The proposed model mirrors the UK’s approach, segregating responsibilities between prudential and conduct regulation
07/17/2024
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Otavio Yazbek — Foto: Silvia Costanti/Valor
The Ministry of Finance is exploring the implementation of the “twin peaks” model in Brazil. This approach would elevate the Central Bank (BC) and the Securities and Exchange Commission (CVM) to “super-regulators” overseeing the financial, capital, insurance, and pension markets.
This proposal would maintain the Central Bank’s operational autonomy, already secured by law. As told to Valor, discussions began early in Minister Fernando Haddad’s tenure and were initially planned for the third year of President Lula’s term. However, the idea has gained momentum amid debates on a constitutional amendment (PEC) to ensure the Central Bank’s financial autonomy.
The concept, already shared with a few senators and inspired by the UK system, involves one body handling prudential regulation of financial, capital, and insurance markets and another overseeing conduct and consumer protection.
Brazil’s regulatory model currently involves the Central Bank, the CVM, and the Superintendence of Private Insurance (Susep) managing regulatory and supervisory roles. According to the Ministry of Finance and various experts, this arrangement leads to overlapping functions and hampers the agencies’ ability to oversee systemic issues and monitor irregular activities effectively.
Given the complexity of implementing the new model, the Ministry of Finance is considering a phased approach to minimize disruption to these institutions and their operations. The initial step would involve integrating Susep into the Central Bank due to perceptions that Susep is currently an underpowered entity that would benefit from the structure and support of the Central Bank.
Subsequently, the plan is to bolster the CVM, enabling it to assume some responsibilities currently held by the Central Bank, while the Central Bank would take over specific duties from the CVM. Ministry experts see this reassignment of roles as the optimal arrangement.
Under the proposed restructuring, the Central Bank would be tasked with regulating and supervising financial and capital markets, along with overseeing monetary policy. The CVM, on the other hand, would focus on regulating and supervising market conduct, extending its oversight to banking activities.
Additionally, the Ministry of Finance is contemplating integrating the responsibilities of the National Superintendence of Complementary Pensions (Previc) into this model. This change would streamline the regulatory landscape by reducing the number of agencies from four to two.
Similar to how the Central Bank’s operational autonomy was established through a complementary law in 2021, this new framework would also be instituted through legislative means. While the Central Bank would retain financial autonomy, the proposal diverges from the current Constitutional Amendment Proposal (PEC) being debated in the Senate, which suggests transforming the agency into a public company—an idea the economic team opposes.
The CVM might also be granted financial autonomy under the new model. Currently, the CVM collects approximately R$1 billion annually in fees from the entities it regulates; however, its discretionary spending is capped at only R$30 million.
Drawing from the United Kingdom’s framework, which Brazil is considering as a model, the UK has the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). This structure was adopted gradually, transitioning from a system where the Financial Services Authority (FSA) was the sole regulator.
In Brazil, there is a consensus between the government and the Senate that the “twin peaks” model and the autonomy outlined in the PEC should be seen as complementary measures. Consequently, the PEC will continue to progress through legislative processes. Government factions are open to modifications in the legal structure of the Central Bank, provided it does not become a “public company.”
The proposal aims to transform the Central Bank into a “Financial Corporation,” a legal framework wherein its employees would not be traditional civil servants, enabling salaries comparable to those at the Brazilian Development Bank (BNDES). This concept aligns with the organizational structures of the Federal Reserve in the United States and the European Central Bank. However, there is no unified agreement on this change among the involved parties.
The voting on the Central Bank’s PEC in the Senate’s Constitution and Justice Committee (CCJ) is currently in limbo. Davi Alcolumbre, the committee chairman, has said that he will not move forward with the deliberation until a consensus is reached.
Neither the Central Bank nor the CVM has issued comments regarding this matter. “Susep supports any proposal that enhances the quality of financial regulation in Brazil,” said Alessandro Octaviani, president of Susep. He further said to Valor, “The current administration at the Finance Ministry has been actively working to improve Susep, which will be evident in the upcoming changes.”
Otavio Yazbek, former director of the CVM and a staunch proponent of adopting the “twin peaks” model in Brazil, argues that the main advantage of consolidating functions into just two agencies is to rectify inefficiencies in supervision and misconduct enforcement within the overlapping sectors of banking, capital markets, insurance, and pensions. “Currently, not only are there gray areas, but also opportunities for contradictory regulations,” he noted.
Mr. Yazbek said, “The ‘twin peaks’ model allows for more efficient management of overlapping areas of action and the gaps in financial regulation activities, as well as better handling of innovation processes within the financial and capital markets.”
He also noted that due to the complexity of such changes, which require redefining the responsibilities of existing regulatory bodies, the implementation must be phased.
Marcelo Trindade, former president of the CVM, also commended the model, saying, “If the proposal advances in this direction, it will represent a significant progression for regulated markets in Brazil. It’s a model that has greatly developed globally and addresses crises arising from the current system’s lack of focus. This model would either eliminate or significantly diminish such issues.”
*Por Guilherme Pimenta, Lu Aiko Otta, Fernando Exman, Andrea Jubé, Caetano Tonet — Brasília
Source: Valor International