New prudential rules for payment instituitions

New regulation must meet the size and complexity of PIs

On March, 11, 2022, the Central Bank of Brazil (BCB) published rules for payment institution conglomerates (PIs) that create prudential regulations similar to those applicable to financial institutions. The new prudential rules applicable to payment institutions were the object of BCB’s Public Consultation Notice No. 78/2020 (“ECP 78”), in response to the need to improve regulation, given the developments that have occurred in the sector.

ECP 78 released regulatory proposals aiming to establish the prudential rules regime applicable to institutions operating in a booming market, either for payment institutions or financial institutions.

Therefore, in practical terms, ECP 78 resulted in the issuance of the new prudential rules for PIs provided for in BCB Resolutions nos. 197, 198, 199, 200, 201 and 202,  with other subsequent complementary rules  still to be issued.

The new regulations improve the concept of regulatory capital applicable to PIs, with the purpose of ensuring a greater capacity to absorb losses and create prudential segmentation, by means of Type 1, 2 and 3 conglomerates. The new BCB Resolutions specifically provide as follows:

BCB Resolution No. 197 of March 11,2022: classifies the prudential conglomerate integrated by at least one institution that performs payment services into: (i) Type 1: prudential conglomerate whose lead institution is a financial institution or another institution authorized to operate by the BCB; (ii) Type 2: prudential conglomerate whose lead institution is a payment institution and which is not integrated by a financial institution or another institution authorized to operate by the BCB; and (iii) Type 3: prudential conglomerate whose lead institution is a payment institution and which is integrated by a financial institution or another institution authorized to operate by the BCB.

It was also established that the Type 3 prudential conglomerate should be classified in accordance with the provisions of the information of the entities participating in the respective conglomerate on a consolidated basis, pursuant to the  Accounting Standard of Institutions Regulated by BCB (“Cosif”, acronym in Portuguese), into (a) Segment 2 (S2), composed of the prudential conglomerates whose size is equal to or greater than 1% of the  Gross Domestic Product (GDP); (b) Segment 3 (S3), composed of the prudential conglomerates with size lower than 1% and equal to or greater than 0.1% of the GDP; (c) Segment 4 (S4), composed of the prudential conglomerates with size lower than 0.1% of GDP; or (d) Segment 5 (S5), composed of institutions with size lower than 0.1% of GDP, which are not multiple banks, commercial banks, investment banks, exchange banks, savings banks or development agencies, and which use the optional simplified methodology for the calculation of the minimum requirement for Simplified Reference Equity (“PRS5” – Patrimônio de Referência Simplificado, in Portuguese).

Resolution 197 also establishes changes to the classification in the segments, according to specific calculation periods, as set forth by the rules of each category. Until December 31, 2024, the Type 3 prudential conglomerate will be classified in S4, regardless of its size, or in S5, depending on the option for using the simplified methodology, the latter conditioned to the calculation of the minimum requirement of the PRS5.

Resolution BCB No. 198 of March 11, 2022: establishes (i) minimum Reference Equity of Payment Institutions (“PRIP” – Patrimônio de Referência de Instituição de Pagamento, in Portuguese) requirements for Type 2 conglomerates, in accordance with Resolution BCB No. 197 and for payment institutions that are not members of a prudential conglomerate, and (ii) methodology for calculating these requirements and the respective continuous risk management structure.

The PRIP must be calculated by the Type 2 conglomerates and payment institutions that are not members of a prudential conglomerate, by adding the amounts of capital, capital reserves, revaluation and profit reserves, and other amounts listed in Article 3, including the deposit in an escrow account to make up for a capital deficiency, in situations that constitute non-fulfillment of the minimum PRIP requirements.

It will be mandatory for Type 2 conglomerates and payment institutions that are not part of a prudential conglomerate to implement a continuous risk management structure capable of identifying, measuring, evaluating, monitoring, reporting, controlling and mitigating operational, liquidity, credit and other risks to which the institution is materially exposed. In addition, the documentation of the risk management policies and strategies must be kept available to the BCB for 5 years.

Resolution BCB No. 199 and Resolution No. 200 of March 11, 2022: establishes (i) the methodology to calculate the Reference Equity (“PR” – Patrimônio de Referência, in Portuguese) for Type 3 prudential conglomerates, except those classified as Segment S5, where the PR is a sum of Tier I – Principal Capital plus Complementary Capital -, and Tier II.

Resolution BCB No. 200 also stipulates that the Type 3 conglomerate must permanently maintain PR, Tier I and Principal Capital amounts higher than the minimum requirements established in the Resolution, and PR amounts sufficient to cover the interest rate variation risk, for the instruments classified in the banking portfolio (IRRBB).

The Rule also establishes that non-compliance with the Additional Principal Capital requirement causes restrictions on (a) the payment of variable compensation to directors and members of the board of directors, in the case of corporations, and to managers of limited liability companies; (b) the payment of dividends and interest on own capital; (c) the repurchase of own shares or quotas in any amount; and (d) the reduction of capital stock, when legally possible.

Resolution BCB No. 201 of March 11, 2022: establishes (i) the optional simplified methodology for calculation of the minimum requirement regarding PRS5 for the prudential conglomerates classified as Type 3; (ii) the requirements for opting for this methodology; and (iii) the simplified structure of continuous risk management.

The option for using a simplified methodology for calculating the minimum S5 requirement is permitted for Type 3 prudential conglomerates composed of institutions belonging to (i) Group II, consisting of non-banking institutions that operate in the granting of credit, or (ii) to Group III, consisting of non-banking institutions that operate in the gold or foreign currency markets, or as fiduciary agents. The option for the simplified methodology is also conditioned to the size compatible with the classification in S5, and to a simplified risk profile, according to the parameters established in the Resolution.

Resolution BCB No. 202 of March 11, 2022: establishes the procedure for calculating the portion of risk-weighted assets (RWA) related to the calculation of the capital required for risks associated to payment services (RWASP) established in Resolutions BCB No. 200 and 201.

The set of new prudential rules for PIs will be effective as of January 2023, and its full implementation will take place within two years, to be completed by January 2025.

Demarest’s Banking and Finance team is available to provide any additional clarification that may be necessary.