SÃO PAULO – The Central Bank (BC) and the National Monetary Council (CMN) approved, on Monday (26), the implementation of the regulatory sandbox, an environment in which authorized companies can test a project that brings innovation to the financial sector, including winning over the first consumers.
The objective of the regulatory sandbox is to allow innovative business models to reach a wide audience, generate productivity gains and bring more competition to the country’s financial and payment systems. But all this needs to be done to guarantee the efficiency and safety of the solutions.
The sandbox is another step towards the development of Brazilian fintechs – scalable, innovative and technological enterprises that work with services such as investments and payments.
This controlled testing environment was carried out in 2016 by Financial Conduct Authority, from UK. The region is known for its mature fintech ecosystem. Other Brazilian institutions have already selected projects for their own sandboxes, such as the Superintendency of Private Insurance (Susep).
The initiative is part of a series of actions by the Central Bank in favor of modernization and competitiveness in the country’s financial and payment systems. Open banking and PIX are among the news announced in this area recently.
How will the Brazilian regulatory sandbox work?
The Brazilian project is regulated by CMN resolutions No. 4,865 [bcb.gov.br] e BCB nº 29 [bcb.gov.br]. These resolutions take effect on December 1, 2020.
Alexandre Vargas, an associate in the Banking and Fintechs sector at the law firm Cescon Barrieu, says that the published rules make occasional updates to what was already being discussed between the government and the market. Some details were missing, such as what will be the areas of interest of the first regulatory sandbox cycle.
An expected benefit, however, is the conversation between several regulators. For example, a startup that operates with financial services and insurance may need guidance from both the Central Bank and Susep. “The purpose is to allow a fintech or a new initiative by an already regulated financial institution to test without having the traditional regulatory burden. An authorization process can take months, ”says Vargas.
The companies will obey specific requirements, which support the “controlled and delimited realization” of their activities. For example, the Central Bank will have access to the results obtained and will assess the operation and credit risks associated with the products.
“You have a process customization. You can define minimum personalized requirements for the risk that the project brings, which you would not have in a normal authorization ”, said Antônio Marcos Fontes Guimarães, head of the Central Bank’s Financial System Regulation Department, in an institution’s press conference on the sandbox .
If there is a problem, innovation can be adjusted, limited or even prohibited. If the experiment is successful, the BC can grant a definitive authorization and release large-scale commercialization.
Incentives for small
Bruno Diniz, co-founder of innovation consulting for financial services Spiralem, highlighted to the InfoMoney some measures that show the willingness of the Central Bank to support nascent ventures. Both regulated and non-regulated institutions will be able to participate in the sandbox, as well as there will be no formal minimum capital requirement for the registered company.
Fintechs will already be able to charge for their products, as long as their prices are announced in a transparent manner (such as full effective cost rates available on the website itself). They should also ensure the verification of users’ identities, the privacy of their data and the security of each transaction.
Consumer contracts must be signed within the authorization period to participate in the regulatory sandbox. The customer should know that fintech is in that trial period and for how long. The consumer will also be aware when the business changes its operation or if the project ends its activities (“exit plan”).
“It was contemplated the possibility of pivotagem of the project throughout the stay in the sandbox. It was an interesting flexibility compared to what was initially proposed in public consultation, and something that several market entities had already questioned ”, says Diniz. “Predicting that the project may change over time is essential because of the innovative character of the solutions and the rapidly changing environment within which the projects are being developed.”
The start of the first cycle of the regulatory sandbox of the Central Bank of Brazil is scheduled for the first half of 2021. Each cycle should have a maximum duration of one year, with permission to extend fintech’s stay for one or two years.
Paula Leitão, deputy head of the BC’s Financial System Regulation Department, also said at the press conference that registration should be open in the coming months. The number of selected projects must also be defined in the call for applications.