Written by Osvaldo Cabezas, Associate
In September 2021, the Chilean Government submitted a Bill to the Congress in an effort to regulate the Fintech industry. This is a developing and growing sector that has from the outset faced legal uncertainty.
The bill is conceived as a framework that establishes regulatory principles oriented to promote and facilitate the adoption of technology to stimulate financial innovation, the entry of new players and competition, as well as the development of new financial products and services with greater outreach.
The Chilean Commission for the Financial Market (“CMF”) ensures the correct functioning, development and stability of the financial market in Chile. They will now also have the task of regulating and overseeing the Fintech Market, under principles of risk-based proportionality, modularity in the services provided and technological neutrality.
The fact that this is law is more of a framework means we should keep in mind that it is very like that ongoing modifications will be required to incorporate new business models that may be relevant, or otherwise make adjustment to the current regulations. This is the case for all laws, but especially true for such a dynamic market like Fintech.
The bill is divided in the following topics:
First Chapter: General guidelines
The first chapter contains the objective of the law and the guiding principles of the law, consisting of financial, financial inclusion protection, customer protection, preservation of integrity and innovation, competition, financial stability and prevention of money laundering and financing of terrorism. These principles must be observed by all parties falling under the law.
Second Chapter: Financial services based upon technology.
This chapter contemplates a regulatory framework and incorporates the following services (Fintech) to the CMF’s perimeter of supervision:
- Crowdfunding platforms (whether investment or loans);
- Alternative transaction systems for securities and financial instruments (including invoices, derivatives, virtual financial assets or crypto-assets, among others). For the purposes of this law, a virtual financial asset is understood as a digital representation of units of value, goods or services, other than money, whether in local currency or foreign currency, which may be transferred, stored or exchanged digitally;
- Order Routing platforms and intermediaries of financial instruments;
- Depository of financial instruments; and
- Credit advisors and investment advisors.
All those who provide these services must register in the “Registry of Financial Service Providers” held by the CMF.
Likewise, before commencing functions, service-providers must prove compliance with certain requirements associated with the level of risk of each service provided. These requirements include information obligations to clients, suitability requirements, capital and warranty requirements, internal regulations, and corporate governance and risk management requirements.
It is also established that the CMF may exempt or establish a less burdensome compliance with the requirements set forth in the law. Such an exemption is available when public faith or financial stability is not compromised, and is allowed having regard to the nature of the service provided and in terms of the number or type of participants, volume of transactions or financial instruments traded, quoted or offered, along with other factors.
Finally, the bill establishes penalties and sanctions, specifying those infractions that will be considered as serious.
Third Chapter: Open Finances System
This chapter establishes the basic principles and rules for the development of an Open Finance System that allows different financial service providers to exchange financial information of clients. This is to be done in an expeditious and secure manner via remote and automated access interfaces, and with the express consent of the client.
It determines who will be the participants of the Open Finance System and the registries in which they must register and the types of data and information that may be shared.
It also allows the CMF to define the technical standards for the exchange of information, including obtaining consent, authentication of clients and participants, and security standards. The gradual implementation and the progressive incorporation of financial service providers and products is also outlaid.
In addition, “Payment Initiation Service Providers” are incorporated into the scope of the CMF, which may provide services to account-holding customers, in order to initiate the execution of payment orders or electronic funds transfers, on behalf of the customers and through electronic interfaces.
This will allow the promotion of electronic transfers as a means of electronic payment, without the need to use or incur in card costs, which will benefit both the customers holding banking current accounts or prepaid accounts, as well as the merchants who will be able to expand their alternatives of accepted means of payment.
Title IV: Other Provisions
As a measure to protect financial clients and to promote an adequate market conduct, it is established the obligation of financial service providers to make a profile of their clients to take into consideration when offering them financial products and services. This aims to avoid commercial practices that favor risk-taking over the client’s expectations.
In addition, an obligation is established to inform the reasons associated with the denial of bank accounts to financial institutions audited by the CMF, considering that access to financial services is essential for the provision of financial services to its clients.
It is important to note certain details of the bill are not fully regulated in this project, and they will be ultimately defined by the CMF. For example, the amount of the banking warranty/insurance that some Fintech companies must issue once they reach certain volumes of business or clients that could be affected by their actions or omissions.
Despite the above, the Fintech market welcomes the possibility of having a broader scope of legal certainty for these matters, in order to meet the objective set by the current government of transforming Chile into a regional financial center for the industry.
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