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CENTRAL BANK STRENGTHENS CORPORATE GOVERNANCE RULES FOR BRAZILIAN FINANCIAL INSTITUTIONS

The Central Bank has implemented new rules governing corporate governance practices for all financial institutions operating in Brazil. The goal of these regulations is to maintain the stability of Brazil’s financial system.

Appointment and Approval Process

According to the new regulations, all appointments to members of the Executive Office, Board of Directors, and Board of Auditors of financial institutions will only be effective upon discretionary approval from the Central Bank. The approval will be based on subjective and objective parameters, ensuring that only qualified individuals are appointed to these positions.

Internal Controls

The rules also require financial institutions to adopt policies and procedures for controlling their activities, financial and operational information systems, and compliance with all applicable regulations. These internal controls must be effective and consistent with the nature, complexity, and risk of the institution’s transactions, regardless of its size.

  • The executive committee of each financial institution is responsible for implementing an effective internal control structure.
  • They will define responsibilities and control procedures, and set out corresponding objectives at all levels of the institution.
  • The committee will also be responsible for verifying compliance with internal procedures.

Anti-Money Laundering Controls

In addition to these general internal controls, financial institutions are also subject to specific anti-money laundering controls and procedures. Regulated entities must adopt risk-based approaches to ensure that their safety mechanisms correspond to the amount of risk they present to the financial system.

Compliance Requirements for Payment Institutions

Payment institutions, which handle a higher volume of transactions, will be subject to stricter compliance requirements. According to Resolution 260/22, payment institutions must appoint a statutory officer responsible for observing compliance with new regulations starting from January 2024.

Operational and Risk Management

Financial institutions are also required to have in place operational, liquidity, and credit risk management structures consistent with their activities and level of exposure to such risks. Additionally, they must have strict cybersecurity rules in place to prevent breaches.

Central Bank Oversight

The Central Bank will perform regular oversight of financial institutions to ensure compliance with these regulations and may order the adoption of supplementary risk management actions if necessary.

INITIAL CAPITAL REQUIREMENTS FOR FINANCIAL INSTITUTIONS

Financial institutions operating in Brazil are required to meet initial capital requirements, which vary depending on their type. The minimum capital requirements range from R$ 1,000 for credit unions to R$ 7 million for broker-dealer companies and securities dealership companies that manage investment funds.

  • These initial capital requirements must be met in addition to compliance with Basel III rules.
  • Financial institutions must also implement structures for continuous risk management as applicable to their risk profile.

CONSUMER DEFENSE CODE APPLIES TO FINANCIAL INSTITUTIONS

The Consumer Defense Code (Código de Defesa do Consumidor) was promulgated to establish more stringent rules governing consumer relations between suppliers of products or services and consumers. The Brazilian Supreme Court has recognized that the CDC is also applicable to transactions between financial institutions and their customers.

  • Financial institutions must follow specific rules issued by the CMN and the Central Bank when contracting transactions and providing services to customers and the public.
  • These regulations prohibit increasing fees without fair reason or charging them at a higher rate than stipulated in current regulations and legislation.

Conclusion

These new corporate governance rules aim to enhance the stability of Brazil’s financial system by ensuring that financial institutions operate with transparency, accountability, and prudence.