This content is from: Local Insights

Marketing rules on cross-border financial and securities services

Carlos Fradique MéndezAdriana C Ospina Jiménez

The sustained and impressive growth rates of the Colombian economy (Colombian economy grew 4.5% last quarter), its sophisticated institutional and retail investors (especially family offices and pension funds) and reliable legal framework, have all contributed to boost the interest of global leading financial Institutions, asset managers and multi-product investment advisers in the promotion of its products and services to Colombian investors.

Foreign financial institutions are particularly interested in targeting Colombian pension funds. Pension funds have become the most important institutional investors in the Colombian financial sector, as they have more than $50 billion assets under management and are growing at a 25% rate per year.

Furthermore, they are now subject to a more flexible investment regime (the multifund scheme), which allows AFPs to administer three types of mandatory pension funds: (i) low risk fund; (ii) moderate risk fund; and high risk fund. Each has different investment limits; the high risk fund has the least limit restrictions.

Given the increase in the number of foreign financial institutions looking to render their cross-border, financial and securities-related services to Colombian investors, regulations regarding the promotion of these types of services have regained popularity in Colombia, and become the new hot topic.

According to applicable regulations, established specifically in the former Decree 2558 of 2007, now included in the recently enacted Decree 2555 of 2010, any foreign financial institution whose core business is to provide financial, reinsurance or securities-related services and is seeking to market its products and/or services in Colombia, is required to either establish a Representative Office (Rep office) in Colombia, or enter into a Referral Agreement with a local broker-dealer or a financial corporation.

Rep offices are deemed to act as a liaison between the home office and its clients in Colombia by means of (i) the delivery to and receipt from the client, documents required in connection with the service; (ii) advising and instructing clients on the risks they would be exposed to in respect of the transactions; and (iii) informing on the fees, costs, expenses and tax implications of the foreign entity's financial or securities-related services.

Rep offices are expressly barred from (i) carrying out, directly or indirectly, any onshore financial or securities-related activity which requires the authorisation of the Colombian authorities, such as the rendering of financial services or securities-related activities, or; (ii) raising funds, regardless of whether this is done by accepting deposits, issuing securities or in any other way, or whether the funds are raised in Colombian Pesos or in a foreign currency.

The establishment and operation of a Rep Office must be authorised by the Superintendence of Finance and is subject to its supervision. On the other hand, referral agreements are agreements entered into between a foreign entity and either a local broker-dealer, or a financial corporation.

In general terms, all the rules and requirements applicable to Rep Offices, also apply to Referral Agreements. The purpose of these agreements is basically to provide for the terms and conditions under which the relevant local broker-dealer or financial corporation will promote the foreign entity's securities-related products and/or services.

Referral agreements, and any amendments to them, must be approved by the Superintendence of Finance. Notwithstanding the above, the approval process of the referral agreements takes less time.

Although the general rule is that foreign financial entities wishing to promote their financial, reinsurance or securities-related services are required to establish a Rep Office in Colombia or enter into a referral agreement, the applicable regulations establish exceptions to this general rule.

For instance, multilateral agencies and foreign governmental entities arranging government-to-government financings are exempted from this requirement. The same applies, subject to specific considerations, in the case of reverse solicitation and existing clients. While we have lobbied in respect of the minimum rules or QIBs/AIs exceptions, there are not, as of now, rules addressing this scenario specifically.

The establishment of a Rep Office in Colombia does not require substantial efforts from the foreign entity, and gives the entity the opportunity to freely promote its financial and securities-related services. In any case, in terms of reputational risk and from a compliance standpoint, it has numerous advantages.

Finally, for local investors, the establishment of a Rep Office typically represents an increase in their confidence in the foreign entity and its products. Given the prospect of the Colombian economy (especially now being an acknowledged leader in the CIVETS group), this might be the best time to set up a local presence in the market.

Carlos Fradique-Méndez and Adriana C Ospina Jiménez

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