In review: consumer finance law in Brazil

All questions

Overview

i Introduction

Financial inclusion-oriented policies and the integration of technology into financial services and products through financial technology (fintech) companies have brought consumer protection into the spotlight.

Increasing the public’s access to essential financial services2 and, more generally, improving the levels of financial inclusion, became a driver for the financial policies and programmes of recent administrations.

Consumer protection standards play an important role in these discussions, as the federal government and regulatory agencies aim not only to increase the financial inclusion indexes by accessing a larger part of the population but also to improve the quality of financial education of those individuals already participating in the banking system.

In the wake of these government programmes and policies on financial inclusion, new products and services arising from the fintech movement, such as online lending, peer-to-peer lending, online and mobile payment solutions, and digital checking accounts, among others, have also contributed to the increasingly prominent role of consumer protection standards given the high penetration of these products and services in the market.

As a result, the legal and regulatory framework applicable both to consumer financing and to all financial products and services offered to consumers has been subject to constant changes and improvements in recent years, resulting in clearer standards and an increasingly favourable regulatory environment for consumer financing practices in Brazil.

ii Overview

In recent years, the federal government and Central Bank have been implementing public policies and actions to foster consumer financing activities as one way to increase financial inclusion and financial citizenship in Brazil.

By extension, consumer empowerment and market conduct, consumer protection, dispute resolution involving consumers, and the relationship between the regulatory authorities (especially the Central Bank), financial institutions and the consumers have received increasing attention from the federal government and the regulatory agencies.

Throughout 2016 and 2017, for example, the Central Bank prioritised financial inclusion, and organised debates and forums to discuss with scholars and industry participants measures intended to develop Brazil’s levels of financial citizenship and financial inclusion.3

In December 2016, in accordance with pronouncements from the federal government, the Central Bank launched a tentative agenda of actions and points of interest for the upcoming years (Agenda BC+). Agenda BC+ offered a glimpse of the short-, medium- and long-term actions that were to be expected from the regulators and it was structured around four main pillars:

1. more financial citizenship;
2. more modern laws;
3. a more efficient financial system; and
4. cheaper credit.4

Each pillar was based on a central point of interest and contemplated both internal and external measures to be taken by the Central Bank in the coming years. Throughout 2017, the Central Bank acted on several of the points listed in Agenda BC+.

In 2019, the Central Bank launched Agenda BC#, adding new dimensions to the original pillars of Agenda BC+. In addition to pursuing the reduction of the cost of credit, the enhancement of banking regulation and the efficiency and competitiveness of the national financial system, Agenda BC# started to focus on three additional dimensions: inclusion, competitiveness and transparency. In 2020, another pillar was added to Agenda BC#: sustainability. As such, the principal objectives of Agenda BC# can now be summarised as follows:

1. inclusion: to bolster overall access to financial markets;
2. competitiveness: to foster competition within both the national financial system and the payments system;
3. transparency: to increase the quality and flow of information provided by the financial markets and the Central Bank;
4. education: to encourage savings and promote percipient participation in the financial markets; and
5. sustainability: to facilitate the reduction of socio-environmental and climate risks within the financial markets and the broader economy, by promoting sustainable finance.

Legislative and regulatory framework

Consumer financing activities are highly regulated in Brazil, being subject to both banking and consumer laws and regulations.

i Banking legal and regulatory frameworkGeneral aspects

Brazil has a sophisticated and solid banking system, although it is subject to a relatively pro-consumer regulatory framework.

The Brazilian financial system in its current format was established in 1964 by federal Law No. 4,595/64 (the Banking Law), which sets out the ground rules for its infrastructure and regulatory framework. The Banking Law assigned the authority to regulate and oversee local financial institutions, as well as to define regulatory policy, to the National Monetary Council (CMN),5 the Central Bank of Brazil (the Central Bank)6 and the Securities Exchange Commission (CVM).7 The Banking Law established the basis for the Central Bank’s role as the primary regulatory authority governing the financial system, and this was later confirmed and expanded by the Brazilian Constitution of 1988.8

Despite the several legislative enactments that followed the Federal Constitution, the Banking Law remains the most significant law in the regulatory structure of the Brazilian financial system. Among the significant laws integrating the regulatory framework of the Brazilian financial system are:

1. Law No. 4,728/65 – the Capital Markets Law;
2. Law No. 6,385/76 – the Securities Law;
3. Law No. 7,492/86 – the White Collar Crime Law;
4. Law No. 9,613/98 – the Anti-Money Laundering Law;
5. Law No. 6,024/74 – the Liquidation Law;
6. Decree-Law No. 2,321/87 – the RAET Law;
7. Law No. 9,447/97 – the Joint-Liability Law; and
8. Law No. 13,506/17 – the Administrative Procedures Law.

In addition to the aforementioned legal framework, the Brazilian banking system is bound to implementing resolutions issued by the CMN in its role as regulatory authority, and supplementary regulations issued by the Central Bank in its role as regulatory and supervising authority. While the CMN resolutions set the policies and guidelines for the financial system, the Central Bank regulations serve to establish the technical details for implementation of the CMN resolutions.9

Performance of consumer financing activities

The Banking Law and ancillary legal and regulatory framework do not provide a legal definition of the word ‘bank’. The individuals or legal entities (either private or public) that have as their primary or ancillary activity the raising, intermediation or investment, or custody of their own or third-party funds are regarded as ‘financial institutions’. The performance of such activities is exclusive to financial institutions and subject to prior and express authorisation by the Central Bank on a case-by-case basis.

As a result, banks are defined in terms of their permissible functions. The Brazilian banking legal and regulatory framework recognises four categories of banks:

1. commercial banks;
2. multiservice banks;
3. investment banks; and
4. development banks.

Consumer financing activities are generally performed by commercial banks or multiservice banks with a commercial bank licence. The activities of commercial banks (which also apply to multiservice banks with a commercial bank licence) are generally in line with the functions of such banks worldwide and include granting of rural credits and personal loans (including consumer financing), receipt of deposits, offering checking accounts, providing short-term lending, collection of trade acceptance bills and other credit documents, and accepting and processing utility bill payments.

Consumer credit companies are also extensively engaged in consumer financing. Consumer credit companies, although not regarded as banks, are deemed financial institutions under Brazilian law and, therefore, are subject to the CMN’s and the Central Bank’s regulatory authority. These entities have the primary purpose of financing working capital and the acquisition of goods and services and, consequently, are often formed with the specific purpose of engaging in consumer financing practices.

The other entities that may occasionally engage in consumer financing or similar activities are credit unions and leasing companies, both also deemed financial institutions albeit not classified as banks. Credit unions are financial institutions organised as non-profit autonomous associations of persons (individuals or legal entities) for the main purpose of extending credit and providing services to their members. Leasing companies primarily engage in the leasing of movable assets and real estate.

Additionally, in 2018, the Central Bank issued the first fintech regulatory framework in Brazil, pursuant to which it created two new types of financial institutions designed to grant credit through online channels: the direct credit companies (SCDs) and the credit-among-individuals companies (SEPs). The main difference between the entities is that SCDs operate in the credit market using their own capital, while the SEPs operate as peer-to-peer platforms linking lenders and borrowers. None of these financial institutions are authorised to receive deposits from the public.

The high levels of acceptance of this new regulatory framework resulted in the Central Bank taking additional steps towards discussing, reviewing and updating financial services regulatory frameworks affected by new technologies. In 2020, the Central Bank issued regulations implementing Pix, an instant payments system that uses technology to effect and clear payment transactions 24/7.

Throughout 2021, the Central Bank also implemented other regulations aimed at strengthening competitiveness and financial inclusion in the national financial system, including:

1. open banking and open finance (including a slew of related financial products, such as capital markets investments offered through the Brazilian securities distribution system and insurance and reinsurance) principles and regulatory guidelines and obligations intended to empower customers in respect of their financial data and to allow sharing of customer data between institutions upon the customer’s request; and
2. a regulatory sandbox infrastructure that works as an experimental environment for innovative models using technology that may require regulatory waivers for appropriate testing.

Consumer protection-oriented banking regulation

In 2021, the CMN and the Central Bank issued the following resolutions, establishing the policies and procedures to be adopted by financial institutions and other regulated entities in their relationship with consumers, and which came into force in 2022: CMN Resolution No. 4,949/21, applicable to financial institutions and other institutions authorised to operate by the Central Bank, and revoking CMN Resolutions Nos. 3,694/09 and 4,539/21 (formerly the main resolutions on this subject); and Central Bank Resolution No. 155/21, establishing almost identical principles and procedures to be adopted by payment institutions and consortium administrators regulated and supervised solely by the Central Bank (i.e., not by the CMN).

The new Resolutions set out new guidelines and requirements with the goal of ensuring fair and equitable treatment at all stages of the relationship between consumers and institutions providing financial and payments services, coupled with an alignment of the interests of these institutions with those of their consumers.

Pursuant to CMN Resolution No. 4,949/21 and Central Bank Resolution No. 155/21, Central Bank-regulated entities must prepare and implement an institutional policy on relations with consumers. This new policy has the purpose of unifying guidelines, strategic objectives and organisational values, so that the conduct of the institution’s activities is oriented by core principles such as responsibility, diligence, ethics and transparency, in line with the institutional objectives of Agenda BC#. They also provide that the regulated institutions must indicate to the Central Bank a specific statutory officer responsible for complying with the obligations provided under the new rules, which will enable the Central Bank to sanction the indicated officer, as well as the institution, for non-compliance with the new guidelines.

Finally, the rules will also impose other obligations on the regulated entities within their scope, such as compliance with suitability and transparency rules.

In this sense, the Central Bank implemented, throughout 2021, an open banking and open finance regulatory framework and guidelines, with the objective of empowering the customers in respect of the ownership, use and transfer of their data. This regulation follows the enactment of the Brazilian General Data Privacy Act in 2018.

ii Consumer legal and regulatory framework

As a rule, consumer relations in Brazil are governed by Law No. 8,078/90, known as the Consumer Protection Code. The rules of the Consumer Protection Code apply only to instances where, on the one hand, there is a supplier, supplying a product or providing a service under a contract and, on the other hand, an end user. Unlike in other jurisdictions, in Brazil the law does not provide a clear definition of the term ‘consumer’.

Currently, there are two different schools of thought regarding the concept of the ‘end user’ as adopted by the Consumer Protection Code. The first, known as the maximalist school, advocates that this concept assumes, in effect, a practical perspective, meaning that an entity or person who acquires a product or service and is not going to resell it to a third party should be considered an end user of the product or service for legal purposes.

Thus, even if an entity or person acquires the product or service as input for further use in a manufacturing process, the entity or person should be regarded as the end user of the supplied product or service. The Consumer Protection Code and its relevant provisions would, therefore, govern the relationship between the end user and the supplier of the goods or service.

The second school, the finalist school, holds that the concept of the end user is economic in nature, to the extent that if the person or entity acquires inputs for further use in the manufacturing process, it should not be treated as the end user of the supplies.

According to this second school, this relationship should be considered to be commercial in nature and, thus, governed by Law No. 10,406/02 (the Civil Code). This is the position adopted by most Brazilian scholars.10

After a number of conflicting decisions on the matter, the Superior Court of Justice reached the conclusion that, as a rule, the individual that acquires goods or services to be used in its manufacturing chain in a for-profit activity is not a consumer in the legal sense of the word. Notwithstanding this, the Court has provided for exceptions to this rule; for instance, in cases where the end user is vulnerable compared with the supplier (i.e., a taxi driver who acquires a car to use as his or her own taxi), the unbalanced relationship should trigger the protective rule set out in the Consumer Protection Code.

Furthermore, after extensive debates, the Brazilian courts have held that financial products and services are subject to the Consumer Protection Code, as long as the counterparty to the agreement is regarded as an end user, as described above.

On 15 March 2013, the federal government enacted Decree No. 7,962, providing general guidance for e-commerce in Brazil. Similarly to the Consumer Protection Code, Decree No. 7,962/13 sets out very broad and high-level rules applicable to any kind of product or service sold over the internet.

According to Decree No. 7,962/13, if a consumer-financing product is offered through electronic means, the financial institution will also be required to make available an electronic channel to handle any requests or complaints relating to this product. In addition, the financial institution will be required to grant a statutory trial period of seven days, during which the consumer will be able to forfeit the agreement without any cost or charge.

On 2 July 2021, Law No. 14,181 was enacted, amending the Consumer Protection Code and the Senior Citizen Statute11 to improve provisions on the offering of consumer credit and the prevention and treatment of over-indebtedness. The new Law created a chapter in the Consumer Protection Code dedicated to responsible credit provision and financial education, stipulating specific information to be presented to the consumer in the context of offering credit or instalment sales and including the effective monthly interest rate, late payment interest and the total charges foreseen in the event of late payment. In another innovation, the Law set out rules on information obligations for suppliers regarding the nature and type of credit being granted, and taking account of the age of the consumer.

The Law also created a chapter in the Consumer Protection Code dealing with conciliation procedures in cases of over-indebtedness, whereby the over-indebted consumer may request the initiation of a debt renegotiation process, with the consumer being responsible for submitting a payment plan proposal that preserves the consumer’s minimum basic income. Unjustified non-attendance of the creditor or his or her attorney at the conciliation hearing may suspend the payment of the loan and interrupt the late payment charges. In cases of conciliation, the court decision ratifying the agreement will set out the debt payment plan, which the court will also enforce. The debt renegotiation request may be repeated only after two years, counted from the date of the settlement of the obligations provided for in the payment plan. If the settlement process is unsuccessful, the judge will, at the request of the consumer, initiate proceedings for review, consolidate the contracts concerned and renegotiate the outstanding debts through a compulsory judicial plan.

In 2022, the federal government enacted Decree No. 11,150,12 which finally regulated the Consumer Protection Code in regard to the issue of preserving or discounting the minimum basic income, for the purposes of prevention, treatment and conciliation in claims involving over-indebtedness.

Decree No. 11,150 established the minimum basic income of the consumer as being equivalent to 25 per cent of the minimum wage in effect on the date the Decree was enacted (1,212 reais); however, the Decree also stated that this amount is not subject to change in line with the annual adjustment of the minimum wage. Furthermore, under the Decree, preservation of the basic minimum income shall not be considered an impediment to the grant of a loan that is intended to replace another transaction or transactions previously contracted by the consumer, as long as this substitution is aimed at improving the consumer’s financial condition.

The Decree also sets out basic consumer rights encompassing guarantees of financial education, responsible credit practices and measures both to prevent and to remedy over-indebtedness, which will be enforced through mechanisms such as debt renegotiation and judicial revision.

Ombudsman, complaints and dispute resolution

Consumers have a set of channels through which they can pursue complaints about financial services and products, in both the regulatory and consumer spheres. The primary and more direct channels are the financial institution’s customer service department (SAC) and the ombudsman.

In accordance with Decree No. 11,034/22 (the SAC Decree),13 financial institutions engaging in consumer financing activities are required to maintain a free call-centre SAC to receive and handle service requests from consumers in respect of information, questions, complaints and suspensions or cancellations of products or services. The SAC Decree sets out general rules to be observed by SACs, including rules on minimum service levels offered, availability of services, disclosure of SAC contact information, handling of requests, and quality of services.

The updated SAC Decree has introduced a number of innovations, including the following requirements:

1. a guarantee of uninterrupted service (24/7) through at least one of the integrated service channels, operation of which must be widely publicised by the service provider;
2. prohibition on broadcasting advertisements during service waiting times, unless the consumer consents in advance;
3. greater accessibility in the SAC channels maintained by suppliers, for use by people with disabilities, in accordance with guidelines to be defined by the National Consumer Secretariat (SENACON);
4. a guarantee as to the quality of the treatment of consumer requests, with due regard for the timeliness, security, privacy and resolution of requests;
5. compliance with Brazil’s General Data Protection Law14 in the collection, transfer, storage, use and processing of consumers’ personal data; and
6. a guarantee of consumers’ right to monitor their demands through numerical registration or another type of electronic protocol, and assurance of access to their request history, free of charge.

In addition to maintaining a SAC, financial institutions engaging in consumer financing activities are required under Brazilian banking regulations to have an ombudsman department. The current regime was updated in 2020 by CMN Resolution No. 4,860/20 to establish more effective and transparent ombudsman services capable of providing better assistance to institution customers.

Additionally, the aforementioned new regulation harmonises the scope of the ombudsman’s activity with the SAC activities under the SAC Decree. In this context the ombudsman department has the following responsibilities:

1. to provide assistance as final recourse to answer customers’ demands, after these demands have been analysed by other customer service channels (including banking correspondents and the SAC);
2. to serve as an interface between the institution and its customers, including for dispute mediation; and
3. to report on its activities to the institution’s management.

Despite the treatment of any consumer complaint by the financial institution’s aforementioned internal channels, the consumer may also register a complaint with the Central Bank’s specific channel. This channel is not the Central Bank’s ombudsman (which only deals with complaints against the regulator itself) but, instead, is a channel made available only for submission of customer complaints. Any complaint filed through this channel will not result in the Central Bank directly taking effective action in respect of an individual’s case but, rather, will only improve the Central Bank’s ability to supervise properly the entity concerned.

Any breach of a consumer’s rights should also be subject to a complaint brought before consumer protection agencies known as PROCONs. PROCONs have the authority to oversee consumer relations and hold conciliatory hearings to promote a settlement in disputes between consumers and suppliers.

If a PROCON understands that a supplier is adopting a commercial practice in breach of the law, it may institute an administrative proceeding to investigate the practice. After the supplier presents its defence, an administrative penalty may be imposed if the PROCON decides that a breach was committed. The most common penalty is a fine. The amount of the fine varies depending on the seriousness of the infraction, the economic status of the supplier and the advantage obtained by the latter, up to an amount not exceeding 10 million reais. Currently, there is a bill of law under discussion that aims to increase the penalty amount to up to 2 per cent of the supplier’s revenues in the preceding year.

Consumers may also file individual lawsuits against suppliers. For claims that do not exceed the value of 40 minimum wages,15 consumers may bring a lawsuit before the small claims courts. Small claims courts offer a simplified and expedited proceeding.

If the claim exceeds the value 40 minimum wages, then consumers should bring the lawsuit before a state court, where proceedings are more time-consuming.