BRAZIL SCOPING NOTE ON REASSESSING AND UPDATING BRAZIL’S FINANCIAL CONSUMER PROTECTION REGIME (P180192) JUNE 2024 ACKNOWLEDGMENTS This assessment was prepared by Gian Boeddu and Sergio Mesquita (Senior Financial Sector Specialists, World Bank). Overall guidance was provided by Gabriel Sensebrenner (Senior Financial Sector Specialist and regional task team lead, World Bank) and Yira Mascaro (Practice Manager, World Bank). This assessment was prepared at the request of the Ministry of Fazenda (MoF), as part of the Brazil Advisory Services and Analytics engagement on productivity and regional development. DISCLAIMER This work is a product of the World Bank staff with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. Contents Acronyms and Abbreviations ........................................................................................................................ 4 1 Executive Summary ........................................................................................................................... 5 2 Introduction.......................................................................................................................................... 6 2.1 Context for Mof’s Request ........................................................................................................ 6 3 Financial Sector Landscape and Consumer Context ................................................................... 7 3.1 Overall Financial Sector Landscape........................................................................................ 7 3.2 Deposit and Credit Market ........................................................................................................ 8 3.3 Insurance-related products ..................................................................................................... 13 4 Current FCP Framework ................................................................................................................. 15 4.1 Good Practice Perspective ..................................................................................................... 15 4.2 Current Financial System Arrangement................................................................................ 15 4.3 Consumer Protection Legal Arrangements .......................................................................... 17 4.4 Consumer Protection Regulatory Framework within the Financial System .................... 20 4.5 Cooperation, Integration, and Information Sharing among Authorities ............................ 21 4.6 External/ Alternative Dispute Resolution Mechanisms for Financial Consumers .......... 22 5 Recommended Approach and Next Steps ................................................................................... 23 5.1 Recommended Approach and Relevant Considerations ................................................... 24 5.2 Immediate Next Steps ............................................................................................................. 26 Annex 1: Laws and Regulations Referenced ............................................................................................... 27 ACRONYMS AND ABBREVIATIONS ANPD Agência Nacional de Proteção de Dados - National Data Protection Agency BCB Banco Central do Brasil – Brazilian Central Bank CDC Código de Defesa do Consumidor - Consumer Protection Code CMN Conselho Monetário Nacional - National Monetary Council CNPC Conselho Nacional de Previdência Complementar - National Council of Complementary Pension Funds CNSeg Confederação Nacional das Seguradoras - National Insurance Confederation CVM Comissão de Valores Mobiliários - Securities and Exchange Commission of Brazil EDR external dispute resolution EFPC Entidades Fechadas de Previdência Complementar - Closed Pension Fund Entities EMDE Emerging Market Developing Economy FCP financial consumer protection FSP financial service provider GDP Gross Domestic Product IDR internal dispute resolution INSS Instituto Nacional de Seguridade Social - National Institute of Social Security LGPD Lei Geral de Proteção de Dados - General Data Protection Act MC market conduct MoF Ministry of Fazenda MOU Memorandum of Understanding MSME micro, small and medium enterprises NBFI nonbank financial institution PI payment institution POS point of sale PREVIC Superintendência Nacional de Previdência Complementar - Superintendence of Private Pension Funds Procon Programa de Proteção e Defesa do Consumidor - Consumer Defense and Protection Program ROE Return on equity SENACON Secretaria Nacional de Defesa do Consumidor - Secretariat of Consumer Defense SFN Sistema Financeiro Nacional - National Financial System SNDC Sistema Nacional de Defesa do Consumidor - National System for Consumer Defense SUSEP Superintendêcia de Seguros Privados - Superintendence of Private Insurance ToR Term of Reference WB World Bank 1 EXECUTIVE SUMMARY 1. Brazil's financial sector has seen significant advancements in financial inclusion, particularly with the rapid adoption of the PIX payment system, which now facilitates over 4 billion monthly transactions. Despite these advancements, financial consumers in Brazil face significant and increasing risks, including fraud, scams, over-indebtedness, and mis-sold bundled insurance products. The most vulnerable groups, such as women and young consumers, are disproportionately affected. Over-indebtedness remains a critical issue, with rising default rates despite government initiatives like the Desenrola Program aimed at restructuring defaulted personal loans1, and recent legal reforms to the Consumer Protection Code, the Código de Defesa do Consumidor (CDC). The numbers of defaulted consumers continue to break previous records, the last figure reported standing at 72.89 million adults. The MoF has raised concerns about the continuing adequacy of the existing Financial Consumer Protection (FCP) regime and has sought assistance from the World Bank (WB) to reassess and reform the current legal and institutional framework to better protect financial consumers. 2. Globally, there is no one-size-fits-all model for FCP regimes, with countries adopting various approaches based on their specific contexts as well as international reference points. Some countries utilize central banks to regulate and supervise specific financial sectors, often in collaboration with other authorities overseeing insurance, capital markets, and credit unions. Others adopt so called Twin Peaks models, where a single conduct authority oversees the market from both a prudential and FCP perspective. The effectiveness of any model is measured by its outcomes for financial consumers and the overall integrity of the financial system. Regardless of the selected approach, authorities it is important to avoid and address possible gaps, overlaps, and inconsistencies in the institutional arrangements and legal and regulatory frameworks. In this regard, Brazil can draw valuable insights from international examples to tailor its FCP framework to its specific political, social, and economic landscape. 3. The WB endorses MoF’s proposal to take a structured and phased approach to reviewing and reforming Brazil's FCP regime. This process begins with this scoping note that outlines the current legal and regulatory framework at a high level, identifies some specific challenges and practical considerations, and suggests an approach to progress the necessary assessment. This phased approach involves engaging with relevant authorities and stakeholders to ensure a thorough assessment, leading to well-founded actionable recommendations. This assessment aims to enhance the FCP regime's effectiveness now and into the future, ultimately fostering a safer and more inclusive environment for Brazilian financial consumers. 1 The Desenrola Program, launched by the Brazilian government, aims to address and alleviate the debt burden of millions of citizens. Specifically, it targets helping up to 30 million Brazilians who are struggling with debt, focusing on those earning up to two minimum wages or with debts up to R$5,000. The program also seeks to negotiate and restructure about R$50 billion worth of debt, offering more favorable terms and conditions to make repayment manageable for the affected individuals and families. 2 INTRODUCTION 2.1 CONTEXT FOR MOF’S REQUEST 4. Brazil has made significant strides in advancing financial inclusion, as evidenced by the increase in account ownership from 55% to 84% between 2011 and 2021. The country has been widely regarded as a success story in rapidly expanding access to and usage of financial services. According to the Brazilian Central Bank (BCB), as of 2020, 96% of the population had at least one financial services provider (FSP) relationship. In November 2020, BCB launched the fast payment system known as PIX, which saw immediate adoption across the population. By March 2024, over 70% of the population had utilized PIX, resulting in more than 4 billion monthly transactions. BCB estimates that 49 million PIX users had never before engaged in digital payments, particularly benefiting women and younger individuals residing in regions with lower financial inclusion. 5. Similar to trends observed in other countries with comparable achievements, Brazil has also experienced a notable increase in risks to financial consumers. Various consumer harms, particularly exacerbated by post-pandemic concerns, such as widespread frauds and scams related to payments, significant levels of over-indebtedness, and mis- selling of insurance bundled with loans, have disproportionately affected the poorer and more vulnerable segments of the population. For instance, the number of consumers facing defaults continues to rise, particularly impacting women and young consumers.2 This trend not only hampers their access to credit but also signals the challenges posed by over- indebtedness. Despite several federal government initiatives, such as Desenrola, a program aimed at facilitating the restructuring of defaulted personal loans to alleviate over- indebtedness, this concerning statistic continues to increase. 6. The MoF has expressed concern about how risks to consumers are trending and how the financial system's legal framework may be outdated and need reform, especially the Financial Consumer Protection (FCP) regime. As a result, the MoF requested the WB to provide technical assistance to support a structured process of reassessing the current regime and indicating which reforms or updates could be undertaken to make the system more effective and beneficial to financial consumers. To support this, it is necessary to undertake a structured reassessment of the current regime and identify potential reforms or updates to enhance its effectiveness and benefit financial consumers. Recognizing the complexity of the task and the need to engage with authorities and stakeholders, the WB has proposed a phased approach, with the drafting of this Scoping Note serving as an initial step before undertaking a comprehensive review leading to a final set of recommendations to guide the reform agenda. 7. Discussions regarding optimal models for an FCP regime are ongoing worldwide, and there are various possibilities. Models range internationally from central banks regulating and supervising specific financial sectors, in conjunction with other authorities overseeing insurance, capital markets, and credit unions, to ‘Twin Peaks’ models where a single conduct authority regulates and supervises all financial segments separately from a single prudential authority. Regardless of the model adopted, its success should be gauged by the ultimate outcomes for financial consumers and the integrity and reliability of the financial system. Any country considering what is the most appropriate model for them needs to take 2 Mapa da Inadimplência, Serasa Brazil March, 2024 into account its distinct political, social, and economic context, which requires considering tailored information, as well as taking into account lessons learned from other jurisdictions. 8. This is intended to be an overall guide for the recommended next step of a comprehensive review to inform potential reforms. It provides a high level description of the current FCP legal and regulatory framework and arrangements in Brazil, including current supervisory arrangements and dispute resolution mechanisms for financial consumers, a brief explanation of specific financial product trends and challenges faced in the country, as well as risks faced by consumers, especially the most vulnerable consumers. Additionally, the note highlights several key considerations that need to form part of the initiative for reforms, not with the intent of providing a pre-packaged solution, but rather to propose a sustainable and informed reassessment of the Brazilian FCP framework, as the country endeavors to bolster the safeguarding of financial consumers. 3 FINANCIAL SECTOR LANDSCAPE AND CONSUMER CONTEXT 9. Brazil's financial sector presents a complex landscape shaped by its status as the largest economy in Latin America and its experiences with economic instability. Over the last few decades the country has shown a marked ability to control inflation successfully and foster financial markets, competition and inclusion, with the country often described internationally as a “champion of financial inclusion.” The access and usage of deposit and payment accounts, especially through digital channels, has increased rapidly over the last ten years. Brazil has also seen rapid development of fintech offerings. For example, even several years ago a fintech innovation hub known as Fintechlab identified the entry of more than 100 new fintechs per year in Brazil between 2015 and 2020. 3 The expansion of financial services has also brought much more widespread availability of consumer credit, especially through credit cards. Despite these advancements, Brazil's credit market remains affected by high costs, insufficient competition, and an overburdened legal system unable to deal well with consequences of default, all of which contribute to the country's high credit spreads and an overindebted population. 3.1 OVERALL FINANCIAL SECTOR LANDSCAPE 10. Brazil boasts a significantly developed financial market for an Emerging Market and Developing Economy (EMDE) country. The largest economy in Latin America, with a GDP of USD1,9 trillion in 20224, Brazil struggled to develop its credit infrastructure during a hyperinflation period until the early 1990s. Subsequently, with a stabilized economy, retail credit expanded, albeit constrained by factors such as recovery costs, taxes, and an overwhelmed legal system dealing with the after-effects. 11. The banking system in Brazil is highly centralized and characterized by stability compared to its peers, and other sectors are at varying levels of development. The banking sector is dominated by large, vertically integrated financial conglomerates, with the 3 https://fintechlab.com.br/index.php/2020/08/25/edicao-2020-do-radar-fintechlab-detecta-270-novas-fintechs- em-um-ano/, accessed on 5/23/2024 4 International Monetary Fund, International Financial Statistics and data files, and World Bank and OECD GDP estimates. five biggest banks accounting for 76.6% of total banking assets in 20215. Brazil’s payment infrastructure witnessed significant growth, especially after the establishment of a national payments system by the Central Bank in 2013, under the Payments Scheme Law (Law 12.865/13)6. The insurance market remains relatively small but with potential for growth, having seen an uptick in volume and profitability levels in recent years. As of 2022, Brazil had 176 banks and 64 nonbank financial institutions, including an increase in Payment Institutions (PIs) to 74 from 37 in 2021. 3.2 DEPOSIT AND CREDIT MARKET 12. Domestic credit to the private sector in Brazil is growing fast, although not yet as high as for some comparable countries, representing 71.8% of GDP (2022) 7. In March 2024, household loans in Brazil amounted to BRL3.6 billion, reflecting a 10% increase from the prior 12 months, with a non-performing loan (NPL) ratio of 3.6%. However, if subsidized loans8 are excluded, the NPL rate rises to 5.44%.9 Moreover, the free float spread reached 42.83% in March 2024. Several factors impact the spread in Brazil. The country has one of the highest prime rates in the world (excluding inflation); however, rate variations over time do not reflect changes in real interest rates. 13. Currently, Brazil’s consumer credit market comprises primarily unsecured loans, especially credit cards and other revolving credit products, and government-managed payroll loans. According to Serasa, the main credit bureau in Brazil, credit cards are the main source of consumer defaults. In March 2024, Serasa reported that 72.89 million consumers were currently in default10, representing 44.3% of the adult population, 50.4% of which were women. More generally, 46.41% of unpaid debts in Brazil as at the same time related to financial services. The current number of defaulted consumers is at an all-time high. In May 2020, Serasa reported the then-highest number being reached during the pandemic, reaching 65.23 million consumers11. However, it has only increased following the pandemic. Due to its concern regarding the increasing level of consumer over-indebtedness, BCB started to monitor the number of consumers considered to be at risk of excessive 5 BCB, Relatório de Economia Bancária, 2021 6 The Law of 2013 was pivotal in advancing Brazil’s payment system, for defining essential concepts for the payment ecosystem, such as payment schemes and payment institutions, integrating these entities into the Brazilian Payments System (SPB). 7 International Monetary Fund, International Financial Statistics and data files, and World Bank and OECD GDP estimates. 8 In the context of Brazil, "subsidized loans" refer to loans offered through targeted credit programs designed to support specific sectors or groups, often facilitated by government policies. These programs aim to provide financial resources under favorable terms to promote economic development in prioritized areas such as housing, agriculture, and small businesses. BCB classifies these types of loans as "earmarked credit" (crédito direcionado), which includes funding for sectors deemed strategically important for the country’s development. These loans often feature government-subsidized interest rates or other favorable conditions to encourage investment and economic activity in these key areas. 9 Central Bank of Brazil and Febraban, Panorama do Mercado de Crédito, March 2024 10 Credit bureaus in Brazil define as defaulted any consumer with an outstanding obligation, whether from commercial or financial contracts. CDC determines that all outstanding records must be purged after five years (art.43). This status can make it difficult or even impossible for individuals to access loans, credit cards, or even certain types of employment until they resolve their outstanding debts and improve their credit standing. 11 Mapa da Inadimplência, Serasa. indebtedness. As of March 2023, BCB identified there were 106 million indebted consumers, and 15.1 million of these were considered at risk12. BCB’s data shows that women made up an even higher proportion of indebted consumers than Serasa’s reporting, at 55.3%. BCB’s data does not include mortgages or rural credit loans, suggesting that the 15.1 million consumers identified as being at risk of excessive indebtedness as a result of debts related to products such as credit cards or other ongoing or consumption credit. Chart 1: Total borrowing population and total risky indebted borrowers Payroll loans 14. Payroll13 loans play a significant role in the Brazilian market, especially for consumers that receive periodic government payments, such as pensions and social security benefits. The current scheme was implemented by Law 10,820/03, in 2003. Although the law covers all possible payroll schemes, in practice the may relevant market for such loans relates to government payrolls, especially at the federal level. This has offered banks and other NBFIs a relatively risk-free credit business at low cost. Repayments for such loans are automatically deducted from government payments and there is negligible risk of government failing to fulfil its payment obligations to retirees and benefits recipients. 12 BCB considers to be a high-risk borrower one who meets two or more of the following criteria: I. Default on credit installments, meaning delays exceeding 90 days in meeting credit obligations (I); II. Monthly income commitment to debt service above 50% (R50); III. Exposure to the following credit modalities simultaneously: overdraft, unsecured personal credit, and revolving credit (multimodalities) (M); IV. Monthly disposable income (after debt service) below the poverty line (RPOB) as defined by the World Bank, of USD6.85 per day per capita, resulting in a monthly income of BRL6292.64. 13 Importantly this refers not only to salary payrolls, but also other periodic payment arrangements, such as government benefits. In the case of retirees and benefits recipients the income stream is ongoing and credit institutions usually also have life insurance in place covering portfolio risk. The government's involvement in providing a reliable repayment source has made the provision of such loans highly attractive despite regulatory caps on interest rates. However, consumers face a range of risk. For example, commercial incentives to sustain revenue and growth leads to consumers facing pressure from agents to renew loans frequently, leading to increased debt burdens. 15. The ability to use agents to offer this type of credit allowed various midsize banks (including without any branches in relevant areas) to reach consumers all over the country, without geographical limitations. Mid-sized banks typically operate a business model that involves them selling the debt assets to generate cash as soon as loans are acquired. This results in targeting ongoing credit expansion. Banks are often aggressive in this endeavor and are willing to pay high commissions to agents to achieve such targets. For consumers, for example, this frequently means being pressured by agents to renew (and increase) loans as much as possible. Loans with up to 96 month terms are renewed after only a short period, frequently without a consumer's clear consent or understanding of what is occurring. Such long loan terms, even with lower interest rates, also increase overall debt commitments for consumers. 16. Regulation of payroll loans involves an additional layer of complexity. Each payroll loan type involves specific regulations issued by the body responsible for administering the relevant payroll scheme. Such regulations are not supervised by BCB. The most important one is the federal government body responsible for administering retirement and benefits, Instituto Nacional de Seguridade Social—the National Institute of Social Security (INSS). INSS has more than 63 million active payroll loans, with a total asset of BRL145 Billion. 14 INSS prescribes the interest rate caps, maximum maturity, and operational procedures (such as parameters for use of digital contracts) for relevant payroll loans. It is also responsible for receiving complaints relating to such loans and supervising and sanctioning FSPs according to the regulations for its scheme. Recently, INSS outsourced complaint handling to Consumidor.gov, a web-based External Dispute Resolution (EDR) platform operated by the Secretariat of Consumer Defense (SENACON), the general consumer protection authority, which now functions as its EDR mechanism. Credit cards 17. Credit cards are the main source of access to consumers in Brazil, and are continuing to grow at a fast pace. There are around 200 million active credit cards in the country. In 2022, more than 84 million had an outstanding balance, an increase of 30.9% in three years.15 Studies conducted by BCB indicate that consumers who have more than one credit card, usually with up to 3 different issuers, are indebted to more than one and usually are more indebted to the most expensive line of credit they hold.16 18. A major concern regarding credit cards in Brazil is related to Retail Installments (Parcelamento Lojista). Retail installment arrangements are similar to those seen in some other jurisdictions. Consumers make purchases by authorizing the full amount on their credit 14 Banco Central do Brasil, 2024 15 Relatorio Estabilidade Bancária, BCB, 2023 16 Boxe 3 – Perfil de utilização de cartões de crédito no Brasil, BCB, 2023 cards. At the moment of purchase, they have the option to spread the repayment into equal installments without incurring any interest. Under these arrangements typical terms range from 2 to 24, depending on the transaction type and agreement. 19. These arrangements have similarities to some aspects of Buy Now, Pay Later (BNPL), although there are also some differences. The amount will be paid in full by the credit card issuer to the merchant, irrespective of whether or not the consumer falls behind its payments. Consumers feel tempted to purchase more expensive goods and services since they are attracted by the smaller initial outlay required with monthly installments, and merchants are willing to not receive the full amount upfront due to the incentive of more sales or, more commonly, incurring fees involved in being paid the full amount upfront under the arrangements. Even though merchants are allowed to charge a lower price for goods and services purchases not using retail installments, the majority of businesses, from small local grocery stores to large corporate supermarkets, tend to prefer maintaining uniform pricing without discounts, further promoting the adoption of such credit. 20. Credit card issuers have been advocating for the discontinuation of Parcelado Lojista, which would require regulatory intervention, as such agreements continue to be offered and contracted across all credit card arrangements. Proponents of ending this practice argue that it is a significant factor contributing to higher interest rates on credit cards, as it exhausts credit limits and increases default risks without yielding expected profits for credit card issuers. The practice was originally created by card issuers, when they had control over acquirers, responsible for negotiating the conditions with the merchants. After new acquirers entered the market and prohibitions on exclusivity for point of sale (POS) were introduced, issuers ceased to benefit from it since the rates to upfront the installments are negotiated between the merchant and the acquirer, both of them without incurring credit risk. This is reserved for the issuers, who will ensure the payments as agreed, regardless of late payments or default events by the consumer. 21. There has been an intense and ongoing debate concerning the exorbitant costs associated with retail credit, making the country one of the most expensive markets for such credit globally. Different stakeholders have offered different perspectives on this, with some frequent suggestions linking the phenomenon to a concentrated banking system, high taxes, arguably higher non-performing loans (NPLs), stringent consumer protection regulations, and challenges related to the efficiency of civil courts. Other contributing factors suggested include the prevalence of subsidized loans, cost of capital, opportunity cost, and regulations that prohibit most typical credit-related fees. However, there seems to be consensus regarding the complexity of the issues and the simultaneous potential impact of multiple factors. 22. The National Monetary Council (CMN) has enacted several regulations over the years aimed at addressing credit card interest rates. While some measures succeeded in temporarily reducing rates, historical data indicates that average rates have consistently remained above 400% per annum despite varying levels of competition and the introduction of new regulatory provisions. For the most vulnerable consumers, credit card interest rates can soar to over 900% p.a. to even 1,000% p.a.. Credit cards 23. Brazilians typically undertake their daily financial transactions using three main types of accounts: Savings, Deposits, and Payments Accounts. Savings accounts are often used by low-income segments as transaction accounts, although the recent surge in digital payment accounts has also been remarkable. Between 2018 and 2020, the number of accounts of all types with payment institutions (PIs) showed a growth of 179%, and when taking into account the entire national financial system (SFN), the growth of such accounts was 49%. In absolute numbers, there were 261 million new accounts opened in three years, primarily as a result of the demand for digital financial services during the pandemic, and to receive government benefits17. Chart 2: New accounts held by individuals per segment 24. More than 240 million savings accounts were active in 2020, representing the most preferred account type for individuals.18 Although savings account rates rarely match the inflation rate, they remain popular as an investment alternative and as an affordable transaction account, especially for lower-income and otherwise informal segments of the population. Regulated by the BCB, savings accounts typically have no maintenance fees, making them attractive for consumers who may not qualify for credit due to income limitations or past delinquency. Savings accounts offer features similar to other account types, including debit cards, ATM access, and utility bill payments. 25. Deposit accounts are the most traditional and full-fledged account, with more than 112 million account holders in 2020.19 Before the emergence of payment accounts, deposit accounts served as the primary means for establishing a credit history with FSPs. Some fintech companies offer deposit accounts with the added advantage of using account balances to finance their loan portfolios. The National Monetary Council (CMN) enforces 17 Relatório de Cidadania Financeira, 2021, Central Bank of Brazil 18 Idem 19 Idem strict regulations on service charges for deposit accounts, as outlined in Resolution CMN 3919, issued in 2010, predating the introduction of payment accounts. 26. Payment accounts have emerged as the fastest-growing account type, and include accounts with a credit card or debit card, as well as cardless accounts . Introduced in 2013 and regulated by the Central Bank of Brazil (BCB) in 2014, these accounts gained popularity following the entry of fintech companies in this space as PIs, particularly in 2019 and 2020. According to BCB, 80 million new accounts were opened with PIs alone between 2018 and 2020, without taking into consideration accounts opened by banks and nonbanking financial institutions (NBFIs). This growth was driven by the increasing preference for non-physical transactions, coupled with the widespread adoption of smartphones offering user-friendly interfaces. Additionally, the implementation of PIX in 2020, a fast payment scheme, further propelled the popularity of payment accounts in Brazil. PIX enabled immediate fund transfers between payment accounts at no cost to users. 27. Currently, consumers often find it challenging to differentiate between payment and deposit accounts. However, unlike deposit accounts, payment accounts are not subject to regulations governing fee structures. Consequently, PIs have the flexibility to impose various fees, provided they are transparently disclosed. Despite this, major PIs in the country typically refrain from charging fees, particularly following the widespread availability of free digital payment accounts. Thus, although payment and deposit accounts may appear similar to consumers, they are subject to different fee structures and regulatory frameworks. 3.3 INSURANCE-RELATED PRODUCTS 28. With an insurance industry that represents only 3.6% of the country’s GDP20, Brazil is continues to struggle to develop its market and expand coverage of consumers. Private pension funds are the leading segment for provision of insurance, followed by property coverage, with life insurance in third place.. This does not include the health insurance industry, which is considered outside the financial insurance sector. Brazil has 132 insurance companies, 19 societies of capitalization, and 13 open private pension societies. 29. The largest banks in Brazil have their own insurance subsidiaries, which serve as key profit centers within their conglomerates. These subsidiaries not only offer traditional insurance products but also provide all products regulated by the Superintendence of Private Insurance (SUSEP), including private pension funds and capitalization bonds. Moreover, these insurance subsidiaries benefit from bancassurance models, where consumers attracted by low-cost accounts and easily accessible credit are offered additional products such as small-ticket insurance and capitalization bonds, often with the promise of a return on investment at the end of the term and participation in raffles. 30. The Brazilian insurance market demonstrates remarkable profitability. Capitalization bonds, although the smallest segment in terms of revenue, achieved an impressive 49.6% Return on Equity (ROE) in 2022. Property and life insurance combined also showed strong profitability, with a 21.9% ROE, despite facing tax-to-net profit ratios of 50-70% in those segments. Auto insurance emerges as the most significant type of property insurance, representing 44% of paid premiums. Life insurance, primarily sold as a mandatory security for mortgages, covers only 20% of the population in any form21. 20 Confederação Nacional das Seguradoras (CNSeg), 2023 21 Confederação Nacional das Seguradoras (CNSeg), 2024 Chart 3: Return on Equity – yearly data 31. A capitalization bond combines elements of savings and lottery in a single financial vehicle. Initially marketed as an investment product, capitalization bonds offered the added incentive of potential prizes through regular drawings or at a bond's maturity. Upon reaching the specified term, investors are entitled to receive the principal amount invested, provided no withdrawals were made during the term. Some bonds may allow flexibility in premium payment frequency, with options for monthly, quarterly, or annual payments. 32. However, SUSEP has prohibited insurance companies from promoting these bonds as investment or savings products. This is because only a small portion of the bond's value accrues interest to the consumer, and the rate does not match that of a savings account or inflation. The primary focus of capitalization bonds is on the chance of winning prizes, rather than preserving the purchasing power of invested funds over time. Consumers have the option to cancel the bonds at any time. However, since 90% of the amount paid in the first three installments is reserved for covering administrative costs, providers retain a level of return even if consumers choose to cancel, as they are not obligated to provide full refunds. Additionally, property and life insurance, usually marketed with low ticket premiums, are also a popular bancassurance product since they are easily debited directly from accounts. They are also easily canceled and partially refunded. 4 CURRENT FCP FRAMEWORK 4.1 GOOD PRACTICE PERSPECTIVE 33. An FCP framework that effectively addresses several core aspects is an important strategy to identify and mitigate risks that may harm financial consumers in a market. Guidance and standards issued by a range of international bodies such as the G20/OECD, World Bank (WB), International Association of Insurance Supervisors (IAIS), and International Organization of Securities Commissions (IOSCO), as well as good practices from other jurisdictions, suggest that countries need to implement a comprehensive, specialized legal and regulatory framework. Such a framework should address the full range of consumer issues specific to financial services and products, across the consumer journey. Additionally, supervisory institutions must be equipped with fulsome mandates, powers, and coverage and have appropriate institutional arrangements to supervise and enforce this legal and regulatory framework effectively. Institutions should work in coordination to address risks and issues impacting financial consumers comprehensively. Lack or poor coordination has been a major factor impacting FCP’s effectiveness worldwide, exacerbating risks to consumers and resulting in less efficient use of scarce supervisory resources. 34. Moreover, it is crucial to have in place robust complaint resolution mechanisms that provide financial consumers with accessible, free, and effective avenues for resolving disputes with FSPs. These mechanisms should serve as effective alternatives to the court system, allowing consumers to have their complaints resolved efficiently and fairly. This holistic approach, combining legal, supervisory, and complaint resolution frameworks, ensures that financial consumer protection is both proactive and reactive, safeguarding consumers and maintaining trust in the financial system. By implementing these measures, countries can create a resilient FCP framework that more effectively addresses and mitigates risks to financial consumers. 4.2 CURRENT FINANCIAL SYSTEM ARRANGEMENT 35. The Brazilian Financial System, known as the 'Sistema Financeiro Nacional' (SFN), is formally outlined in Article 192 of the Constitution. It is a complex framework comprising various institutions and regulations governing financial operations within the country. This system is structured by a series of laws and normative acts that define the roles and responsibilities of different entities. The SFN is overseen by several key regulatory bodies, each responsible for different aspects of the financial industry, ensuring stability, transparency, and efficiency. The main regulatory bodies include: 1) National Monetary Council (Conselho Monetário Nacional - CMN): The CMN is the highest regulatory authority, responsible for formulating monetary and credit policies, regulating the financial system, and ensuring currency stability. 2) Central Bank of Brazil (Banco Central do Brasil - BCB): As the central monetary authority, the BACEN implements CMN policies, regulates and supervises financial and PIs, controls inflation, and maintains financial stability. 3) Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários - CVM): The CVM oversees and regulates the securities market, protecting investors, ensuring fair trading practices, and fostering capital market development. 4) National Council of Insurance (Conselho Nacional de Seguros Privados—CNSP): Analogous to the CMN, the CNSP shapes the regulatory framework for insurance and related sectors, ensuring stability, development, and proper functioning. 5) Superintendence of Private Insurance (Superintendência de Seguros Privados - SUSEP): SUSEP regulates and supervises the insurance, open private pension, and capitalization sectors, protecting policyholders and ensuring market stability. 6) National Council of Complementary Pension Funds (Conselho Nacional de Previdência Complementar - CNPC): Similar to the CMN and CNSP, the CNPC regulates and supervises private pension funds, particularly closed pension fund entities (EFPCs). 7) Superintendence of Private Pension Funds (Superintendência Nacional de Previdência Complementar - PREVIC): An autonomous federal authority, PREVIC operates under the Ministry of Economy, regulating and supervising private pension entities, particularly closed pension fund entities (EFPCs). Each regulatory body operates independently but under the oversight of the respective normative board. Figure 1: National Financial System Framework – simplified representation22 36. Although the three councils referred to above are responsible for issuing regulations, the respective supervisory authority for each undertakes the necessary drafting, technical deliberation, and public consultation processes. Law 4.595/64 and Decree- Law 73/66 establish the mandates of BCB and SUSEP. Originating from the 1960s, these legal frameworks do not include requirements or references pertaining to consumer-related rights or risks, including FCP. CVM, on the other hand, is primarily governed by Law No. 6.385/1976, which regulates the Brazilian securities market. This law empowers CVM to regulate, supervise, and discipline entities and individuals operating in the securities market to ensure its efficiency and transparency. 37. BCB’s enforcement and sanctioning powers were updated under Law No. 13.506/17, enacted in 2017. Although this law does not specifically mandate actions related to FCP or Market Conduct, it serves as the legal basis for BCB to sanction FSPs in relation to regulatory requirements generally. These sanctions aim to ensure compliance with financial 22 Source: https://www.bcb.gov.br/en/financialstability/nationalfinancialsystem, accessed on 5/23/2024 regulations and maintain the stability and integrity of the financial system. The types of sanctions BCB can impose include: 1) Warnings: For minor infractions, BCB may issue formal warnings to institutions to prompt corrective action. 2) Fines: Monetary penalties may be levied for various infractions, the amount of which is determined by the severity and nature of the violation and the size of the institution. 3) Temporary Prohibitions: BCB may temporarily prohibit individuals or entities from conducting specific activities or operations within the financial system. 4) Suspension of Activities: In more severe cases, BCB may suspend the activities of an institution or its managers for a specified period. 5) Cancellation of Authorization to Operate: BCB has the authority to revoke an institution's authorization to operate within the Brazilian financial system in cases of serious violations. 6) Disqualification: BCB can disqualify directors and board members from holding positions in the financial system for a certain period. These sanctions are applied based on the specifics of each case and the outcomes of BCB's supervisory and enforcement actions. Additionally, BCB may negotiate Conduct Adjustment Terms (Termos de Ajustamento de Conduta). SENACON may negotiate similar agreements. Through such agreements, FSPs may agree to compensate harmed consumers and pay fines to the authority, thereby avoiding the initiation of administrative processes. In terms of sanctions, there is only a very limited reference to the Central Bank being able to sanction FSPs should they fail to comply with CMN regulations on a list of topics, including ones related to the “relationship between the persons mentioned in the caput of art. 2 of this Law and its customers and users of financial services and products.” 38. SUSEP has the authority to impose various administrative penalties on entities that do not comply with applicable regulations. These penalties include: 1) Fines: SUSEP can issue fines to entities that violate regulations. The amount of the fines can vary depending on the severity and nature of the infraction, up to a cap of BRL one million, equivalent to USD200,000.00. 2) Suspension: The agency has the power to temporarily suspend an entity's operations if it fails to comply with certain regulations or requirements. 3) Cancellation: SUSEP can cancel an insurance broker’s authorization to operate, which means the person or entity is no longer allowed to conduct its business in the insurance and related sectors. 4) Prohibition: Depending on the infraction, SUSEP can also prohibit individuals or entities from performing certain activities within the insurance market for a specific period or indefinitely. 5) Intervention: In certain cases, SUSEP may intervene in the operations of an entity to ensure compliance with regulations and to protect the interests of policyholders and beneficiaries. 4.3 CONSUMER PROTECTION LEGAL ARRANGEMENTS 39. Brazil currently lacks a dedicated FCP law specifically tailored to FSP interactions with financial consumers, and which would address the full spectrum of FCP issues and risks. Instead, the primary legislation governing financial consumer protection is the general Consumer Protection Code, known as Código de Defesa do Consumidor (CDC), or Law 8.078/90. Enacted in 1990 following a mandate from the 1988 Constitution, this law was among the first of its kind globally. The CDC imposes various important requirements that generally apply to all goods and services. It is widely regarded as a crucial tool for consumer protection but given its intended general application it focuses on addressing abusive and unfair practices and clauses in a broad sense, rather than specifically targeting FCP concerns. 40. In response to mounting concern regarding escalating levels of individual over- indebtedness, the National Congress passed amendments to the CDC in 2021, culminating in the enactment of the Law of Overindebtedness (Law 14,181/21). This legislation introduces a legal definition of over-indebtedness and mandates that service providers, including those offering financial services, undertake preventive and mitigative actions to restructure consumers' debts while safeguarding their ability to support their households financially. However, these amendments have limitations in addressing the full range of consumer concerns related when it comes to credit, and were not intended to establish a more comprehensive FCP framework. 41. Even though amendments made to the CDC were intended to address FCP concerns, their enforcement remains under the jurisdiction of the Ministry of Justice, through the SENACON. SENACON does have range of functions of a full regulatory agency. It functions as a key component of the National System for Consumer Defense (SNDC), a collaborative network that brings together federal, state, and municipal bodies and entities, along with consumer associations. The primary objective of the SNDC is to ensure the effective enforcement of consumer protection laws. Its members include: 1) National, state, and municipal consumer protection agencies and entities. 2) Public bodies tasked with consumer protection responsibilities, such as the Ministry of Justice and Public Security. 3) Legally recognized consumer associations focused on consumer issues. 4) Public prosecutors responsible for enforcing consumer protection laws. 5) Public defenders who offer legal assistance to consumers, particularly the most vulnerable ones. 6) Other relevant entities and organizations contributing to consumer protection and education. 42. In addition, notably, BCB and SUSEP are not part of the SNDC. One significant member of the SNDC is Procon, short for "Programa de Proteção e Defesa do Consumidor," or Consumer Protection and Defense Program. Procon operates at both the state and municipal levels, enforcing consumer protection laws and regulations. It is tasked with promoting and implementing policies to safeguard consumers, handling complaints, mediating disputes between consumers and businesses, and ensuring compliance with the CDC. While states and cities have the freedom to define their operational frameworks, they are technically supported by SENACON. 43. While the SNDC lacks formal powers to sanction providers directly, the CDC specifies a range of penalties for businesses engaging in abusive practices: 1) Fines: Businesses found engaging in abusive practices may face financial penalties. The fines imposed can vary based on the severity of the violation and its impact on consumers. 2) Product Recall or Replacement: If abusive practices involve unsafe or defective products, businesses may be required to recall the products or provide replacements to affected consumers. 3) Prohibition of Certain Practices: Regulatory authorities have the authority to prohibit businesses from engaging in specific practices deemed abusive or unfair to consumers. 4) Legal Action and Damages: Consumers harmed by abusive practices have the right to sue the business to seek damages for their losses. 5) Public Disclosure of Violations: In some cases, businesses may be compelled to publicly disclose their violations of consumer protection regulations, which can harm their reputation and credibility. These penalties and enforcement mechanisms typically involve legal proceedings. Procon agencies, operating at both state and municipal levels, have the authority to impose fines similar to SENACON. In some states and cities, funding for Procon agencies relies solely on fines. However, it's important to note that SENACON and Procon agencies are staffed with legal professionals knowledgeable about consumer protection laws and court proceedings but may lack specific expertise in the financial sector. SENACON also has the authority to enter into terms of conduct agreements with providers to rectify consumer issues and avoid civil action. 44. Brazil also lacks any formal legal definition of a financial consumer (or equivalent). Since all provisions related to financial consumer protection stem from the CDC, a law not originally designed for specific elements of financial consumer protection, the legislative framework only defines a general consumer. Financial authorities have avoided formulating addressing this subject to prevent potential concerns about attempting to regulate provisions of the CDC, which could be deemed illegal due to a lack of competence. 45. Relevant risks faced by financial consumers in Brazil are treated by authorities as general consumer protection issues rather than specific FCP issues. The CDC defines abusive practices and clauses as those that contravene the principles of good faith and equity between parties. Such practices and clauses exploit consumers, impose excessive burdens, or unfairly disadvantage them. Examples include: 1) Imposing unjustifiably high costs or excessive price disparities. 2) Placing undue risks on the consumer. 3) Contradicting or deviating from fundamental contract principles, causing imbalance. 4) Limiting consumer rights. 5) Being imposed without adequate and clear consumer information or consent. 6) Exploiting the consumer's lack of knowledge or vulnerability. The code stipulates that abusive clauses may be declared void, but this requires a court decision, either through collective or individual action. 46. In Brazil, topics relevant to FCP for credit, such as predatory lending or abusive rates, are traditionally categorized as abusive practices and clauses, falling under the jurisdiction of SENACON and Procons for investigation. However, in practice, only the BCB, as the authority for lending institutions, possesses the requisite knowledge, expertise, and access to data to effectively investigate FSPs practices. BCB is empowered to supervise FSPs based on Law 13.517, and any attempts by FSPs to limit BCB's access to data are subject to administrative enforcement, including action against the director responsible for the data. SENACON and Procon lack similar powers, and any challenges to responses provided by FSPs or other businesses must be pursued through legal avenues. This also goes for BCB and SEPS when it comes to other relevant financial products and services and consumer issues, such as accounts and insurance respectively. 47. Data privacy and protection for financial consumers in Brazil are governed by the General Data Protection Act (LGPD), Law 13,709/18. These provisions are overseen by the National Data Protection Agency (ANPD), which was established by the law and is still in the process of development. Additionally, the BCB is responsible for supervising banking secrecy provisions as established by Complementary Law 105/01, the Financial Data Secrecy Law, but it is covered by prudential regulation and supervision as an operational and legal risk element. 4.4 CONSUMER PROTECTION REGULATORY FRAMEWORK WITHIN THE FINANCIAL SYSTEM 48. There are also various regulations issued by the CMN, BCB, and CNSP, specifically focusing on the segments supervised by BCB and SUSEP, covering key retail financial services giving rise to most risks to consumers. It should be noted, however, that many observations here regarding to such regulations are also applicable to the general context of FCP, including the activities supervised by CVM. The current set of regulatory instruments makes for a relatively complex and fragmented landscape, as show in Figure 2. 49. CMN has issued an overarching regulation for financial institutions through Resolution CMN 4.949/21. The rule “establishes principles and procedures to be adopted in the relationship with clients and users of products and services.” CMN and BCB avoid using or defining the term consumer. The content is intended to reflect the G20/OCED High- Level Principles for Financial Consumer Protection, so all relevant topics are addressed to varying degrees, except for data privacy and protection, given national data privacy legislation. Areas addressed include conduct, with provisions relating to topics such as suitability, debt collection, consumer mobility, and account closure. Various transparency and disclosure are also covered, as well as obligations on FSPs to establish policies and control mechanisms for compliance with the rule. 50. CMN also has separate resolutions on other key topics of FCP, such as internal dispute resolution (IDR), fees and charges on accounts and loans, as well as several product specific provisions for credit cards, loans, and direct debits. Payments and consortiums are regulated directly by BCB, not by the CMN, so there is a specific BCB Resolution covering these. However, both segments don’t have the same provisions from all CMN regulations, with some gaps related to fees, transparency, and disclosure and suitability. 51. CNSP also issued a resolution touching on FCP provisions in 2020, Resolution 382/2020. Its principles are derived from the CMN Resolution, with some articles simply replicating those from Resolution 4949. There are some specific provisions regarding intermediaries’ conduct, an issue common in insurance distribution in Brazil. In a contrasting approach from CMN and BCB, CNSP decided to also expressly reference to the possibility of mystery shopping by SUSEP. SUSEP's enforcement powers in case of non-compliance with this regulation are limited to fines up to R$500,000.00, equivalent to USD100,000.00. There are no other specific provisions on consumer protection. Figure 2: Diagram representing the current Financial Consumer Protection Framework 4.5 COOPERATION, INTEGRATION, AND INFORMATION SHARING AMONG AUTHORITIES 52. There are two levels of cooperation arrangements to support FCP supervision in Brazil: one is a collective arrangement covering the financial authorities and the other consists of bilateral understandings between BCB or SUSEP and members of SNDC. Under Law Complementary 105/21, all financial authorities are legally obliged to report to the competent authority possible situations that could indicate irregularities or misconduct. Each authority has to define its process on how to select and report cases. This is usually a process conducted through the exchange of formal letters, without measures to follow up or conduct meetings to provide context or further information. Although BCB and SUSEP have a Memorandum of Understanding (MoU) that would even allow joint inspections on any supervised topic, the authorities’ interaction in this regard remains limited to sharing complaint-related data and some broad, general findings on an ad-hoc basis, without any periodic and systematic procedure for broader information sharing. Additionally, SUSEP has limited capacity to undertake more intrusive supervision when supervising insurance companies within banking conglomerates, since sales channels are always designed and operated by the banks, which are not within their purview. 53. SENACON has MoUs with BCB and SUSEP, which are limited to exchanging aggregated complaints data. Information from SENACON’s EDR is easily accessible to financial authorities. The data is a statistic reporting the number of complaints filed at any channel, including state and city Procons, but considering the amplitude of channels, the accuracy in identifying the nature and FSP for each complaint is somewhat limited. 4.6 EXTERNAL/ ALTERNATIVE DISPUTE RESOLUTION MECHANISMS FOR FINANCIAL CONSUMERS 54. Under the CDC, Brazil provides a dispute resolution mechanism for consumers that covers all products and services but has various limitations in terms of how complaint may be resolved. Procons are able to receive complaints from consumers in relation to products and services generally. Usually, Procons are favored by low-income consumers, who also prefer to register their complaints in person. SENACON has created a web platform named Consumidor.gov. Consumers can submit their complaints on the platform, and the participating companies are obliged to respond within 10 days and attempt to resolve the issue. The consumer will rate the response as “solved” or “unsolved”, contributing to a publicly available indicator. If an agreement cannot be reached, consumers may use the information provided by the platform to seek further assistance from consumer protection agencies or take legal action. Created in 2014, the platform processed almost 1.5 million complaints covering all sectors in 2021. There were 1,1418 companies registered. Companies are not obliged to register except when mandated by the segment authority, which is the case of SUSEP and INSS. The financial sector responds to 30% of the complaints processed by Consumidor.gov, led by credit cards and INSS payroll loans. 55. Importantly, SENACON and Procon’s mechanisms are limited to intermediation/routing of complaints. Procons have the authority to summon providers to appear at a conciliation meeting, but they are not obliged to offer a solution. Even the Consumidor.gov platform does not evaluate responses to complaints, only monitoring if they are deemed “resolved” by the provider. 56. BCB receives around 500,000 complaints per year through its application known as “Demandas and Complaints Register - Registro De Demandas e Reclamacoes (RDR), a web-based channel developed by BCB. The unit responsible for the system also receives complaints by phone, mail, and email. BCB closed face-to-face complaint submission during the pandemic and has since decided not to resume it. The EDR service operated by BCB analyzes individual complaints and even rates the complaint as indicative of a breach of compliance. Only the FSP is advised of such an indication and not the consumer. However, BCB is not legally able to impose its binding determinations on what is an adequate response to a complaint. Although the Central Bank has powers to demand data and information regarding each complaint from an FSP, the consumer will not know what is BCB’s final analysis, as this information is provided to the supervision department and the FSP. Although BCB does not have formal determination powers for individual complaints, FSPs may feel under a greater obligation to offer adequate responses to consumers since their responses may ultimately be evaluated by BCB in its supervisory capacity as part of its assessment of the quality of FSP’s own complaint handling. 57. Data collected by RDR is also used by BCB to compile quarterly rankings of complaints, an index based only on complaints regarded as indicating a breach of compliance. The ranking is easily accessible and monitored not only by BCB’s prudential and conduct supervision departments but also by external stakeholders such as investors. For example, mid-sized banks, who usually pay higher rates in the interbank market, may find it more difficult to access wholesale credit when they are leading such rankings. The ranking compiles only complaints that fall under BCB’s jurisdiction. For example, complaints on insurance products will not be eligible for the ranking. 58. Even for products regulated by CMN and BCB, a complaint must relate to regulations issued by the financial authorities. For example, complaints about any provision specific to the CDC, like abusive rates or clauses and debt collection practices, will be regarded as non-regulated and, therefore, won’t review proposed resolutions. 59. Although SUSEP has various channels to receive queries from consumers, all complaints regarding supervised entities are routed to Consumidor.gov. SUSEP obliged all supervised entities to register at Consumidor.gov in 2021, making the platform its official EDR mechanism. In addition, SUSEP has historically been more focused on acting on individual complaints on an ad hoc basis, with occasional demands for providers to make refunds or otherwise compensate consumers. Its current approach, as reflected in Circular SUSEP 643/21, notes that supervisory action may be undertaken on an individual level. 60. While access to EDR for financial consumers is currently offered through a patchwork of mechanisms, EDR seems to be used widely and produces some satisfactory responses for at least some consumers when smaller amounts are involved. However, particularly where higher amounts are involved, FSPs appear to be more comfortable in declining any refund or compensation, being less concerned about potential further recourse by consumers given that the only alternative left for consumers is usually to go to court. For example, this has been the case in relation to growing instances of consumer losses from fraud and scams where there may be provider responsibility, and also with regard to payroll loans for retirees and benefit recipients where the purported borrower was not aware of new credit being issued. These have become major sources of complaints in Brazil. 5 RECOMMENDED APPROACH AND NEXT STEPS 61. Given current market trends, the emergence of new risks, including due to technological developments, and the longstanding lack of any comprehensive review of FCP, it is timely for Brazilian authorities to revisit the existing legal framework and institutional arrangements. The current framework has resulted from historical factors, including piecemeal reactions to some specific challenges. A comprehensive review would allow authorities and stakeholders to assess how well the current framework is able to address present challenges and is prepared for developing risks, such as those posed by artificial intelligence and climate change-related issues. Brazil can also learn from the experiences of other countries and consider innovative approaches. This would ensure financial consumers benefit from an updated, customer-centric framework, aligned with the Financial System's commitment to positive outcomes as established by the Constitution. The current framework is a result of historical factors combined with a unique context and connected to other frameworks, financial and non-financial. 5.1 RECOMMENDED APPROACH AND RELEVANT CONSIDERATIONS Scope of reassessment 62. A comprehensive and effective FCP framework comprises three core elements that should be addressed in the reassessment:  Legal and regulatory framework This element encompasses the set of laws and rules that establish roles, powers, definitions, provisions, and duties. It forms the foundation of the FCP framework, ensuring that all aspects of financial consumer protection are clearly defined and regulated.  FCP and Market Conduct (MC) Supervision This element involves the entire structure designed to supervise and enforce compliance with the legal and regulatory framework, as well as, more broadly, promote beneficial consumer outcomes and good industry practices through a variety of actions.  Institutional arrangement for External Dispute Resolution (EDR) for financial consumers This element includes the arrangements established to provide impartial, free, accessible, transparent, effective, and fair channels for consumers to resolve grievances with FSPs without resorting to legal proceedings. Effective EDR is crucial for maintaining consumer trust and ensuring quick and fair dispute resolution. Set clear objectives for the process upfront 63. Clear and comprehensive objectives, outlining policy goals and desired outcomes, should be identified upfront for the process – it is suggested that this be done through a formal ‘terms of reference’ document. Inherent risks should be assessed to enable proper mitigation when necessary. A thoughtful definition of outcomes, based on the purposes of the whole initiative, will facilitate decision-making at the end of the process. (Policy objectives will, of course, need to be adjusted following the reassessment for the purposes of development of resulting reforms to reflect lessons learned and information and insights obtained). The terms of reference should also inform parties and organs assisting with the reassessment process, such as working groups and supporting experts. Assessing against international standards and good practices while having regard to country context 64. The current framework should be assessed having regard in part to international principles and good practices. The reassessment should include a consideration of the current framework in contrast with standards, principles, and guidance from the various international bodies relevant to FCP. These include, for example, the G20/OECD, Financial Stability Board (FSB), International Association of Insurance Supervisors (IAIS), International Organization of Securities Commissions (IOSCO), etc., as well as various other international bodies that research and work on the topic. 65. The reassessment should also carefully consider the current market from both a consumer and provider perspective. It should include appropriate primary and secondary research and analysis to contextualize consideration of each facet of the current framework and potential outcomes. (Effective consultations for these purposes will also be essential, as further discussed below.) Governance and rigor of the process 66. The reassessment may lead to recommendations that, if accepted, could significantly alter longstanding arrangements, structures, and responsibilities. From the outset, it will be important to have a clear governance structure to ensure appropriate integrity and independence of the process to arrive at such recommendations and ensure that all affected stakeholders are given the opportunity to provide input. Naturally, it will also be important to make clear whose prerogative it will be whether to ultimately accept such recommendations. 67. It will also be important for the MoF and any relevant working group to have sound advisory support. This will include ensuring there is sound and wide-ranging expertise contributing to the assessment and recommendation formulation process. Broad and effective consultation 68. Effective and appropriately broad consultations with the full range of relevant stakeholders will be essential to both inform and validate the assessment and recommendations. While authorities will initiate the reassessment, their views should be considered alongside those of other relevant stakeholders, including consumer representatives, FSPs, and representatives from other segments and areas connected to the FCP framework. The following table lists key stakeholder groups: Table 1: Relevant stakeholder groups (not exhaustive) Stakeholders 1. MoF and Financial Authorities (CMN, CNSP, CNPC, BCB, CVM, SUSEP, Previc) 2. Non-financial Authorities (MoJ, SENACON, Procons, Previc) and other judiciary and legislative branches 3. Industry and consumer representatives 4. Other groups (e.g. expert commentators, representatives from other sectors connected with financial sector etc.) Adopting a phased approach to any reforms 69. International experience shows that complex reforms require phased strategies to ensure a smooth and effective transition. Suggestions on potential phasing will be an important consideration for recommendations, and subsequently when determining implementation. Phasing will be relevant in potentially a variety of ways, including phasing as between, or within, specific elements of FCP arrangements. Initial decisions on the way forward for overarching elements will also determine options available for more specific components. Transparency and communication 70. Maintaining transparency and clear communication throughout the reassessment process is crucial. Regular updates and open channels for feedback will help keep all stakeholders informed and engaged. This transparency fosters trust and facilitates smoother implementation of any resulting reforms. 5.2 IMMEDIATE NEXT STEPS 71. As immediate next steps, MoF and other authorities should develop the overall problem statement to be addressed by the assessment as an initial step toward preparing terms of reference for the assessment and a roadmap for any resulting reform process. Both documents will be essential to setting the agenda for the assessment and reforms and gaining buy-in from authorities and other key stakeholders. The subsequent necessary steps may be defined within those documents. Terms of Reference for the Assessment 72. The Terms of Reference (ToR) will provide the parameters and overall guidance for the assessment to be undertaken (and report(s) to be produced. They should inform all participating authorities and other stakeholders, including working groups and experts, about their roles and the scope of the review. Establishing the problem statement and clear objectives from the outset will facilitate decision-making and ensure the reforms align with the overarching aims. The ToR should be defined by the MoF, with inputs from relevant authorities. Roadmap Development 73. The roadmap would delineate the phases of the reform (starting with the assessment process), to support a consistent and effective transition. It will incorporate a detailed timeline, stakeholder engagement steps, and specific milestones to be achieved at each stage. The roadmap will also outline the necessary research and analysis to be conducted, including consultations with a broad range of stakeholders, such as financial and non- financial authorities, industry representatives, consumer groups, and other relevant groups. It will be important to acknowledge that while an initial (likely higher level) roadmap should be developed prior to the assessment being undertaken, this should be adjusted once the assessment is completed to reflect its output. ANNEX 1: LAWS AND REGULATIONS REFERENCED  Brazilian Constitution  Banking Law  BCB Enforcement Powers Law  Financial Data Secrecy Law  Consortium Law  Consumer Protection Code  General Data Protection Law  Overindebntess Law  Payments Schemes Law  Payroll Loan Law  Securities Exchange Law  Decree/Law on Insurance Regulation  Resolution CMN 3919  Resolution CMN 4949  Resolution CNSP 382  Circular SUSEP 643