/ CMF regulates management of financial service providers under the Fintech Law, including investment advisors

Felipe Cousiño 
Partner

Francisca Donoso
Associate Attorney

On January 12, 2024 the Financial Market Commission (CMF) issued General Applicability Rule No. 502 (NCG), containing the implementing regulations on the registration, authorization and obligations of crowdfunding platforms, alternative transaction systems, financial instrument intermediaries, investment advisors, credit advisors, financial instrument custodians and trades order routers, in accordance with the provisions of Law 21,521 (Fintech service providers and Fintech Law).

These regulations clarified that referring clients or acting as agents to receive client orders for third party intermediaries authorized in Chile or abroad is an activity inherent to investment advisors (and trades order routers) that will not require separate authorization from the CMF.

Moreover, the regulation now includes an important exception to the sole purpose entity requirement for by investment advisors, credit advisors, alternative transaction systems and crowdfunding platforms. Indeed, if the service is being provided to Qualified Investors (as defined in CMF Rule NCG 216) only, then the relevant service providers shall not be required to be sole purpose entities.

Exemption from authorization/license, but not from registration, will also apply to such investment advisors, credit advisors, alternative transaction systems and crowdfunding platforms.

There is a further exemption from having to set up a branch or subsidiary in Chile.

Does the above mean that foreign investment advisors may be required to register with the CMF if they perform direct marketing of their funds? The answer to this question will depend on whether or not they make investment recommendations or assessments. However, even if they are required to register, they would be exempt from applying for authorization (or establishing a branch or subsidiary) if they target Qualified Investors only.

The CMF also clarified in its frequently asked questions (Q&A) document that entities that “provide the service of routing orders abroad are not subject to the Fintech Law, since they would not be providing such service in Chilean territory.”

 Registration of financial service providers

This title regulates:

1. The circumstances under which a Fintech service provider renders services in Chile.
2. The requirements to be met by applications for registration of those providing Fintech services in Chile, addressing general aspects related to the identification of the applicant, corporate background and the absence of disqualifications or bankruptcy proceedings, among others.
3. The process and timeframe for the CMF to approve or reject an application for registration.
4. The cancellation of the registration.
5. Exceptions involved:
   – Legal capacity: it is not necessary for individuals that provide the Fintech service of investment advisory to less than 100,000 specific persons to be organized as legal entities.
   – Exclusive line of business and request for authorization: Fintech service providers that only provide investment advisory services, credit counseling, alternative transaction system and crowdfunding platform, and that target qualified investors, are exempted from the requirement of exclusive line of business and request for authorization.
   – Establish domicile in Chile: foreign entities that comply with the requirements of the preceding paragraph are exempted from establishing domicile in Chile.

Authorization for the provision of services

The NCG defines the requirements that an application for authorization must comply with for each service regulated by the Fintech Law that is intended to be rendered. It may be submitted together with the application for registration.

Those Fintech service providers engaged exclusively in investment advisory services, credit counseling, alternative transaction systems and crowdfunding platforms, directed exclusively to those who have the status of “Qualified Investor”, are exempted from the obligation to attach to their application for authorization, the documents required by the NCG. However, they are obliged to submit a declaration in this sense and to comply with the obligations not expressly exempted by the NCG.

Disclosure and reporting obligations

Fintech service providers must establish policies, procedures and controls to comply with the information obligations associated with each authorized Fintech service. Information provided by Fintech service providers must meet specific requirements to ensure that it is understood and received by the intended recipient.

Fintech service providers that only provide investment advisory, credit advisory, crowdfunding platform and alternative transaction system services exclusively to “Qualified Investors” are exempt from all requirements of Section III of the NCG regarding disclosure and reporting obligations.

Corporate governance and risk management

Fintech service providers must ensure compliance with corporate governance and risk management requirements applicable to the services they offer. In the case of entities that provide more than one Fintech service, it is necessary to comply with specific corporate governance and risk management requirements for each of them.

The characteristics and requirements to be met by internal policies and procedures related to risk management, internal control, operational risk management, information security, cybersecurity, among other aspects, are defined. Fintech service providers must develop and implement specific risk management and internal control policies and procedures for each Fintech service provided.

For this, proportionality shall be applied, adapting these procedures and policies according to the size, volume and nature of the business and associated risks.

The board of directors or equivalent body shall be responsible for approving and authorizing the risk management and internal control policies of financial service providers and ensuring compliance with them.

Capital and guarantees

Minimum capital and guarantee requirements are established for entities that offer Fintech brokerage and custody services for financial instruments, as well as the requirement to provide guarantees for those that provide order routing services.

In accordance with the principle of proportionality, the CMF has established different criteria for the classification of entities, dividing them into three blocks according to business volume, covering the number of active clients, average transactions, assets under custody and revenues in the last 12 months. Classification in one of these blocks and the type of Fintech service provided by the specific entity influence the level of regulatory requirements in terms of regulatory capital and guarantees.

Operational capacity

Those providing Fintech services of alternative transaction system, order routing, intermediation and custody of financial instruments must have the necessary operational capacity to support the processing of operations or transactions carried out through their systems or infrastructures.

To prove such operational capacity, applicants, when applying for authorization of Fintech services, must submit a statement certifying that they comply with the requirements established by the NCG, together with an estimate of the number of operations they can perform per unit of time for each type of Fintech service, among other aspects.

Inherent activities

This NCG details the activities that will be considered inherent to the scope of each of the Fintech services, and, therefore, exempt from authorization as supplementary activities. Special attention should be drawn to the clarification that referring clients or acting as agents for the sole purpose of receiving client orders for intermediaries authorized in Chile or abroad is an activity inherent to investment advisors (and order routers) that will not require authorization from the CMF.

Validity

This NCG came into force on February 3, 2024.

As of said date and until February 3, 2025, Fintech service providers must submit the relevant applications for registration and authorization for the activities they were performing as of the effective date of this NCG.

The above, except in the case of investment advisory service providers, who must submit the relevant applications for registration and authorization before February 3, 2024.

Fintech service providers who, at the date of entry into force of the NCG, are already registered in the Register, must submit the background information to comply with it before August 3, 2024.

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To access the text of the published NCG click here.

For more information regarding the NCG, please contact Felipe Cousiño (fcousiño@alessandri.cl) or Francisca Donoso (fdonoso@alessandri.cl).