On September 3rd, the Government announced the bill that seeks to regulate Fintech or companies that provide financial services using advanced digital technologies to optimize their activities.
The “Bill to promote competition and financial inclusion through innovation and technology in the provision of financial services” (hereinafter, the “Project”), is based on the global digital transformation that has experienced sustained growth in the recent years, seeking to address the absence of a specific regulatory framework that Fintech companies face.
- Objectives, principles and role of the Financial Market Commission
The Project is proposed as a law framework based on the following guiding principles: promotion of financial inclusion and innovation, promotion of competition, protection of financial clients, preservation of financial integrity and stability, and prevention of money laundering and financing of terrorism.
Regulation and supervision is entrusted to the Financial Market Commission (“CMF” for its initials in Spanish), who must follow the criteria of proportionality based on risks (requirements are determined on the risks associated with a given activity); Technological neutrality (so that it does not inhibit the use of certain technologies or generate biases in favor of others); and Modularity in the services provided (the requirements will be directly related to the different components of the value chain of the traditional service to be performed).
As it is a framework law, it is recognized that other modifications to the legal framework will probably be required in the future to incorporate new relevant business models or other adjustments to current regulations. In consideration of the above, de role of the CMF takes special relevance, being empowered to dictate general standards in a series of areas to which the Fintech Bill makes reference, and empowering it to adopt the requirements and preventive or corrective measures that are deemed necessary to adequately address the potential risks of the sector, protect the rights of consumers, protect the privacy and security of their information, as well as insure that the stability and resilience of the financial system is maintained.
- Regulated Fintech Services
The following Fintech services are incorporated into the CMF’s audit perimeter:
- Collective financing platforms (either investments or loan)
- Alternative systems of security transactions and financial instruments
- Credit and investment advisers
- Custodians of financial instruments
- Order routers and financial instrument intermediaries.
The entities indicated must register in the Registry of Financial Service Providers that the CMF will keep, as well as prove compliance of certain requirements associated with the risk level, according to the type of services to be provided.
Legal entities registered in said Registry may provide one or more Fintech services, as well as perform those adicional activities authorized by the CMF by means of a general rule. Nevertheless, entities currently supervised by the CMF (banks, securities intermediaries and product brokers, risk rating agencies, among others) may provide certain Fintech services without being registered, in accordance with the provision of the Fintech Law itself, the legal and regulatory framework that governs such institutions or the complementary regulations issued by the CMF for this purpose.
The CMF may exempt or establish a less burdensome compliance requirement than the established in the law when, due to the nature of the service provided, the public faith of financial stability is not compromised.
Likewise, the CMF, at any moment and for the founded resolution, could suspend the authorization to carry out any of the activities regulated by law, to that registered entity that does not comply with the requirements established for the respective activity, or as a preventive measure when necessary for the due protection of investors, public faith or financial stability; and without prejudge of criminal and administrative penalties that may be applicable.
Finally, penalties and sanctions are established for infractions of the law, specifying those infractions that will be considered serious.
- Open Finance System
Other axis of the Project is the establishment of an Open Finance System, allowing the exchange of financial information from clients (who have expressly consented to it) between different providers of financial services (traditional and Fintech), through interfaces of remote and automated access that allow direct interconnection and communication, under adequate security standards. This seeks to reduce information asymmetries between Fintech services providers and traditional providers, with the aim of promoting competition, innovation and inclusion in the financial system.
Thus, the Project indicates that the institutions that qualify as (i) providers of information, (ii) providers of information-based services, (iii) providers of accounts and (iv) payment initiation service providers will be participants of the Open Finance System; as established by the law itself and by the CMF through a general rule.
The CMF records in which such providers must register and the types of data and information that may be shared are also defined, empowering the CMF to define technical standards for the exchange of information, obtaining consent, client authentication and participants, security standards, among other aspects, such as gradual implementation and progressive incorporation of providers of financial services and products. The CMF may establish differentiated requirements in consideration of the type of data or information that will be transmitted through the interface.
It is highlighted that for the purpose of the issuance of the regulation that control the Open Finance System, public consultation procedures and regulatory impact assessments must me carried out by the CMF, who may also arrange to perform the pilot operation test with the institutions that participate or that express interest in participating in this Open Finance System, for the purpose of defining technical and operational aspects of the regulations.
- Other relevant provisions
- Offer of financial products and services according to the profile. Both Fintech companies and traditional financial service providers must adopt policies and controls aimed at preventing the offering of products that are not in accordance with the need, expectations and willingness to risk that clients have previously communicated to them. In those cases, the entity must adopt the necessary safeguards in order to prove to the CMF that this fact the client was warned prior to hiring.
- Conditions to access bank accounts by audited financial institutions. Banks that offer current account services must establish the objective and non-discriminatory conditions under which they will offer and give access to said services to Fintech service providers, issuers and operators of payment cards and other financial institutions subject to the inspection of the CMF, justifying also the decision to deny an account opening request or to suspend or close the contract, if applicable.
- Other modifications
Additionally, the Fintech Bill incorporates modifications to various regulatory bodies, among which the following stand out:
- Law N°20,950 that Authorizes the Issuance and Operation of Payment Means with Fund Provision by Non-Banking Entities: recognizes the possibility of issuing means of payment with provision of funds to carry out payment operations without cards, through electronic transfers of funds between accounts opened in different financial entities. Additionally, modifications are introduced to extend the Central Bank’s regulatory powers in terms of retail payment methods, according to those payment methods that correspond to crypto assets issued by centralized entities, against the receipt of money from the public (“crypto assets equivalent to money electronic”, known in other jurisdictions as stablecoins).
- Law N° 18,045 on the Securities Market: incorporate the possibility for the CMF to make proportional requirements in the regulations applicable to stock exchanges and securities intermediaries, attending to the risk of public faith; it also simplifies the applicable requirements for the issuance of public offering securities, by eliminating the obligation to register the issuer, only maintaining the registration of securities. On the other hand, the legal framework applicable to securities intermediaries is adapted, to improve different standards currently applicable and to ensure regulatory symmetry with other similar activities. The legal framework applicable to the stock exchange is adapted to improve different standards currently applicable and to ensure regulatory symmetry with other similar activities; and the existence of a new debt security with a simplified registration regime is incorporated to facilitate access to the capital market for medium-sized companies.
- Law N°18,046 on Public Limited Companies: increases the threshold for the number of shareholders that generate a transformation into a public limited company, with its consequent regulatory burden; and eliminates the obligation of special corporations to obtain prior authorization from the regulator for capital increases in cash.
- General Banking Law: specifies the CMF’s supervisory powers regarding retail means of payment, which include payment methods that correspond to crypto assets equivalent to the electronic money or stablecoin, and the power to establish minimum requirements in terms of customer service and other obligations in relation to the type of services they offer, to strengthen the protection of financial clients. In addition, it facilitates the provision of banking services digitally by incorporating technological neutrality with respect to the customer service channels that they may use, allowing baking support companies to provide services to third parties with prior authorization from the CMF in order to facilitate interoperability with non-bank actors.
- Finally, regarding the recent law N° 21,314 that established new transparency requirements and reinforces the responsibilities of market agents and regulates provisional advice: repeals article 3° on the provision of investment advisory services, by joining in the Project a new more comprehensive regulation on financial advisers.