Diego A Ramos Castillo José Antonio Casas Vessi June 21 2022 Raising funds alternatives with financial institutions Ramos, Ripoll & Schuster | Banking & Financial Services - Mexico Diego A Ramos Castillo, José Antonio Casas Vessi Banking & Financial Services IntroductionSofiposSocapsIntroductionIn the past decade, the financial sector has transformed through the digitisation of many of its products and services to reach an increasing number of sectors. Fintech business models have played a fundamental role in this transformation due to the emergence of companies that offer products and services which:do not fall under the regulatory framework of activities restricted to financial entities; andenhance the financial services offered by authorised financial entities.However, the authorities have established prohibition criteria about the "banking or fintech as a service" business model. Consequently, there is a considerable appetite for novel business models that may be granted authorisation to raise and custody funds from the public.The most regulated and protected activity in the financial sector is raising funds in any form (eg, deposits for custody or for savings, transfer or investment purposes). For this reason, the financial authorities have emphasised that any business models that require authorisation to carry out fundraising activities or to receive or take custody of funds from the public must be supervised.Furthermore, article 103 of the Law of Credit Institutions establishes that no individual or legal entity may, directly or indirectly, raise funds from the public in Mexican territory by entering into a deposit, loan, credit or mutual fund or carrying out any other act that causes direct or contingent liabilities. Further, individuals and legal entities are obligated to cover the principal and, if applicable, the financial accessories of any funds raised without express authorisation from the National Banking and Securities Commission (CNBV).However, it is not only credit institutions (banks) that can carry out fundraising activities – various financial entities are authorised to raise funds from the public as well.SofiposPopular financial companies (Sofipos) are financial institutions authorised by the CNBV to offer financial products and services for deposits and loans. These companies have migrated their business models from the lower-income social sector industry to a digital model. Initially, the main objective of Sofipos was to serve the lower-income social sector, which banks were not serving.The main regulation covering Sofipos is the Savings and Popular Credit Law and the general provisions issued by the CNBV. Like other authorised financial institutions, Sofipos must comply with:anti-money laundering provisions;regulations relating to transparency; andregulations on financial services and abusive clauses issued by the National Commission for the Protection and Defence of Users of Financial Services (Condusef).The CNBV is the authority in charge of supervising the operations and prudential regulation of Sofipos; however, Sofipos affiliated to federations authorised by the CNBV will be supervised in an auxiliary manner by these federations. In addition, Condusef is the commission in charge of supervising the compliance of Sofipos with provisions relating to:transparency in offers of financial services;the registry of commissions;standard terms conditions;abusive clauses; andthe relationship between the user and the financial entity.Sofipos are classified into four operations levels according to the amount of capital and total assets they own and manage. The products or services that they offer depends on their authorised operation level.Level of operationProduct or serviceLevel one (assets of less than or equal to 15 million investment units (UDIS) (approximately $5,500,000))Level one Sofipos may:offer deposit accounts;issue and operate debit and rechargeable cards;issue credits and loans;distribute insurance and surety bonds;buy and sell foreign currency on their account and on behalf of third parties;distribute and pay for products, services, and government programmes;accept mandates and commissions from financial entities; andreceive or issue payment orders and transfers.Level two (assets of more than 15 million UDIS (approximately $5,500,000) and less than or equal to UDIS 50 million (approximately $18,400,000))Level two Sofipos may:carry out financial factoring;provide safety box services; andoffer payroll credit and discount services.Level three (assets of more than 50 million UDIS (approximately $18,400,000) and less than or equal to 280 million UDIS (approximately $102,500,000))Level three Sofipos may:carry out financial leasing;provide cash and treasury services; andact as a trustee in guaranteed trusts.Level four (assets of more than 280 million UDIS (approximately $102,500,000))Level four Sofipos may:issue debt securities in series and bulk, as well as subordinated debentures;issue credit cards; andassume obligations on behalf of third parties, based on credits granted, through the granting of acceptances, endorsement or guarantee of debt securities.SocapsSavings and loan cooperative companies (Socaps) are regulated by the Law to Regulate the Activities of Savings and Loan Cooperative Companies.Socaps are financial sector companies recognised as members of the social sector of the economy without speculative intent. It is acknowledged that they are not financial intermediaries with profit motives and that the Law allows them to offer financial savings and loan services only to their members.The CNBV is the authority in charge of the supervision and regulation of Socaps. Like Sofipos, Socaps have additional oversight by the Auxiliary Supervision Committee, and the Federal Government Protection and Guarantee Trust.Socaps are classified into five levels of operation according to the amount of capital and total assets owned and managed. The products or services that Socaps may offer depends on their level of operation. It is important to note that basic level Socaps do not require prior authorisation from the CNBV, nor are they subject to supervision or regulation by the CNBV.Level of operationProduct or serviceBasic level Socaps (assets equal to or less than 2.5 million UDIS (approximately $950,000))Basic level Socaps may:receive demand deposits, savings deposits and time deposits that are withdrawable on pre-established days or with prior notice;grant loans;provide money transmitter services (the originator or beneficiary must be a member); andcarry out the distribution and payment of products, services and government programmes.Level one (assets equal to or less than 10 million UDIS (approximately $3,700,000)).Level one Socaps may:issue and operate debit cards and reloadable cards;grant credits;grant liquidity loans to other Socaps;discount, pledge or negotiate credit instruments, and affect the rights arising from the financing contracts entered with their members;carry out the purchase and sale of foreign currency over the counter on their account;distribute surety bonds; andaccept mandates and commissions from financial entities related to their purpose.Level two (assets of more than 10 million UDIS (approximately $3,700,000) and less than or equal to 50 million UDIS (approximately $18,400,000))Level two Socaps may:carry out financial factoring;provide safe deposit box services;offer payroll credit and discount services; andpurchase and sell foreign currency over the counter for their account or the account of third parties.Level three (assets of more than 50 million UDIS (approximately $18,400,000) and less than or equal to 250 million UDIS (approximately $91,600,000))Level three Socaps may:carry out financial leasing; andprovide cash and treasury services.Level four (assets of more than 250 million UDIS (approximately $91,600,000))Level four Socaps may:assume obligations on behalf of third parties;issue credit cards; andgrant discounts of all kinds. For further information on this topic please contact Diego Ramos or José Antonio Casas Vessi at Ramos, Ripoll & Schuster by telephone (+52 55 1518 0445) or email ([email protected] or [email protected]). The Ramos, Ripoll & Schuster website can be accessed at www.rrs.com.mx.