Reforming Financial Safeguards: A Path to Protect Brazil's Vulnerable Consumers

The World Bank's report highlights the urgent need for Brazil to reform its fragmented financial consumer protection framework, addressing rising risks like over-indebtedness, fraud, and ineffective dispute resolution mechanisms. Comprehensive legal, regulatory, and institutional updates are recommended to safeguard consumers and foster financial inclusivity.

The World Bank's scoping note, prepared by Gian Boeddu and Sergio Mesquita under the guidance of Gabriel Sensebrenner and Yira Mascaro at the request of Brazil’s Ministry of Fazenda, highlights the urgency of reforming Brazil’s financial consumer protection (FCP) regime. While Brazil has made remarkable progress in financial inclusion, evidenced by the rapid adoption of the PIX payment system and an increase in account ownership from 55% to 84% between 2011 and 2021, the challenges for financial consumers have grown significantly. The document underlines issues such as fraud, scams, over-indebtedness, and mis-sold financial products, which disproportionately affect vulnerable groups like women and younger consumers. Despite government initiatives like the Desenrola Program, over 72 million Brazilians remain in default, emphasizing the inadequacy of the current framework in addressing these risks.

Risks in a Rapidly Growing Financial Landscape

The expansion of Brazil’s financial sector has been transformative. PIX, launched in 2020, has revolutionized payments, with over 4 billion monthly transactions benefiting previously underserved populations. Fintech innovation and the proliferation of digital payment accounts have further expanded access. However, this rapid growth has introduced new risks. Credit cards, a dominant form of consumer debt, have seen a sharp rise in usage, with more than 84 million active accounts in 2022. Interest rates on credit card debt can exceed 1,000% annually for vulnerable consumers, exacerbating financial strain. Payroll loans, particularly those tied to government pensions and benefits, have also fueled rising debt levels. Mid-sized banks aggressively market these loans, often pressuring consumers into renewals that increase long-term liabilities. These practices, combined with high borrowing costs and systemic inefficiencies, highlight the need for stronger regulatory oversight.

A Fragmented Framework Failing to Meet Modern Needs

Brazil’s current FCP framework, governed primarily by the Consumer Protection Code (CDC), is ill-suited for the complexities of modern financial products and services. Enacted in 1990, the CDC provides broad protections but lacks the specificity required for addressing financial sector challenges. Amendments such as the 2021 Law of Over-Indebtedness introduced preventive measures to manage debt but fail to comprehensively tackle financial consumer risks. Regulatory oversight is split among various bodies, including the Central Bank of Brazil (BCB), the Superintendence of Private Insurance (SUSEP), and the Securities and Exchange Commission (CVM). This fragmented structure, combined with outdated legal mandates, creates gaps in enforcement and accountability. Moreover, Brazil lacks a formal legal definition of a financial consumer, complicating efforts to address sector-specific risks. Agencies like SENACON and Procon, while active in consumer protection, are not equipped to handle the technicalities of financial sector issues.

External Dispute Resolution: Limited and Inconsistent

External dispute resolution (EDR) mechanisms for financial consumers in Brazil are fragmented and often ineffective. Platforms like Consumidor.gov and the BCB’s complaints system offer avenues for consumers to report grievances, but they lack the authority to enforce binding resolutions. For example, cases of fraud and unauthorized loans—common sources of complaints—are often left unresolved due to inadequate mechanisms for holding providers accountable. While financial institutions may respond to EDR channels to avoid reputational damage, they face little compulsion to offer meaningful resolutions. Consumers seeking redress for significant financial losses often have no alternative but to pursue lengthy and costly legal action. This patchwork of complaint-handling systems underscores the need for a unified, effective EDR framework that provides timely and fair outcomes for consumers.

A Roadmap for Reform

The World Bank proposes a comprehensive reassessment of Brazil’s FCP framework to address these systemic issues. The recommended approach includes updating the legal and regulatory structure, enhancing market conduct supervision, and creating robust EDR mechanisms. Drawing on international best practices, the note emphasizes the importance of tailoring reforms to Brazil’s unique economic and social context. Immediate priorities include establishing a dedicated FCP law, equipping regulatory bodies with expanded enforcement powers, and improving coordination among agencies like the BCB, SUSEP, and SENACON. For example, systematic information-sharing and joint inspections between these entities could address overlapping responsibilities and improve oversight.

Transparency and stakeholder engagement are critical to this process. The World Bank advocates for broad consultations involving financial service providers, consumer representatives, and policymakers to ensure the reforms reflect diverse perspectives. A phased implementation strategy is also recommended, allowing for gradual adaptation and minimizing disruption. Initial steps might focus on updating existing regulations, while longer-term efforts could involve institutional restructuring and the adoption of new technologies to enhance consumer protection.

Building a Safer, Inclusive Financial System

Brazil stands at a pivotal moment in its financial sector development. The World Bank’s scoping note underscores the urgency of creating a modern, consumer-centric FCP framework to address the challenges of a rapidly evolving financial landscape. By adopting a structured, phased approach, Brazil can build a more resilient financial system that balances innovation with robust consumer safeguards. Such reforms are essential not only for mitigating risks but also for fostering trust and inclusivity in the financial sector. If implemented effectively, these measures could set a global benchmark for emerging economies navigating similar challenges, ensuring that financial inclusion benefits all Brazilians while protecting them from harm.