Miguel Angel Peralta and Pedro Said Nader of Basham Ringe y Correa look at the implications of the country’s soon to be enacted Fintech Law
Technology has advanced exponentially since the turn of the century; and as technology has advanced, the way in which business is carried out has evolved to benefit from it. However, in many cases, laws and regulations have not kept pace with the innovations in business allowed by such technologies. In the case of Mexico, financial technology – fintech – companies have been operating for most of the 2010s as commercial entities rather than financial entities. Thus, financial regulators have had their hands tied when consumers approached them with complaints against fintech entities. As a result, during the fourth quarter of 2015, Mexican president Enrique Peña Nieto ordered the financial authorities, including the Central Bank of Mexico (Banxico), the Ministry of Treasury and Credit and the National Banking and Securities Commission (CNBV) to prepare a draft bill known as the Law to Regulate Financial Technology Institutions (Ley para Regular las Instituciones de Tecnología Financiera) (Fintech Law). However, certain factors, including the 2016 presidential elections in the United States, delayed the preparation of the draft of the Fintech Law until early 2017.
On March 23 2017, the draft bill of the Fintech Law was finalised by the financial authorities and certain members of the Mexican private sector. On September 19 2017, the draft bill was introduced to Congress, to be reviewed by the Senate. Subsequently, on December 5 2017, the Senate unanimously approved the draft bill, and sent the project to the House of Representatives for final approval before being passed. The House of Representatives will reconvene on February 1 2018, and it is widely expected that the Fintech Law will be passed in the following months.
The draft bill of the Fintech Law was prepared under five key pillars: (i) financial deepening; (ii) consumer protection; (iii) preservation of stability in the Mexican financial system; (iv) promoting competition; and (v) preventing money laundering and the funding of terrorism. Its purpose is to regulate fintech institutions by providing transparency to the financial authorities and consumers.
As per the draft, in order to act as a fintech institution, authorisation must be obtained from the CNBV. The first requirement to obtain such authorisation is to be incorporated as a limited liability stock company (sociedad anónima). This will be a hurdle for foreign entities wanting to carry out fintech activities in Mexico, since they will need to create a vehicle to specifically do so within the country. In addition, entities wishing to obtain authorisation shall: include an explicit reference in their corporate purpose to the activities provided in the Fintech Law; have a physical domicile within Mexico; and establish a minimum capital stock necessary to carry out their business, pursuant to the general provisions to be issued by the CNBV after the Fintech Law passes.
Additionally, after meeting the above requirements, entities interested in obtaining authorisation must submit an application to the CNBV, which will include: (i) power of attorney of legal representation of the entity; (ii) corporate bylaws, conformed to applicable provisions of the Fintech Law; (iii) a business plan; (iv) policies to separate own accounts from those accounts where funds received by clients will be kept; (v) policies for disclosing risks in each project; (vi) measures for controlling operational risks; (vii) processes for adequately identifying clients; (viii) policies to prevent money laundering; (ix) a list of all agreements entered into with other financial technology institutions; (x) a list of direct and indirect shareholders in the entity, as well as the amount that each shareholder is investing thereto, and the origin of the funds invested in the entity; (xi) proof that the entity is the owner of the electronic platform to be used for its business; and (xii) any other information determined by CNBV at its own discretion.
Once the application is submitted, the CNBV will have 90 days to respond to the interested entity. Additional information may be requested at such time, and a new timeframe will be provided to both submit the additional information and receive a response from CNBV.
Under the draft bill of the Fintech Law, two types of fintech institutions are regulated: collective financing institutions (crowdfunding); and electronic payment institutions (e-wallets). Below is a brief description of the provisions for these institutions.
Collective financing institutions (crowdfunding): These are entities whose main purpose is to connect investors with applicants and for the latter to obtain financing from the former. The draft bill of the Fintech Law provides three schemes for collective financing: debt crowdfunding; equity crowdfunding; and royalty crowdfunding, as follows:
- Debt crowdfunding: investors provide loans, credit or any other type of financing to applicants.
- Equity crowdfunding: investors invest in projects and obtain shares or equity interest in the applicant.
- Royalty crowdfunding: investors and applicants enter into joint-ventures for specific projects, whereby investors obtain proportional ownership in such project.
The primary responsibilities of collective financing institutions before their clients include, among others, providing investors with clear guidelines for their selection process of potential applicants and projects and informing investors of the potential risks in their investment.
Electronic payment institutions (e-wallets): These are institutions whose primary business consists in issuing, managing, redeeming, and transferring electronic payments through an electronic platform, interface or webpage. The primary activities of electronic payment institutions, include among others: (i) opening and maintaining electronic payment accounts for its clients; (ii) transferring electronic payments between its clients, charging and crediting the accounts of each client pursuant to item (i) above; and (iii) transferring electronic payments between the accounts it maintains and those of other electronic payment institutions and banks.
The draft bill of the Fintech Law includes a third category of fintech institutions called innovative models, defined as those entities which use technological tools or mediums, different from the methods provided in the Fintech Law, to provide financial services. Commercial entities providing financial services as described above, and which are not fintech institutions or banks, will have to obtain authorisation known as an Innovative Model authorisation. Such authorisation will be granted on a temporary basis, and will not exceed a period longer than two years –depending on the particularities of the specific project. During the life of the temporary authorisation, entities will have to obtain definitive authorisation, adhering to the terms and conditions provided by the financial authorities in the temporary authorisation.
The draft bill of the Fintech Law considers cryptocurrency as the representation of value registered electronically, used by the public as a form of payment for all types of legal acts, and whose transfer may only be carried out through electronic platforms. Fintech institutions will only be able to use cryptocurrencies previously determined by Banxico through general provisions to be issued once the Fintech Law passes. As in all countries, cryptocurrencies shall not be considered legal currency for Mexico and will not be endorsed by Banxico.
The Fintech Law will be a first step in the right direction for regulation in Mexico, however, the challenge is to expand the entrance of fintech institutions rather than create a complex entry process, which could limit the participation of smaller star-up entities and foreign fintech companies. Similar to the current requirements for banks and other financial institutions, the proposed framework will impose high floors on the minimum capital requirements, which could become an obstacle down the road.
Furthermore, the Fintech Law provides that the CNBV will handle all authorisations, supervision and fines, among other issues. Keeping in mind the timeframes provided in the Fintech Law for each of such actions, it will be difficult for the CNBV to meet all timeframes, particularly in the early stages of the enactment of the Fintech Law, where existing entities must comply with the new framework within a limited period.
Likewise, the additional provisions referenced in the Fintech Law draft will be of the utmost importance to complement the general framework provided in the Fintech Law. It is expected that the additional regulations shall be passed and in force within two years following the passing of the Fintech Law.
For Mexico, 2018 is going to be a transition year which could bring tremendous changes, specifically to its business landscape. With the current renegotiation of the North American Free Trade Agreement and the looming federal elections, including a presidential election, business in Mexico may slow down until the dust settles. The new Fintech Law will only increase speculation as to the direction Mexico's economy will take.
|About the author|
Miguel Angel Peralta
Miguel Angel Peralta has been a partner since 2007 in the banking, finance and capital markets practice group in the Mexico City office. His professional practice has developed in the area of banking, finance and capital markets as well as in M&A and real estate. He has participated in national and international transactions including syndicated loans and other financing transactions, IPO, securitisation, financial regulatory matters, LBOs, formation of businesses, agreements among partners, strategic associations, M&A, reorganisations, banking investments, acquisitions through the stock exchange and public and private offers. He has also participated in the incorporation or affiliation of foreign financial institutions. Angel Peralta graduated from the University Del Valle De Mexico Law School, he has with a degree in corporate law from the Iberoamerican University and a master's in North American law from Boston University.
|About the author|
Pedro Said Nader
Pedro Said has been an associate in the banking, finance and corporate areas in the Mexico City office since 2014. He has developed his practice for over 15 years, focusing on national and international transactions, including structuring and reorganising debt, securitisation, factoring, financial leasing, financing, guarantees and security interests, securities' markets, fintech, mergers and acquisitions, incorporations and other finance and corporate transactions. He is author of various publications covering both financial and corporate matters and previously worked as a foreign law advisor at Jackson Walker LLP, in Houston. Said is head lecturer in the undergraduate program at the Universidad Iberoamericana, Campus Santa Fe, Law School.