Brazil: Who Controls Financial Institutions Mergers?

Last Updated: 25 April 2002
Article by Priscila Brólio Gonçalves

The Conflict of Attributions between CENTRAL BANK and CADE Regarding Concentrations in the Financial Sector

Late in 2001, news about the existence of a dispute between CADE and the Central Bank have taken the specialized sections of the country’s main newspapers.

CADE is the federal agency that has the last word in respect of competition defense matters in Brazil, with regard to both mergers and acquisitions and the analysis of conducts questioned under the Brazilian antitrust law (Law 8884/94). Central Bank, in its turn, is in charge of applying the legislation about financial matters, implementing the policy established by the National Monetary Council and overseeing the financial institutions.

The matter dealt with in the press was only one: which one of the above-mentioned organs has competence to analyze processes of concentration of financial institutions vis-à-vis competition. Both CADE and Central Bank argued that such task was included in their respective attributions.

The polemic, far from being restricted to a simple power dispute in the ambit of the Executive Power, affects directly the legal sphere of those administrated, to the extent that the latter, upon taking one or the other position, run the risk of failing to attend legal requirements, being subject to the applicable penalties.

Such question acquires an even greater importance when we take into consideration the recent privatizations taken place in the financial sector, a process that has not yet been concluded, as well as the mergers and acquisitions that are frequently announced in the press.

Does a conflict still exist today between Central Bank and CADE about competition in the financial sector? In the affirmative answer, which measures can be taken by the interested parties to minimize possible risks? These are the aspects that will be addressed below.

I - History of the Conflict Between Central Bank and CADE

The conflict of attributions between Central Bank and CADE started long after the creation of the two organs. Since the decade of the 60s, when they were created, until the mid-90s, CADE and the Central Bank had a harmonious relationship: while CADE was not yet a significant organ, especially due to the strong state’s intervention in the economy, relegating competition defense to a secondary level, Central Bank has always been a very strong entity.

In 1994, CADE was transformed into an autarchy by Law 8884 of June 11, which granted greater powers to the organs comprising the Brazilian system of competition defense. CADE then started to have more and more power, to the extent that its activities increased in volume and importance.

In 1999, a task force with people from Central Bank and CADE was created for defining their respective functions in the markets in which financial institutions operated. CADE’s president at that time, Gesner Oliveira, was a great enthusiast of the cooperation between the two authorities, both for analyzing concentration acts and for investigating conducts involving financial institutions, in the light of the antitrust law.

While the discussions in the ambit of the task force failed to produce any practical results, in 2000 CADE judged two important cases in the financial sector: in August, the Act of Concentration nr. 08012.005424/99-00, which had as Petitioners the consortiums Daimler-Chrysler and Rodobenz; and in October, the Act of Concentration nr. 08012.000765/00-41, about the increase of the BNY’s shareholding in the corporate capital of Credibanco, constituting the first CADE’s precedent involving banks.

It seems that CADE’s hectic movement aroused Central Bank’s interest in the polemic, since on October 18, 2000, the General Attorney’s Office of Central Bank issued an opinion affirming the Central Bank’s exclusive competence for appreciating concentration processes involving financial institutions, including competition matters.

Ignoring Central Bank’s opinion, CADE, in February 2001, took advantage of the judgment of the operation of the acquisition of shares of the Patagon portal by Santander Bank (Act of Concentration nr. 08012.007435/00-02) – which did not deal with financial matters, however involved a bank as a Petitioner–, for reaffirming the understanding that it was within its attributions to analyze acts of concentration and anticompetitive conducts in the financial sector.

In view of the impasse arisen from the dispute between such autarchies, the case was taken to the Union’s General Attorney’s Office ("AGU"), which issued the opinion AGU/LA – 01/2001 on April 24, 2001, concluding that Central Bank was right.

Once again CADE disregarded such opinion and declared that it was competent for analyzing concentrations between financial institutions. Such a position was taken in the judgment of the operation that had as petitioners Banco Finasa de Investimentos, Brasmetal Indústria and Zurich Participações e Representações. Five Councillors – Afonso Arinos, Celso Campilongo, Roberto Pfeiffer, Ronaldo Porto Macedo Jr. and Thompson Andrade – voted in favor of CADE’s competence. Two Concilors – the agency’s President João Grandino Rodas and the rapporteur of the case, Hebe Romano – were defeated in the contrary position.

In a notice in the Press, Central Bank repudiated CADE’s attitude, insisting that the analysis of processes of concentration between financial institutions would, in all aspects, be within its legal attributions.

II - Arguments Favourable to the Position Defended by Central Bank

Those that defend the idea that it rests with the Central Bank to analyze, with exclusivity, the concentration operations carried out between financial institutions, justify that the sector has peculiarities that make it differ from other regulated markets (e.g., the guarantee of credibility of the system and the fact that a free access to the market is not permitted).

It is also argued that the need to impose constraints on the part of the regulating entity with the purpose of reducing the participants in the market and, in this way, to make it strong, would be incompatible with the competition system, which has as principle the entry of new competitors for disputing the customers.

Law 4595/64, in its art. 18, §2, provides that the Central Bank will regulate the competition conditions among financial institutions, restraining abuses, and that it is competent to grant the authorization for such institutions in order for them to merge, amalgamate or for takeovers. Some defend that CADE’s competence has been removed in respect of the analysis both of acts of concentration and conducts in the financial sector.

It should be pointed out in this respect that Law 4595/64, although being an ordinary law, has the status of a complementary law, which would also be extended to the rules that provide for the Central Bank’s attributions.

In addition to the hierarchical superiority, there are also some who defend that Law 4595/64, although preceding Law 8884/94, was not revoked by the latter, since it deals with specific rules for the financial sector (art. 2, §2 of the Law of Introduction to the Civil Code). They further state that, if this was not sufficient, Central Bank’s competence for authorizing transfers of shareholding control, mergers and splits of financial institutions, assuring the normality of the public economy and safeguarding the depositors’ interests, was confirmed by art. 5 of Law 9447/97, enacted subsequently to Law 8884/94.

Finally, the Central Bank’s exclusive competence is defended based on the AGU’s opinion, since, as an autarchy, CADE is subordinated to the Federal Administration and, consequently, to the conclusions of the above-mentioned opinion.

III - Arguments Favorable to the Position Defended by CADE

Those that support the thesis that it rests with CADE to analyze and judge, vis-à-vis competition, the concentrations in the financial sector, allege, firstly, that neither free access exists in the other regulated markets (e.g., telecommunications, energy, gas and petroleum). The fact of existing constraints imposed by the regulating organ is not by itself contrary to the competition idea; by the way, it is very much to the contrary, being the objective exactly to make competition possible.

In other words, the imposition of constraints for the entry of new competitors in the market is compatible with a competition system: the quantity of competitors is not synonymous with competition.

Secondly, it has been defended that Central Bank is in charge of the regulatory control of the market in general, while it rests with CADE to authorize concrete actions relating to competition in such market, observing the general regulation rules. These are complementary activities, and therefore no conflict of attributions exists.

With regard to the allegation of hierarchical superiority of Law 4595/64, the majority’s position at CADE consider that the Federal Constitution of 1988 did not take cognizance of the articles of said law regarding competition, or it did take cognizance of them with the status of an ordinary law. In both cases, Law 8884/94 prevails, as well as the attributions that it has granted to CADE. Anyway, even if it is understood that the competition rules of Law 4595/64 were in fact received as a complementary law, the promulgation of Law 8884/94 would have supposedly only harmonized the situation of the Brazilian financial system with the rules of competition defense.

The argument that the conflict between the general law and the special law supports the Central Bank’s position is refuted based on the alleged "specificity" of Law 8884/94 (which established competition rules), as compared to the generality of Law 4595/64 (which provided for the national financial system in a broader manner).

It is finally defended that CADE is not subject to the AGU’s opinion, since its autonomy is incompatible with any submission to political and governmental powers.

IV - Present Status

The impasse created between CADE and the Central Bank has not yet found a solution which free enterprise can comfortably rely on: the AGU’s opinion was repudiated by CADE, whereas Central Bank rose publicly against the decision taken in the case involving Finasa, Brasmetal and Zurich. The Judiciary, in its turn, has not yet been called to pronounce on this sensitive issue.

Although Central Bank does not admit it, the truth is that CADE considers itself competent to analyze the operations involving the financial sector, which it has been making whenever the parties notify such operations to the Brazilian system of competition defense. There are currently in the system several cases involving the financial sector, waiting for the opinions from the "SDE" and "SEAE" and/or CADE’s judgment.

On the other hand, financial institutions that do not adopt such policy run the risk of being subject to fine for untimely notification, as well as of being compelled to submit concentration operations in which they participate.

To date, the best news that the financial sector could receive was the addendum by Councilor Celso Campilongo to his vote, holding out that CADE does not intend to apply retroactively the majority understanding established in the decision Finasa/Zurich/ Brasmetal. It is only the case of a promise; if it is followed – and there is no guarantee to such effect, since it is usual that CADE’s understanding changes according to the composition of the Council –, the transactions preceding such decision should not be investigated or be subject to fines. However, for transactions carried out after such a decision, the risks relating to the non-submission to the defense authorities will persist.

Finally, it is important to highlight that the conflict of attributions between the Central Bank and CADE does not involve other sectors, even if they are indirectly linked to the national financial system, as it is the case of insurance companies, whose activities are regulated by SUSEP, or in case of health insurance, regulated by the National Agency of Supplementary Health ("ANS"). Further, for financial institutions that enter other sectors – Internet, real estate or any other kind of commercial or industrial activity – no conflict exists, prevailing the attributions granted to CADE by Law 8884/94.

This article was prepared by Mrs. Priscila Brólio Gonçalves, with the assistance of Mariana Duarte Garcia de Lacerda and under the supervision of Mr. Mauro Grinberg

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.

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