Brazil (Letra Imobiliária Garantida – LIG). Such law is a conversion of the Provisional Measure 656, issued by the federal government in October 2014. Widely used in sophisticated markets (such as in Europe and US), the LIG has finally been regulated after great expectations by the local market for the past few years and is expected to reduce funding costs for institutions acting in the real estate market and, by extension, expanding the availability of real estate credit at a lower cost to consumers.
The main feature related to the LIG is the fact that the pool of assets (mainly real estate financing credits) backing the issuance of the LIG will be treated as a segregated pool of assets, by which the underlying credit rights as well as the other assets and rights relating to them will be kept separately from the issuer’s own assets. Hence, in case of default, intervention, extrajudicial reorganisation or bankruptcy of the issuer, the non-comingling pool of assets will not be affected and will thus be earmarked solely for settlement of the debts owed under the corresponding LIG. If the pool of assets is not sufficient to settle all debts owed to the relevant investors, these will be entitled to enrol their outstanding credits in the bankruptcy estate ranking pari passu with the other unsecured creditors of the issuer.
The LIG has not yet, however, been regulated by the CMN and the Central Bank. As a result, local banks have not yet been able to use this new instrument.
Another funding alternative recently created in Brazil is Certificados de Operação Estruturada (COE), which are similar to structured bonds negotiated in international markets.
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COE are, pursuant to the applicable rules, certificates issued against an initial investment and represent an indivisible group of rights and obligations with income structure similar to derivative instruments.
In addition to the application of local indexes, COE may also have foreign indexes applied as references to its remuneration. Thus, financial institutions may issue COE based on variation of foreign currencies, stock or commodities prices, among others.
Although COE were originally regulated in 2013, the rules relating to the public offerings of COE have only been enacted in final form by the CVM in October 2015. As a result, we have seen an increasing offer of different types of COE in the local market since then.
VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
As a prerequisite to operate in Brazil, a financial institution must apply for a prior authorisation before the Central Bank. The documents that must be presented to the Central Bank include, among others:a a formal letter of application for authorisation of the intended transaction; b a statement declaring the intent of the applicant to incorporate a financial institution;c a statement of inexistence of restrictions;d a study of the financial or economic feasibility of the project, including a business
plan; e definition of the corporate governance patterns;f details on the controllers of the institution; and g evidence of the financial or economic capability, among others.
The acquisition of a controlling or significant interest in an existing bank also requires prior approval from the Central Bank and entails, basically, the same procedures.
In addition to the ordinary documentation indicated above, the incorporation or acquisition of financial institutions by foreign entities or individuals must be submitted to the Presidency of the Republic for the issuance of an executive decree acknowledging the national interest underlying the proposed transaction. As a result, whenever a foreign entity intends to set up a financial institution in Brazil, or to acquire an equity interest in a domestic financial institution, the transaction may only be closed after the granting of a presidential decree.
VII THE YEAR IN REVIEW
In addition to new funding instruments, which have played a relevant role in bank debt issuances in the last few months, another relevant development has become effective in January 2016.
From this date, the perfection of security interest over certain securities and derivative agreements, which had to mandatorily be performed through the registration of the respective agreements before the competent Registries of Deeds and Documents, was permitted to be carried out before entities authorised to perform such registrations by the Central Bank and the CVM.
Such proceeding had been discussed in the local market for years. It was first introduced in the Brazilian legislation in 2011 and regulated by the CVM a couple of years
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later. Nevertheless, such feature only became effective early this year, when the systems provided for by CETIP SA – Mercados Organizados and BM&FBovespa SA – Bolsa de Valores, Mercadorias e Futuros have been made available, accomplishing the deadline for availability established by the CVM.
Before the applicable systems were made available, the perfection of security interests of securities traded in stock exchanges could require the delisting of such securities, which significantly delayed the perfection and enforcement process. Upon enactment of the systems, delisting is no longer required and enforcement may be carried out by creditors immediately after default, providing further assurance for creditors.
In a separate matter, another relevant development relates to the electronic payments industry. Although this area is not essentially part of the banking industry per se, due to its signifiance to the financial system Brazilian lawmakers have delegated their regulation to the CMN and the Central Bank. As a result, such regulators have issued an extensive set of rules regulating payment arrangements and payment institutions, including operational and technical requirements, minimum risk management policies and criteria for fund allocation. Among those changes, a relevant impact relates to a requirement for compensation and settlement of funds through independent entities authorised by the Central Bank of any funds transfer under any payment arrangement, in the event such settlement between final users involves transfer of funds among different financial institutions and/or payment institutions.
The rationale of local regulators in regulating this area is to avoid systemic risks under the payment arrangements, which are now a relevant part of the financial industry in Brazil.
VIII OUTLOOK AND CONCLUSIONS
As mentioned above, the launching of new systems enhanced the process for perfection and enforcement of security interests over securities and derivatives. The same rules also apply to financial assets but, unfortunately, this feature is not yet available.
The issue above arises from the fact that there is no legal or regulatory definition of ‘financial assets’. For this reason, market participants and regulators are currently discussing the implementation of said rules and possible enactment of additional regulations, in order to enable the utilisation of the new systems for financial assets, which will be of major importance for local banks. Such matter will certainly be a relevant issue for the bank industry in the near future and, thus, shall be one of the focus of discussions throughout the year.
Another matter that may raise the attention of the regulators is the rise of the ‘FinTech’ business, which is growing rapidly in the country. Many start-ups are now operating in Brazil – some with the help and resources of international private equity investors – and many transactions have been made in the last few months.
Differently from other countries where models such as peer-to-peer lending – a standard financing form internationally created by technology companies – are not regulated, in Brazil, banking regulations require the participation of financial institutions and, thus, brings regulatory challenges to this new industry.
As this area is not yet specifically regulated, start-up companies are using creativity to adopt their business to the existing regulations and initiate a new financial industry. ‘Tropicalised’ models such as banking correspondents, historically created to provide banking access to the population in less developed areas, are now utilised by the FinTech industry as innovative forms to their activities while complying with the local rules.
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The adoption of long-existing rules to new business and high-tech models demonstrates that, while the Brazilian financial industry remains a highly regulated business, new and innovative ideas can adapt to this trustable and broad system, which is under ongoing review by local regulators. As a result, we expect stable growth in the area to continue for the next few years, with new business supporting the development of the industry during challenging times for the economy.
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ABOUT THE AUTHORS
TIAGO A D THEMUDO LESSAPinheiro Neto AdvogadosTiago A D Themudo Lessa is a partner at Pinheiro Neto Advogados’ corporate department, practising in the São Paulo office. He is primarily engaged in the areas of banking and finance (treasury, derivatives and foreign exchange transactions, financing, domestic and international lending, capital markets and agricultural credit deals); corporate law; mergers and acquisitions; debt restructuring; and capital markets.
RAFAEL JOSÉ LOPES GASPARPinheiro Neto AdvogadosRafael José Lopes Gaspar is an associate in Pinheiro Neto’s corporate department, practising in the São Paulo office. He advises on corporate law; mergers and acquisitions; finance and banking (domestic and international financial transactions, project finance, treasury, derivatives and foreign exchange transactions); debt restructuring; and capital markets.
GUSTAVO FERRARI CHAUFFAILLEPinheiro Neto AdvogadosGustavo Ferrari Chauffaille is an associate in Pinheiro Neto’s corporate department, practising in the São Paulo office. He advises on corporate law; mergers and acquisitions; finance and banking (domestic and international financial transactions, project finance, treasury, derivatives and foreign exchange transactions); debt restructuring; and capital markets.
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PINHEIRO NETO ADVOGADOSRua Hungria 1100São Paulo 01455-906BrazilTel: +55 11 3247 8400Fax: +55 11 3247 [email protected]@[email protected]
