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Executive Summary
While Brazil boasts a robust and well-established consumer protection system, including a Consumer Protection Code, client protection in the growing microfinance sector is not as institutionalized as in other parts of the economy. A wide array of government agencies and NGOs promote client protection in financial services, especially around commercial banks. As financial services reach more and more low-income Brazilians, banks, MFIs, NGOs, and government will have to work together to ensure that Brazil’s tradition of consumer protection extends to cover new MFIs and customers:
- Numerous banks, MFIs, and networks have established principles, values, and codes of conduct that address client protection issues like transparency, ethical staff behavior, and redress of client grievances. However, other principles, such as prevention of client over-indebtedness and privacy of client information, have not yet been as widely adopted.
- The Consumer Protection Code established a comprehensive system for defending consumer interests that involves multiple branches and levels of government. PROCONs, state and municipal agencies that help consumers defend their rights and mediate disputes, are central to this system. These institutions are located throughout Brazil, offering many Brazilians the opportunity to seek redress for their grievances.
- Following a tradition that started in the government, many financial institutions employ ombudsmen at their own expense to look out for and defend consumer interests. The National Ombudsman Association of Brazil represents these consumer advocates and holds them to a strict Code of Ethics.
Introduction
Small businesses in Brazil account for almost half of the country’s formal employment. The World Bank reports that nearly 60 million people get their primary income from one of the 4.1 million formal small businesses in Brazil. An additional 14 million informal small businesses also exist in Brazil and contribute to the income of Brazil’s poor. In order to continue to fuel Brazil’s economic growth these microenterprises need access to credit, but Brazil has a relatively low microfinance penetration rate in comparison to its neighbors.
Nonetheless, since the late 1990s, microfinance has expanded throughout Brazil. According to a 2005 World Bank report on access to financial services in Brazil, this growth stems from several factors: legal and regulatory changes that benefit microfinance, government support for a new large-scale microcredit program, and government financial backing of emerging microfinance institutions (MFIs).
As access to financial services in Brazil has expanded to less financially sophisticated segments of the population, consumer protection issues have become more important. In 2008, the National Monetary Council (CMN, for its initials in Portuguese), the highest-ranking financial regulator in Brazil, issued new rules that make it easier for consumers to compare fees among different banks. Moves like this are increasing consumer protection in Brazil, but they are largely directed at the established financial sector (e.g., commercial banks). The delayed emergence of microfinance in Brazil has meant that the application of consumer protection rules and norms to MFIs has lagged as well.
While MFIs in Brazil may not have yet reached maturity, civil society organizations that promote consumer protection certainly have. The Brazilian Institute of Consumer Defense (IDEC) is one of the leading consumer protection groups and focuses a portion of its work on financial services and banking. However, like other consumer protection agencies and organizations, IDEC’s work in this sector focuses almost exclusively on commercial banks, which are not heavily involved in microfinance.
Despite its still-developing microfinance sector, Brazil boasts a robust consumer protection regime that involves a myriad of regulators, agencies, and consumer advocates. As microfinance in Brazil continues to grow, this mix of interested parties will have to broaden their view of consumer protection in financial services. Recent events, like a 2009 conference on consumer rights and responsible lending, indicate that consumer protection in Brazil will make this shift
Legal Framework
The legal and regulatory framework in Brazil can be split into two distinct categories: financial law and consumer protection law. Consumer protection law protects consumers of all products and services, not just financial ones, but aspects of the existing Consumer Protection Code like contractual protection and bans on false advertising are especially pertinent to financial consumers.
Financial Law
The framework law for the financial services industry is Law 4595 of 1964 that established the National Monetary Council (CMN), the Central Bank of Brazil (BCB), the Bank of Brazil (BB), and the National Bank of Economic Development (BNDES).
Under Law 4595 the CMN regulates the formation and operation of all institutions in the National Financial System (SFN), public and private. The law sets general guidelines, but leaves the actual rule-making to the CMN. Subordinate to the CMN, the Central Bank regulates all types of credit and most other transactions in the financial system. Because of the general tone of Law 4595, it does not touch on consumer protection issues directly. However, it gives power to the CMN and the BCB to set consumer protection rules.
Within this framework, MFIs have emerged in three main categories:
- Microfinance Credit Societies
- Public Interest Civil Societies
- Credit Unions/Cooperatives
Both SCMs and OSCIPs were created as new legal entities in 1999. Microfinance Credit Societies (SCMs) are for-profit lending institutions, while Public Interest Civil Societies (OSCIPs) are non-profit organizations not specifically limited to microfinance activities. SCMs can access capital by borrowing from banks and are regulated by the Central Bank of Brazil (BCB). They report their lending activities to the BCB’s credit bureau, improving their ability to avoid client over-indebtedness. However, SMNs are non-bank financial institutions (NBFIs) because they cannot take deposits from customers.
As non-profit institutions, Public Interest Civil Societies (OSCIPs) can access public sector funds and donor funds for their microcredit activities. OSCIPs can also engage in a broader range of activities beyond lending, including financial education and business advising. OSCIPs are subject to non-prudential reporting requirements with the Ministry of Justice. Non-profit OSCIPs are allowed to own for-profit SCMs, which, according to the World Bank, has led many microfinance NGOs to incorporate under this structure with their lending activities in an SCM and their education and advising activities in the OSCIP.
Since 2003, regulators have treated credit unions in essentially the same way they treat banks. The National Monetary Council approved new rules that made it easier for credit unions in smaller municipalities to attract members and harmonized their capital requirements with bank capital requirements. A major difference between SCMs/OSCIPs and credit unions is that the latter are allowed to take deposits from the public. Many credit unions belong to larger central cooperatives in order to pool risks and offer services over a wider geographical area. These central cooperatives frequently standardize service offerings among their members and could be useful entities for promoting consumer protection standards throughout a large number of institutions.
Consumer Protection
Beyond financial services laws and regulations, Brazil has a robust legal framework of consumer protections. The 1988 Constitution enshrines consumer protection as one of the basic principles of “Economic and Financial Order.” Putting this principle into practice, in 1990 Brazil passed Law 8078, the Consumer Protection Code (CDC). This law establishes basic consumer rights, details contractual protections, and sets penalties for infractions. The 10 basic rights established by the CDC are:
1. Protection of life and health – Suppliers must warn of possible risks from products.
2. Education before consumption – Suppliers must offer instructions on proper use of products and services.
3. Freedom of choice among products and services.
4. Information – Consumers are entitled to all necessary information (quantity, weight, makeup, price, risks) before purchase.
5. Protection from misleading and unfair advertising – False advertising is illegal and voids the contract between buyer and seller.
6. Contractual protection – A supplier’s failure to meet a contract’s requirements is a punishable offense. Judges can amend contracts that are harmful to consumers, and consumers are not obliged to honor contracts they do not understand.
7. Indemnification – Suppliers, not consumers, are liable for damages caused by faulty products.
8. Access to Justice – Consumers whose rights are violated can take their cases to court.
9. Inversion of the burden of proof – In cases of violations of consumer rights, the burden of proof rests with suppliers, not consumers.
10. Quality public services – Consumers can expect quality public services from government agencies and their contractors.
Additionally, the Consumer Protection Code established the National Consumer Defense System (SNDC). The SNDC is a network of federal, state, and local authorities, other federal agencies, and civil society groups. The Consumer Defense and Protection Department in the Justice Ministry coordinates the SNDC’s activities, while 27 state PROCONs handle much of the enforcement work. Many municipalities also have PROCONs to defend local consumers by helping them through the consumer complaint process and making sure they know their rights. These agencies function as an adjunct to the judicial system and resolve conflicts between consumers and companies outside the courtroom. If a PROCON cannot mediate a solution, it refers the complaint to the appropriate civil court. The federal Public Ministry also has a group of attorneys dedicated to filing lawsuits to defend consumer interests.
PROCONs function differently throughout Brazil, but in 2007 the Justice Ministry created the National School for Consumer Defense to train federal, state, and local consumer rights enforcers, including those who work for the PROCONs. Despite this high level of sophistication in consumer protection, most client protection activity in the financial sector seems to be centered on commercial banks. However, MFI customers can still access the National Consumer Defense System for redress of grievances. Nonetheless, few resources appear to be devoted to proactive prevention of consumer rights violations in these institutions. Thus, advances in client protection in microfinance will likely be led by networks and individual MFIs that incorporate the Six Principles of Client Protection into their daily operations.
Consumer Protection Organizations
Brazilian Institute of Consumer Defense (IDEC)
IDEC is an independent non-profit institute without links to businesses, governments, or political parties. Nationally, IDEC belongs to National Forum of Civil Entities for Consumer Protection, and, beyond Brazil, it is a member of Consumers International, an international NGO dedicated to securing a fair, safe, and sustainable future for consumers. The institute has four main goals:
- Achieve balance in the consumer-producer relationship.
- Implement and improve consumer protection laws and regulations.
- Prosecute the abuse of economic power in consumer-producer relationships.
- Improve the quality of life for consumers, especially with regard to the quality of products and services.
IDEC works on consumer protection issues on everything from food safety, to international commerce, to public health. The Institute does focus on consumer protection in financial services as well, with sections of its website devoted to comparing banking fees and navigating the international credit crisis. However, most of this work appears to deal only with the large commercial banks. IDEC’s materials don’t appear to mention microfinance specifically, and its watchdog role does not yet seem to extend to non-bank financial institutions and other types of MFIs.
Brazilian Institute of Consumer Policy and Rights (BRASILCON)
BRASILCON is one of Brazil’s leading consumer protection groups and is committed to creating a “fair and transparent market.” The Institute conducts research on consumer protection issues in Brazil, makes policy recommendations, and promotes international exchanges of information and experts. In May 2009, BRASILCON and the Central Bank of Brazil hosted the International Congress on Consumer Rights and Responsible Credit in Brasilia. Topics discussed included over-indebtedness, transparent pricing, abusive contracts, and regulation among others. In addition to hosting conferences, BRASILCON also publishes magazines and commentary on the latest consumer protection issues.
Networks/MFIs
Brazilian Association of Managers and Operators of Microcredit, Solidarity Lending, and Similar Entities (Abcred)
Abcred was founded in 2002 to promote microcredit as an instrument of public policy and social inclusion. The organization unites MFIs throughout Brazil in order to further their institutional development. Abcred’s 52 member institutions share four main objectives centered on economic development and MFI growth. The association’s charter also outlines how the group helps MFIs streamline operations.
While Abcred’s website does not list any specific client protection initiatives, some of the association’s goals could strengthen the establishment of the Six Principles of Client Protection among member MFIs. For example, the association’s role in deploying information technology systems among its members could strengthen privacy of client data or prevent client over-indebtedness via sharing of credit profiles. Further, in the association’s Letter of Principles, members pledge to prioritize customers’ needs, especially for the poorest of the poor. Nonetheless, these goals do not address the Six Principles directly, leaving member MFIs to promote client protection as they see fit.
Center for Assistance to Small Enterprises (CEAPE Nacional)
CEAPE is a national network of thirteen OSCIPs that together constitute one of the largest MFIs in Brazil. According to the World Bank, in 2006 CEAPE served more than 26,000 clients in 220 municipalities across Brazil. The network’s mission and vision commit it to creating jobs, strengthening small businesses, advancing women, and promoting economic and social development.
Since its founding in 1990, CEAPE has handled training and qualification of microfinance professionals, obtained financial resources for the network, and established partnerships to improve the performance of the whole CEAPE system. It is not clear if the CEAPE network as a whole has articulated a set of values and principles, but member MFIs have individually adopted principles that include:
- Commitment to the success of the business customer
- Working with professionalism and ethics
- Making loans that are not beyond the client’s ability to pay and that provide enough capital for the success of the business
- Transparent dealings with customers and employees
Although they all belong to the same network, member MFIs have a large degree of autonomy. Management practices are harmonized to some extent across the members, but each MFI is free to adapt network policies to its particular operating conditions. This means that while the individual OSCIPs may share many of the same values, so far there is no uniform implementation throughout the network.
National Association of Credit Cooperatives in the Family and Solidarity Economy (Ancosol)
Ancosol is an association, formed in 2004, of six central credit cooperative networks (Ecosol, Crehnor, Integrar, Creditag, ASCOOB, Cresol Central, & CRE$OL) designed to coordinate the credit cooperative industry’s political and social activities. As a high-level industry organization, Ancosol is in a prime position to push for client protection standards among its member networks, while at the same time engaging with the government to create standards throughout Brazil’s microfinance industry. Currently the organization’s objectives and actions include coordinating training, education, and infrastructure among networks, developing new credit products, and sharing management methodologies, among other activities. In the arena of client protection, the association’s core principles touch on transparency and ethical behavior, but Ancosol’s website does not list any further client protection activities.
Network Details:
|
Member Cooperatives |
73 |
|
# Clients |
50,685 |
|
Loans |
US$89.7 million |
|
Savings Deposits |
US$50.9 million |
(2008 data)
Cooperative System of Rural Credit and Supportive Interaction (CRE$OL)
CRE$OL is a network of rural credit cooperatives started in 1995 that promotes financial and social inclusion in the agricultural sector. Farmers manage the individual cooperatives in the network, while CRE$OL acts as a central credit cooperative to provide financial stability and strategic direction to the network. This organizational structure results in a decentralized decision-making process that supports the democratization of financial services. Within this model, CRE$OL highlights principles of client protection like transparency and ethical staff behavior in its mission and actions.
Network Details:
|
Member Cooperatives |
73 |
|
# Clients |
50, 685 |
|
Loans |
US$89.7 million |
|
Savings Deposits |
US$50.9 million |
(2007 data)
Brazilian Association for the Development of Cooperativism (ABRACOOP)
ABRACOOP is an organization dedicated to the development of cooperatives in Brazil. While the organization works with all types of cooperatives, credit cooperatives (credit unions) are among the institutions it seeks to strengthen. The organization has four main objectives focused around promoting the cooperative model and improving operations and management.
Because the organization does not focus solely on credit cooperatives, many of its principles do not directly address the Six Principles of Client Protection. However, ABRACOOP does emphasize the principle of ethical behavior in its standards of conduct for member cooperatives.
Brazilian Federation of Banks (FEBRABAN)
As of 2008, FEBRABAN members represented 120 of the 159 commercial banks registered with the Central Bank of Brazil. Since 1967, FEBRABAN’s goals have included extending the reach of the financial system and reducing risk. Notable in terms of client protection, the federation’s values include promoting ethical behavior, defending private enterprise, acting transparently, and valuing diversity and social inclusion. The Federation has an ombudsman commission to deal with customer relations issues as well as a social responsibility and sustainability commission that advises the organization’s board. Additionally, banking consumers can find contact information for ombudsmen at member banks on the FEBRABAN website.
CrediAmigo
CrediAmigo is one of the largest microcredit programs in Brazil. Banco do Nordeste do Brasil (BNB) started the CrediAmigo program in 1997 and it uses a solidarity lending methodology to provide credit to hundreds of thousands of Brazilian microentrepreneurs. As part of BNB, CrediAmigo is governed by BNB’s Code of Ethical Conduct and customers can contact BNB’s ombudsman regarding problems they have with the bank. The code of conduct institutionalizes BNB’s commitment to client protection, cementing transparency, ethical behavior, responsiveness to client concerns, and privacy of client information as vital to CrediAmigo’s operations.
Conclusions
Best-practice institutions, like CrediAmigo, illustrate the dual potential of MFIs in Brazil to bring credit to low-income populations while protecting clients’ interests at the same time. The consumer protection landscape in Brazil is full of effective and well-developed government agencies and civil society organizations. However, in the microfinance sector at least, most of the activity seems focused on addressing complaints after clients already believe their rights have been violated. Programs like IDEC’s transparent pricing initiative for commercial banks need to be replicated in the microfinance sector. This kind of proactive action will ensure that the push to roll out financial services for all low-income Brazilians achieves the dual goals of financial inclusion and client protection.
These profiles are not exhaustive and have not been reviewed by country experts. If you notice a gap or error in any of the profiles, we would very much appreciate your comments about how they can be improved. In this way we can work together to expand our understanding of the variety of client protection strategies and initiatives that are being pursued in different parts of the world.
