Brazil: Setting Up A Financial Institution In Brazil Control By Foreign Investors

Last Updated: 5 April 2011

By Eduardo Amaral Gurgel Kiss1

The Brazilian economy has been performing reasonably well in recent years and international investors become interested in setting up financial institutions in Brazil. We present below the basic requirements for that purpose.

Before setting up a financial institution, the interested investor must obtain authorization from the Brazilian authorities.

The procedure to obtain the authorization comprises two phases.

The first phase is aimed to obtaining a decree by the Brazilian President. Such Decree is necessary whenever the investment will result in an increase of the foreign investment in the financial system.

The Brazilian Central Bank is the governmental agency that reviews the application and gives the initial approval. Subsequently the application is submitted to the National Monetary Council and, finally, it must be reviewed and approved by the President of Brazil for the issuance of the required Decree.

At the Central Bank In addition to various legal documents and data related to the interested investor, he/she/it must present a business plan which must cover at least the projection for the first 5 years of the company's activities. The following is a summary of the contents of a business plan, in accordance with the Central Bank requirements. The Central Bank expects a business plan to contain:

  1. an introduction or executive summary;
  2. macroeconomic premises;
  3. corporate governance standards;
  4. market plan;
  5. operating plan;
  6. human resources plan;
  7. risk management plan;
  8. economic-financial feasibility analysis (financial plan).

The following is a brief summary of the contents of the above items.

1. Executive Summary

This section should detail the line of business the company will be engaged in, with a brief history of the economic group applying for the authorization. Additionally, the summary should also point out the list of controllers, holders of qualified interest (individuals holding 5% or more of the prospective investor), and the managers of the applicant, as the case may be. The investor should indicate the countries in which he operates and the business conducted in those countries. The Central Bank can consult with the financial authorities of the country in which the investor has its head office with respect to the investor's status and his plans to set up a subsidiary in Brazil.

2. Macroeconomic premises

The main macroeconomic premises used in the projections utilized in the project must be explained to enable the understanding of market, financial, operating, human resources and risk management plans to be implemented by the investor. The investor should insert in the business plan considerations on how the institution will develop its operations within the local environment vis-à-vis the GDP evolution, the inflation rate (actual and forecast), interest rate (actual and forecast), exchange rate (actual and forecast) and any other economic rates deemed relevant.

3. Corporate Governance Standards

The corporate governance has been viewed within the Brazilian financial market as a key tool to support the company's management to carry out the daily operations within the most reliable and secure internal economic ambient.

The use of corporate governance standards help the Central Bank to assure the non-existence of the so-called "agency conflict" between the business ownership and business management. Hence, the Central Bank expects the investor to create and maintain efficient mechanisms to ensure that the executive officers' conduct is in line with the stockholders' interests. Those mechanisms are usually monitoring and incentive systems.

4. Market Plan

The project description must contemplate the market analysis as a whole, including the target public the finance company should work with, the products and services to be offered and the aspects related to publicity and advertising.

In processing the market analysis, the investor must describe the data, trends, market structure, as well as the analysis on competition and potential clients in the local market.

The competition analysis must mention the main competitors, and how the investor foresees the market dispute. Additionally, the analysis must take into account the intended market share, the investor's competitive positioning, the competitors' strategy, the strengths and shortcomings, and a description of the legal, operational and market issues for the intended institution.

As to clients, there must be a description of the target clients, along with a definition of the social-economic profile and segmentation criteria.

The pricing strategies must factor in the spread, the fees and the taxation on financial products and services, the estimated sales by product and services (quantity and average value) must also be detailed, further to the presentation of the main products and services offered.

The service network and its capacity must be described (call and service centers, internet brokerage) as well as their suitability to the offered products.

The market plan must finally encompass the publicity and advertising strategies, such as communications, promotions and the brand and institutional strategy.

5. Operating plan

The operating plan must describe and quantify the investor's operational activities, as well as mention:

  1. the future company's organizational chart, employees assigned to each department and distribution channel, as well as a definition of the duties attributed to the different layers of the institution;
  2. the aspects related to operational outsourcing, human resources, process technologies, products and controls, physical structure (physical facilities and equipment) and other investments;
  3. the description of the sales team, its size, support hardware, segmentation, professionals' profile, service procedures, collection processes and default credit policy.

6. Human resources plan

In this section the project description must introduce the management policies and the corporate culture. It must contemplate:

  1. the training policy,
  2. the performance evaluation methods,
  3. the compensation policy (salaries, fixed and variable amounts, average charges, among others),
  4. the hiring, training and termination expenses (when applicable), as well as
  5. how the finance company will address the main aspects of the labor and social security regulation.

7. Risk management plan

The risk management plan must contemplate the following items:

Control environment encompassing the risk control and management structure (areas, personnel and systems used), the formalization of the internal control procedures, and conformity of the risk profile to the institution's strategic goals.

Risk Identification and Measurement describing the tools and procedures to measure, control and minimize the risks intrinsic to the business (credit, market, liquidity, operational, and legal risks).

8. Economic-financial feasibility analysis (financial plan).

The financial plan is of paramount importance for the economic-financial evaluation of the project.

The analysis must include the forecast prepared in electronic spreadsheets, covering at least the projected first 5 years of the company's activities, the cash flow, accounting statements (balance sheet and income statement) and main operating limits used by the Central Bank, namely: minimum capital, reference net worth, risk diversification and lock-in rate.

The financial company's capital structure must mention the financing sources and the expected financial funding costs.

The cash flow, including forecast inflows, outflows, investments, taxes and shareholder's remuneration must be consistent with the premises and the aspects described in the market, operating and human resources plans.

The strategy evaluation must use the most suitable performance and profitability evaluation indexes depending on the proposed financial plan, such as: net present value (VPL), internal rate of return (TIR), return on equity (ROE), etc. Furthermore, it is necessary to present the analysis on the sensitivity to specific factors in diverse scenarios (realistic, conservative and optimistic). In other words, the Central Bank expects that the three scenarios be included in the financial projections.

There is no specific rigid project model under any strict standard for the drafting of documents concerning the constitution project, as outlined above. Therefore, it is left up to the investor to prepare the project description in a form deemed the most adequate, pursuant to the nature and size of the intended institution, provided that it encompasses all such required aspects.

In processing the analysis of the enterprise project, the Central Bank will verify whether the information submitted reflect sound principles and show a realistic risk evaluation pursuant to the economic and competitive conditions of the target market segment.

Finally, and equally important, the project must clearly indicate the national interest involved in the project investment, as this is key to obtain the Presidential Decree.

The initial measure, which must be taken at the time the project is ready to be submitted to the Central Bank, is for the investor to publish in Brazilian newspapers a certain communication informing its intent to set up or acquire a financial company in Brazil. The text of this communication must follow the Central Bank rules and the draft document must be previously approved by the Central Bank. Such publication will make the plan public.

The second phase initiates after the presidential authorization is granted and comprises the presentation of the document to incorporate the financial company and to elect its managers.

Footnote

Eduardo Kiss is a partner at Demarest & Almeida's São Paulo office (email:eagkiss@demarest.com.br / phone: +55 11 3356.1631

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.