Written by León Lanis V. , Paralegal
The fintech market has been booming in Chile since 2019! Since humble beginnings with no more than 50 start-ups to now more than 400 companies, it has seen the biggest growth rate in all of Latin America’s ecosystem. This is not a random phenomenon – Chile has steadily pushed itself to become the Latin American hub of digital finance, pioneering in institutional incentives, creation of ground-breaking technologies, market-friendly government agencies and most notoriously a gigantic effort to reform its laws and regulations towards the democratisation of finance.
Fintech Law – A framework for new regulations
One of the pinnacles of said reforms was the Fintech Law, setting Chile as a pioneer and leader in financial technologies legislation. As informed in previous blogs, the fintech law regulates seven different types of activities (investment advising, credit scoring, crowdfunding, multilateral trading systems [SAT], custody, intermediation and routing of financial instruments) and as well creates the first ever centralised Open Finance data model.
This said, the Fintech Law was just the start of reform. As a very wide framework for the regulation, it put the ball in the Financial Markets Commission’s court to regulate the specifics of the market. The law established that the following must be regulated in secondary rulings and which types activities will need to comply:
| Disclosure | Operational capacity | Corporate governance | Guarantees | Capital | Idoneity | |
| Crowdfunding | Yes | NO | Yes | NO | NO | NO |
| SAT | Yes | NO | NO | NO | ||
| Credit scoring | NO | NO | NO | Yes | ||
| Investment advising | NO | NO | NO | Yes | ||
| Custody | Yes | Yes | Yes | NO | ||
| Routing | NO | NO | ||||
| Intermediation | Yes | NO |
The Financial Market Commission had a period of 18 months to issue said rulings. This highly anticipated regulation came into force on 3 February 2024, with companies having a 12 month window period to ensure compliance. Here will summarise its obligations:
PROCEDURE OF LICENSING
Firstly, the regulation creates two separate processes. For starters, and similarly to the Australian process, Fintech companies must register as a Financial Services Provider, which is just to publicly inform that the company is in the scope of the Commission’s oversight and to avoid fines and penalties. Then, the company must undergo a review in order to obtain an authorisation from the Commission to provide such services, where the Commission will study the compliance of the company of the aforementioned requisites. All companies wanting to obtain the licence for providing financial services must have a Chilean domicile.
DISCLOSURE
Each type of activity has different requisites when it comes to services disclosure. The main idea is that the company takes every possible instance to inform the consumer of the risks of investment, possible conflicts of interest, the characteristics of the services provided, the characteristics of the instruments and assets to be invested in, etc.
CORPORATE GOVERNANCE
The Board of Directors -or its equivalent in the company- takes a very important role in this matter, for it is obliged to take all the decisions in regards to risk appetite, risk assessment, internal policies, code of conduct, and the overall management of the compliance.
As said in the previous matter, all types of activities have varied obligations, but the main aspects are:
- The creation of risk assessment and internal auditing roles -in charge of enforcement-
- The creation of risk appetite and management manuals
- Thorough internal policies that touch matters such as risk mitigation, internal limitations, mechanisms of position liquidation, ethics, cybersecurity and data protection, etc
- The creation of methodologies of approval, evaluation and control of algorithms
- Third party and providers controls
- Amongst many more requisites
CAPITAL AND GUARANTEES
Following many of the principles of Basel III, the Commission created a volume and risk-based capital and guarantee requisite. For these purposes, the regulation creates three blocks of proportional regulation:
- Block I: any regulated company with no more than 500 active clients and that does not reach any of the following block’s conditions;
- Block II: any company that has between 500 and 5.000 actives clients, average daily transactions of UF 100.000 and UF 500.000, an average of UF 20.000 and 500.000 of assets in custody or the total of -between- UF 25.000 and UF 50.000 in income in the last year.
- Block III: any company with over 5.000 active clients, more than UF 500.000 in daily average transactions, over UF 100.000 of assets in custody or more than UF 50.000 in annual income.
Block I companies may not comply with any further requisite in capital, Block II must have an adjusted capital of UF 1.000 (which must be calculated by pondering asset risk factors) and Block III companies must have a constant capital of at least UF 5.000 plus a 3% of risk pondering of assets in custody. Block II and III companies must add another UF 500 in case they also do routing services.
OPERATIONAL CAPACITY
Last but not least, Multilateral Trading Systems, Routing, intermediation and custody services must prove to the Commission that they stress-tested their systems and which procedures they established in order to monitor operational risks and costs that may affect the financial consumer.
Conclusion
This is only a very brief summary of the 136 pages of regulation the Financial Market Commission just issued, but it contains very high level and groundbreaking standards that have never been seen before in the region. Although the ruling entered into force the 3rd of February of this year, regulated companies will have a period of one year in order to comply. Non-compliance may be dealt with fines of UF 1.000 (roughly USD 45.000) and the impossibility to provide the aforementioned services. With this in mind, it is important for Fintech companies to begin working now to ensure that they are compliant with these new regulations.
