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Law to Regulate Financial Technology Institutions


March 9, 2018



INFORMATION NOTE

Dear Clients and Friends,

With this Information Note we would like to share with you a brief analysis of the Decree published on March 9, 2018 in the Official Federal Gazette ("DOF" for its initials in Spanish), issuing the Law to Regulate Financial Technology Institutions ("Fintech Law") and amending other financial regulations, as follows:

I. BACKGROUND

On October 10, 2017, the head of the Federal Executive Branch presented to the Senate a initiative containing a Draft Decree issuing the Fintech Law and amending other financial regulations, which was approved by the Senate on December 5, 2017, and subsequently by the Chamber of Deputies on March 1, 2018. By virtue of the foregoing, on March 9, 2018 the legislative process concluded with the publication in the DOF of the decree issuing the Fintech Law and amending the following financial regulations:

  • Credit Institutions Law;

  • Securities Market Law;

  • General Auxiliary Financial Institutions Law;

  • Financial Services Transparency and Regulation Law;

  • Law for the Credit Information Companies;

  • Financial Consumer Protection Law;

  • Financial Groups Law;

  • National Banking and Securities Commission Law; and

  • Federal Law to Prevent and Identify Operations with Resources of Unlawful Origin.

The above mentioned laws were amended in order to be consistent with the provisions of the new Fintech Law.


II. GENERAL PROVISIONS OF THE FINTECH LAW

A. PURPOSE


The purpose of the Fintech Law is to regulate the financial services provided by financial technology institutions, as well as the organization, operation, functioning and financial services that are subject to a special regulation and are offered or carried out through innovative means.


B. SUPERVISION


The National Banking and Securities Commission ("CNBV" for its acronym in Spanish) and the Bank of Mexico will be the authorities responsible for supervising compliance with the Fintech Law in the scope of their respective competencies, as specified in such Law and in the other applicable legal provisions.

In addition, the National Insurance and Bond Commission ("CNSF" for its acronym in Spanish), the National Retirement Savings System Commission ("CONSAR" for its acronym in Spanish) and the National Commission for Protection and Defense of Financial Services Customers ("CONDUSEF" for its acronym) will have the powers conferred to them by the Fintech Law and the other applicable legal provisions in the sphere of their respective competencies.

C. RELEVANT DEFINITIONS

The definitions article of the Fintech Law includes the following:

Customer will be considered the individual or entity that contracts or carries out any Transaction with a Financial Technology Institution ("FTI"), and anyone that contracts or uses the services of the Financial Entities specified in this law or companies authorized to operate with Innovative Models.

Financial Entities will be understood as the financial group holding or sub-holding companies, credit institutions, brokerage firms, stock markets, investment fund operators, investment fund stock distributors, credit unions, credit auxiliary organizations, foreign exchange companies, full service financial institution, popular financial institutions, community financial institutions with operating levels I to IV, rural financial integration organizations, savings and loan cooperatives with operating levels I to IV, securities deposit institutions, central counterparty clearance houses, securities rating institutions, credit bureaus, insurance institutions, bond institutions, mutual insurance companies, retirement fund managers, and other public institutions and trusts that engage in activities over which the CNBV, the CNSF or the CONSAR have oversight powers.

Technological Infrastructure, refers to the computer infrastructure, telecommunications networks, operating systems, databases, software and applications that the FTI, the companies authorized to operate with Innovative Models and the financial entities use to support their operations.

FTI refers to the collective financial institutions and the electronic payment funds institutions.

Innovative Model will be understood as a model that uses technology tools or means different from those existing in the market at the time the temporary authorization for providing financial services is granted.

Electronic Payment Funds will be funds that are registered in an electronic registry of transactional accounts kept by an electronic payment funds institution.

D. THE FTI AND THEIR OPERATIONS

The FTI must obtain an authorization from the CNBV to organize and operate, and must take measures to prevent the dissemination of false or misleading information as well as to circulate the information their Customers need to identify the risks of the operations they carry out through them.

It is important to mention that neither the Federal Government nor the entities of the parastatal public administration will be responsible for or guarantee the funds Customers use in the transactions carried out with the FTI, nor will they assume any responsibility for the obligations undertaken in the transactions they execute.

When Financial Entities decide to invest in FTI, they may not use the personnel and the promotion channels of their own operations to promote the FTI.

E. CROWDFUNDING INSTITUTIONS

Only entities previously authorized by the CNBV as Crowdfunding Institutions will be authorized to carry out activities on a regular and professional basis, to contact the general public in order to offer them financing through computer applications, interfaces, web pages or by any other electronic or digital means of communication.

Article 16 of this Law considersinvestors to be those individuals or entities that contribute resources to the seekerswho, for their part, will be considered the individuals or entities that have requested such resources through the crowdfunding institution.

The Customers of a crowdfunding institution may carry out among themselves and through such institution the following operations:

  1. Debt Crowdfunding: with the purpose of the investors granting any financing causing a direct liability for the seekers.

  2. Equity Crowdfunding: so investors may acquire instruments representing the capital stock of entities that act as seekers.

  3. Profit-Sharing Crowdfunding:so investors and seekers execute among themselves joint venture agreements or any other agreement by which the investor acquires an aliquot part of a present or future good in the income obtained from carrying out one or more activities or projects of a seeker.

It is important to mention that such operations will be considered mercantile operations and will be prohibited from promising returns or yields on the investment made or guaranteeing the result or success of the investments.

Finally, the FTI and related persons that have decision-making power in the FTI may not be seekers of financing through the crowdfunding institutions.

F. ELECTRONIC FUNDS TRANSFER INSTITUTIONS.

Only entities previously authorized by the CNBV as electronic funds transfer institutions will be authorized to provide to the public regular and professional services consisting of the issuance, administration, redemption and electronic transfer of funds, through computer applications, interfaces, internet pages or by any other electronic or digital means of communication.

Electronic funds transfer institutions must carry out certain steps to provide the services of issuance, administration, redemption and electronic transfer of funds, among which are the following:

  1. Open and control the Electronic Funds Transfer accounts of the Customers, in which the deposits equivalent to the amount of electronic funds issued against the reception of an amount of money in Mexican or foreign currency or of specific virtual assets records are kept.

  2. Make electronic funds transfers between its Customers.

  3. Deliver an amount of money or virtual assets equivalent to the same amount of electronic funds in an Electronic Funds Transfer account, by the respective charge in such account.

Electronic Funds refer to a monetary value equivalent to a specific amount of money or to a specific number of units of a virtual asset established by the Bank of Mexico and they must correspond to a payment obligation of their issuer for the same amount of money or virtual assets.

The electronic funds transfer institutions cannot pay their Customers interest or any other return or monetary benefit for the balance they accumulate over time. However, they can allow the offering of non-monetary benefits.

G. TRANSACTIONS WITH VIRTUAL ASSETS

A Virtual Asset is considered the representation of value stored electronically and used by the public as a means of payment for all types of legal acts and which can only be transferred electronically.

Under no circumstance will Virtual Asset be understood as the legal currency in national territory, foreign currency or any other asset denominated in legal currency or foreign currency.

The FTI previously authorized by the Bank of Mexico may only carry out transactions with Virtual Assets determined by such Bank and provided they can deliver to the Customer the amount of Virtual Assets it holds when it requests it.

Additionally, the FTI are prohibited from selling, assigning, transferring the ownership, loaning or guaranteeing or conveying the use or enjoyment of the virtual assets they control on account of their Customers.

H. GENERAL OBLIGATIONS OF THE FTI

According to the provisions of the Fintech Law, the FTI must comply with the following obligations, among others:

  1. To obtain the authorization of the CNBV for their organization and operation as an FTI.

  2. Once the above authorization is obtained, they must add to their name the words “institución de financiamiento colectivo” (“crowdfunding institution”) or “institución de fondos de pago electrónico” (“electronic funds transfer institution”), as applicable.

  3. With respect to the amounts of money they receive from their Customers, the FTI must keep them separate from their own, and also keep a record of transactions made by each Customer.

  4. Have a record of accounts that reports the transactional movements, identifying the owner of the resources and balances kept with the FTI as a result of such movements.

  5. Audit the annual financial statements of the FTI by an independent external auditor.

  6. Report to the CNBV, to the CONDUSEF and to the Bank of Mexico, in the scope of their jurisdictions, on the activities and transactions they carry out, in accordance with the general provisions those authorities may issue.

  7. Establish measures and procedures to prevent or detect acts that can be considered transactions financing terrorism or transactions with resources of unlawful origin.

III. SANCTIONS AND CRIMES

Legal acts executed in violation of the provisions established in the Fintech Law or of the conditions indicated in their individual authorizations for operating as an FTI will result in the imposition of the applicable administrative and criminal sanctions, but such violations will not make those acts null and void, in protection of good faith third parties, unless the Fintech Law expressly establishes otherwise.

IV. TRANSITORY PROVISIONS OF THE FINTECH LAW

Among the most relevant transitory provisions of the Law are the following:

FIRST. The Fintech Law will enter into force on March 10, 2018.

SECOND.The Ministry of Finance and Public Credit ("SHCP"for its acronym in Spanish), CNBV, CONDUSEF, CONSAR, CNSF and the Bank of Mexico are given a period from six to twenty-four months to issue the general provisions established in the Fintech Law, as may correspond to them.

THIRD. The persons who as of the entrance into force of this Law are engaging in activities regulated under the Fintech Law and those who are obligated to establish standardized computer application programming interfaces, must request their authorization before the CNBV in the terms indicated in the general provisions issued for that purpose,in a period not to exceed twelve months from the entrance into force of this Fintech Law. .

For more information contact: Rafael Sámano, Partner: rsamano@samanosc.com.mx Tania Zúñiga, Senior Attorney:tzuniga@samanosc.com.mx Lic. Cristina Loera.

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