On March 23 2017 the draft Financial Technology Law was published. The law will regulate:
- the organisation, operation, function and authorisation of companies that offer alternative means of access to finance and investment (so-called 'financial technology (fintech) institutions' (FTIs));
- the issuance and management of electronic payment funds; and
- the exchange of virtual assets or cryptocurrencies.
The bill will also amend existing financial services laws.
This fintech initiative will formally introduce to the regulatory framework several widely used industry concepts, including cryptocurrencies, e-money, robo-advisers and application programming interfaces.
The Ministry of Finance and Public Credit Comments (SHCP) has sought comments on the draft law from the Mexican banking and financial industries.
Mexico is leading the way in Latin America in implementing a fintech regulatory framework for several reasons. By establishing a basis for the regulation and development of the fintech industry, the regulators are looking to give legal certainty to industry participants. They are also hoping to take advantage of the opportunity to expand the financial market to include segments not covered by traditional banking institutions due to limitations resulting from their infrastructure, service costs and operational structures. The aim is to encourage products and services that are practical, easy to access and relevant to clients.
Another objective of this initiative is to provide financial stability by:
- introducing prudent financial risk, operational, technological, marketing, corporate governance and accounting rules; and
- establishing limitations and maximum amounts for transactions.
Encouraging healthy competition is also important for the regulators, in order to:
- increase diversity;
- reduce costs for the provision of services; and
- create new distribution channels for financial services consumers.
Finally, this initiative intends to provide the basis for preventing the use of fintech activities for money laundering and terrorism financing purposes and protecting users of financial services
Under the law, the main authorities in the fintech field are:
- the SHCP;
- the National Banking and Securities Commission (CNBV); and
- the Bank of Mexico (known as Banxico).
In addition, the CNBV, the National Commission for the Protection and Defence of Financial Services Users, the National Commission System for Retirement Savings and the National Insurance and Bond Commission will have supervision and surveillance powers with regard to their jurisdictions.
The law also proposes that a Financial Technology Institutions Committee be set up, which will consist of two representatives from each of the SHCP, the CNBV and Banxico.
The committee, together with the CNBV, will be responsible for granting FTIs the necessary authorisations to operate in Mexico.
Pursuant to the initiative, the following institutions that undertake financing, investment, savings, payments or transfer activities through interfaces, the Internet or any other means of electronic or digital communications will be considered FTIs:
- electronic payment institutions – these offer issuance, management, accountability and transfer of electronic payments services. Electronic payment funds include:
- the amounts or units of an asset that can be assigned a monetary value and are recorded in an electronic transaction accounting ledger; and
- the amounts accepted by a third party as receipt of an amount of money or respective virtual assets;
- virtual asset management institutions – these contact third parties through digital means in order to buy, sell or dispose of their own or a third party's virtual assets and receive virtual assets to make transfers or payments to a person, including another virtual asset management institution. Virtual assets are digital units that have similar uses to the Mexican peso, as determined by Banxico in accordance with certain criteria; and
- crowdfunding institutions – these serve as mediators to investment seekers and potential investors through digital platforms, such as websites or mobile applications, so that prospective investors can fund applicants through such digital platforms.
If the law comes into force in its existing form, FTIs will have to be incorporated as a Mexican corporation or limited liability company in order to provide services in Mexico. Interested parties outside Mexico must take this into consideration.
All FTIs must obtain prior authorisation from the CNBV, together with an opinion from the Financial Technology Institutions Committee. FTIs that are already providing services in Mexico will have to obtain the CNBV's authorisation in order to continue operating.
For an entity to be authorised as an FTI, the CNBV must certify that:
- the transactions that it wishes to carry out are expressly indicated in its bylaws;
- it has the appropriate governing bodies and corporate structure to carry out its operations; and
- it has the necessary infrastructure and internal controls – such as operating, accounting and security systems and offices – and the respective manuals.
The CNBV will publish granted authorisations in a public registry and on its website.
Notably, if an FTI fails to comply with the minimum operating requirements or any of the other conditions established in the law, the CNBV has the authority to revoke its authorisation to operate.
Once the finance and banking community has provided feedback on the initiative, the draft law will be introduced to Congress. Congress will then make any adjustments and, if passed, the law will be enacted.
If the draft provisions are enacted without any amendments, existing fintech companies will have six months from the date on which the law comes into force to request authorisation from the CNBV to continue operating. In the meantime, they will need to disclose to the public that their fintech activities are pending authorisation from the CNBV and are being carried out unsupervised.
Secondary regulations are expected to be enacted, which will contain general provisions regarding, among other things:
- FTIs that act as attorneys in fact or agents for their clients;
- the requirements and methodologies for reporting client risk and payment behaviour to investors;
- the technological infrastructure provided by financial entities with interests in an intention to float;
- the creation of a specialised office for responding to claims; and
- the use of robo-advisers.
Companies should closely monitor the continuing developments regarding this groundbreaking initiative.
For further information on this topic please contact Federico de Noriega Olea, René Arce Lozano, Mayuca Salazar or Luis Dávalos at Hogan Lovells BSTL by telephone (+52 55 5091 0000) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Hogan Lovells website can be accessed at www.hoganlovells.com.
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