On January 10th, 2014, an amendment to a series of financial laws in Mexico (hereafter “Reform”) was published in the Federal Official Gazette, aiming to broaden competition in the sector, increase the foreclosing of collateral and collection of loans, reduce the risk associated with the granting of loans, thereby encouraging the granting of loans at more affordable rates.
To make this possible, 34 statutes were amended and a new Law to Regulate the Financial Holding Companies was enacted.
Below is a summary of certain of the issues we consider to be of most relevance of the Reform.
Strengthening of the National Commission to Protect the Rights of Users of Financial Services (or its acronym in Spanish “CONDUSEF”) and other authorities on financial matters
CONDUSEF is vested with powers to issue recommendations to the financial institutions and to publish such recommendations; to define the activities that deviate from the sound practices related to the offering and marketing of financial services; and to execute agreements for the exchange of information with other authorities on financial matters. The determinations issued by the CONDUSEF shall be considered as executive, this is, may be judicially enforced as if they were a credit instrument such a promissory note, when it resolves on the breach of a certain, enforceable and liquid contractual obligation in favor of the customer.
Likewise, the Federal Economic Competition Commission will be required to launch an investigation on the conditions for competition in the financial sector and issue recommendations to financial authorities.
A Reporting Company of Financial Entities is created, subordinated to CONDUSEF, which shall contain information about the performance of the financial institutions, penalties imposed to them, claims filed against them and the necessary information to notify users about their performance in the provision of their services. Separately, the obligation for financial entities to provide information about credits they granted to at least one credit score company is imposed.
Arbitration is established on financial matters, in order to implement a new dispute resolution procedure.
The Reform seeks to make the regulatory framework that rules the Development Banks more flexible by removing obstacles that limit their functioning and including mechanisms that allow them to obtain the funds needed to fulfill their social objective. Likewise, Development Banks are granted certain powers in order to promote, through the offering of financial services, innovation, boosting environmental sustainability and promote financial inclusion of micro, small and medium enterprises and small rural producers.
Development Banks can only invest, acquire obligations to buy or sell shares or make future contributions to the capital stock of companies, in excess of 15% of the paid-in capital stock of the issuer and for a term longer than three years, provided these are companies that perform activities that relate to the corporate purpose of the banks, and with the prior authorization of the Ministry of Finance and Public Credit.
A control and surveillance system for Development Banks is established to avoid the duplication of functions and administrative tasks, and the periodicity of the Board of Directors’ meetings of Development Banks is homologated in all organic laws.
The General Law of Negotiable Instruments and Financial Transactions is amended to provide that the entire amount of an issuance of participation certificates shall be fixed through an opinion issued by a Development Bank (Sociedad Nacional de Crédito), previous expert opinion on the assets held in trust.
Auxiliary credit organizations: Multiple-Purpose Financial Companies (or its acronym in Spanish "Sofomes") and General Storage Warehouses (or their acronym in Spanish “AGDs”)
The Reform seeks to modernize the legal framework applicable to the auxiliary credit organizations, specifically the AGDs, Sofomes, Currency Exchange Companies, Money Transferors and Currency Exchange Centers.
In connection with the AGDs:
A new corporate governance regime is introduced;
A new kind of AGDs is regulated, which is that engaged exclusively to the storage of agricultural and fishing products, which incorporation requires less equity, with a regulation that seeks the preservation of stored agricultural and fishing products; and
A Sole Registry of Certificates, Warehouses and Merchandise and an Integral Information System of Agricultural Products Storage are created as tools and information consulting intended for those involved in storage, certification and credit operations based on storage certificates and pledge bonds.
In connection with the Sofomes:
CONDUSEF is in charge of their registration, which is a requirement for their formation. Such entities shall be considered of a “financial” nature when they meet certain incorporation, corporate purpose, transparency and financial information reporting requirements.
As in the case of banks, Sofomes shall have the obligation to provide information of their debtors to at least one credit score company;
New cases or circumstances are provided under which Sofomes shall be considered regulated entities and, consequently, comply with additional regulation;
A voluntary regime is established for those non-regulated Sofomes that want to become regulated entities, prior approval from the National Banking and Securities Commission (for its acronym in Spanish “CNBV”) and only if those entities comply with certain capitalization and experience in the sector requirements; and
The circumstances in which a Sofom looses its qualification are listed, and a special regime is created for the loss of registration and mandatory dissolution of regulated Sofomes in certain events, prior opinion of the CNBV.
In relation to other organizations, it is established that to obtain their registration before the CNBV, Currency Exchange Centers, Money Transferors and non-regulated Sofomes, must have a favorable opinion on anti-money laundering and prevention of transactions involving funds of illegal origin.
The range of services that Credit Unions can offer to their members is expanded, including true leases over assets. Furthermore, the possibility for Credit Unions to receive direct funding from decentralized government bodies and other Credit Unions with a larger equity is now foreseen. It is also foreseen for Credit Unions to be capitalized through the issuance of preferred stock up to an amount equivalent to 25% of their ordinary capital stock.
By incorporating new economic activities, more persons are able to be members of Credit Unions; and the concept of business experience is included as a requirement to participate in the Board of Directors of Credit Unions.
Finally, the corporate governance of Credit Unions is strengthened by establishing that related-party transactions must be previously approved by a Credit Committee and the Board of Directors. Furthermore, Credit Unions shall deliver to the CNBV a copy certified by the Secretary of the Board of the resolutions whereby related-party transactions were approved.
The name of the current Investment Companies Law is modified to Investment Funds Law and, as a consequence, the name of the Investment Companies is replaced by Investment Funds. Also, the process for their incorporation and approval is modified, and their corporate structure is modernized by strengthening the corporate governance of the Investment Funds Operating Companies (i.e., asset managers), Investment Funds Shares Distributing Companies and Investment Funds’ Shares Valuating Companies.
Investment Funds are empowered to act as trustees on trusts that meet certain requirements, such as: (i) the purpose of the trust must be a business directly related to their business activities; (ii) they must be administration or guaranty trusts; (iii) the funds must be received from people fully identified at the execution of the agreement, not allowing the adhesion of third parties once it is executed, nor the issuance of certificates from the assets held in the trust to be placed in the public; and (iv) the estate of the trust is comprised exclusively by assets, rights, cash and shares authorized for the Investment Funds they manage.
In the same manner, Investment Funds in Debt Instruments are empowered to invest in other assets on an exceptional basis. Likewise, asset managers are empowered to outsource to third parties who have greater knowledge for the management of the assets of Investment Funds, with the limitation that they will only be able to subcontract with foreign financial institutions of the same kind.
The Reform describes in detail which corporate actions must be reported to the CNBV for their registration with the National Registry of Securities, including any amendment to the formation deed, capital increases, dissolution, merger and spin offs, which shall only be effective upon registration. The Securities Market Law was amended accordingly to include the registration of corporate actions taken by Investment Funds in the regulations of the National Registry of Securities.
The CNBV is empowered to issue sound and safety regulation as well as general provisions related to the distribution of shares of Investment Funds. Likewise, the CNBV’s surveillance powers with respect to Investment Funds are strengthened.
Savings and Loans Entities
Savings and Loans Cooperatives, Communitarian Financial Entities and Popular Savings and Loans Entities are now able to engage third parties to provide necessary operational services with certain limitations and under the supervision of the CNBV.
The requirement of rotating the members of the Board of Directors every five years is deleted but now at least 25% of the directors must be independent.
Likewise, the elimination of the two-year operation requisite, in order to get authorization to raise funds from the public at large is now contemplated for Popular Savings and Loans Entities.
The Reform foresees the possibility for Popular Savings and Loans Entities to execute operations and contract services with costumers by electronic means.
Enactment of a New Law to Regulate the Financial Holding Companies
With an effort to strengthen corporate governance of Financial Holding Companies, the new law seeks to homologate their regime to the regime applicable to publicly-traded companies regulated by the Securities Market Law. Likewise, a more flexible corporate structure is introduced for Financial Holding Companies to make investments, considering the indirect investments in the same financial group members entities as well as entities over which they have control, through a sub-holding companies.
Financial groups can only be integrated by financial entities in whose capital the relevant Financial Holding Company participates with more than 50% of it’s paid-in capital.
The new law authorizes a financial member of a certain financial group, to offer to the public at large products and services of other members of the same group, as long as they are related to the products and services they offer and subject to disclosure of the name of the financial institution that actually offers the product or service.
Certain aspects of spin off, dissolution, liquidation and bankruptcy of Financial Holding Companies are now regulated, and the new Law to Regulate the Financial Holding Companies will govern mergers of members of financial groups.
It also contemplates the possibility of a Financial Holding Company to request voluntarily revocation of its authorization to act as a Financial Holding Company, following compliance of certain requirements.
Finally, a Council on Financial System Stability, a Council on National Financial Inclusion and a Financial Education Committee are created to act as bodies of permanent coordination, evaluation and analysis of the Mexico's financial system.
The amendment includes new kind of offerings restricted to certain investors and specifies that privately offered securities may not me offered publicly. Furthermore, the amendment provides that notice to the CNBV shall be given whenever there is a foreign placement of securities issued in Mexico or by Mexican corporations.
Certain rules applicable to broker-dealers are homologated with certain provisions in the Banking Law, such as the integration of net capital, capitalization, minimum ratios of first and second tier capital, and the incorporation of the leverage ratio and capital supplements. Likewise, it is provided that broker-dealers will be liable and shall pay damages for the breach of their duties.
The range of people who can act as investments advisors is broadened and the obligation to register in the CNBV is imposed on all investment advisors, enabling such commission to periodically request information from investment advisors. Likewise, certain obligations are imposed on transactions with illegally obtained resources.
Regarding the stock pledge referred in the Securities Market Law, a new procedure to allocate proceeds from the sale of the pledged securities is provided.
Grant and enforcement of security interests
Through the amendment to various commercial laws, the Reform seeks to improve the efficiency in the enforcement of security interests (e.g., terms for the admission of evidence and notification to parties is reduced, as well as the authorities’ obligation to timely provide information), thereby promoting the granting of loans to the general public and business development.
Some amendments to commercial laws were passed in order to soften the documentary requirements to commence a conciliation proceeding before the Federal Consumer Agency and CONDUSEF.
When the parties believe that a decision has omissions or inconsistences, they now can request verbally a clarification of the award during a hearing.
The Organic Law of the Federal Judicial Branch was amended to include specialized commercial courts.
It is noteworthy to mention the introduction of Article 336-bis of General Law of Negotiable Instruments and Financial Transactions, which seeks to establish a direct and effective way to exercise lienholder rights. Said legal provision stipulates the specific events where the breach of an obligation that is secured by a pledge on cash entitles the lienholder to retain and apply such cash for the payment of the secured obligation without judicial or any enforcement proceeding, and in the event where the monetary pledge is insufficient, the creditor may commence a judicial proceeding to collect the outstanding balance. The enforcement of the pledge on cash is not considered a unilateral action by the creditor but an action consented by the pledgor since the creation of the security interest.
The Reform empowers the CNBV to disclose through its web site the resolutions issued as consequence of administrative sanction proceedings. The CNBV may order provisional remedies consisting in corrections or adjustments in reasonable matters of accounting records and financial statements, inter alia. Upon publication of the Reform, foreign exchange centers and money transferors will be subject to supervision regarding their organization and operation.
The powers of the Bank of Mexico on these matters, which shall conduct its proceedings in accordance with the regulations issued by its Board of Governors, were reinforced.
The possibility of creating a credit reporting company as a government-owned company part of the financial system is established.
The Federal Code on Criminal Procedures is amended to include a list of crimes graded as “serious”.
The Reform eliminates restrictions on foreign investment in the equity of several financial institutions, including but not limited to insurance and surety companies. Therefore, upon publication of the Reform, foreign investors will be able to invest directly in Mexican financial entities and also through the current framework of affiliates of foreign financial institutions.
The Reform includes a substantial amendment to the Insolvency Law to provide greater protection to creditors and to incorporate
measures designed to expedite the insolvency proceedings. The amendment establishes, among other things, the following:
Contemplates the institution of “joint bankruptcy” to request or demand insolvency of subsidiaries or companies belonging to the same group;
Obtaining “emergency loans”, in order to preserve the economic unit and the entity’s value, providing mechanisms to prevent abuses in the granting of such loans;
The limitation of the voting rights of intercompany creditors for the execution of the reorganization plan;
Extension of claw-back period, only in the case of inter-company transactions where it is presumed that all actions and transactions were fraudulent conveyances in detriment of creditors;
Liability regime of directors and officers vis-à-vis the insolvent entity;
Prohibition to extend the reorganization period beyond what is contemplated in the Insolvency Law; and
Limit the veto rights to acknowledged unsecured creditors that have not signed the reorganization plan.
Liquidation of Banks
The Reform states new proceedures for bank liquidation and new causes for their commencement. Among other amendments, the Institute for the Protection of Bank Savings is entitled to create “transitional” banks to absorb the assets and assist in the recovery of the bank.
The approved financial amendment is an integral reform involving several financial laws; it is an ambitious amendment in scope and objectives. Although this Reform is certainly perfectible, we consider it can mean a positive step towards better regulation of the financial activity.