The Chilean securities regulator, the Comision Para El Mercado Financiero (CMF), has posted draft regulations for Fintech including investment crowdfunding rules. The objective is to provide a regulatory framework for online capital formation. The CMF believes that a proportional, tech-neutral, framework will promote innovation in financial services as well as advancing financial inclusion goals.
The preliminary draft proposal is said to incorporate an update of part of the current legislation in other matters of the CMF’s stock market, in order to adapt it and preserve regulatory coherence between the new Fintech players and the players that operate today under regulation. The draft rules is a culmination of a process that the CMF began in 2018, and that has involved a series of consultation and discussion instances with the financial industry, in addition to having the advice of the Inter-American Development Bank. (IDB).
The Five Pillars of the draft rules as posted by the CMF include:
1. Proportionality: The requirements must be differentiated and proportional based on the risks inherent to the particular activities carried out by each entity.
2. Neutrality: The regulation should not generate regulatory asymmetries between those entities that are intensive in technology or those that use technology to a lesser extent.
3. Comprehensiveness: For the regulation applicable to Crowdfunding to fulfill its purpose, it must not only address the aspects of the activity itself, but it must also regulate the services and related aspects to allow companies to generate economies of scale or of scope, and improve its competitiveness at the local and regional level.
4. Flexibility: Regulation must allow different business models to coexist and allow them to change over time without the need to constantly adapt that regulation.
5. Modularity: The regulation must recognize that the service that was traditionally provided in a comprehensive manner, with technology can be decomposed and, therefore, that there may be service providers that only perform a component of the traditional service value chain, For this reason, the requirements that the entity must comply with will be directly related to the different components (modules) to be carried out.
The proposed draft rules encompass the following entities into the regulatory perimeter of the CMF:
i) Collective financing platforms: physical or virtual place through which those who have investment projects or financing needs.
ii) Alternative transaction systems: physical or virtual place that allows its participants to quote, offer or trade financial instruments and that is not authorized to act as a stock exchange.
iii) Order routers and financial instrument intermediaries: receive and channel orders from third parties for the purchase or sale of financial instruments to alternative transaction systems, securities intermediaries, or product stock brokers.
iv) Custodians of financial instruments: an entity that owns financial instruments in its own name on behalf of third parties, or maintains money or foreign currency on their behalf and that come from the flows or their disposal or have been delivered for the acquisition of the same or to guarantee operations with those instruments
v) Credit advisers: those who provide evaluations or recommendations to third parties regarding the ability or probability of payment of persons or entities.
These entities must register in the Public Registry and before starting their functions they must prove compliance with the requirements associated with the level of risk of each service provided.
Additionally, the preliminary draft incorporates a definition of financial instrument, which includes, among others, securities not registered in the Securities Registry, derivatives, contracts for differences, invoices, and digital assets.
The project does not include regulation of those digital assets that are used as a means of payment, a matter that the CMF is working on together with the Central Bank.
In order to guarantee regulatory symmetry and technological neutrality, modifications are also made to the rules that govern stock exchanges, securities intermediaries, general fund managers and portfolio managers.
The draft also incorporates a Regtech requirement as the Commission demands that the new regulated entities and other supervised entities, enable a remote and automated access interface to facilitate the exchange of customer information, with prior authorization from them. With this provision, Open Banking is incorporated into the legal framework.