Even though the Mexican economy has shown a deceleration in the last couple of years and a contraction of our economy is foreseeable in 2020, the banking sector in Mexico has continued to have a sustained growth and default rates seem to be stable.
That said, a considerable part of our country’s population remains unable to access banking services (in particular the lower and middle classes) and, as a consequence, banking financing. Based on the foregoing and considering that Mexico concentrates one of the biggest lower- and middle-class population in the Latin American region, alternative and new non-banking financial sector and financing products have arisen and developed in our market, as well as other non-banking borrowing opportunities targeting “small businesses” have come into play (e.g. non-banking payroll and asset-backed loans, crowdfunding and technology/online lending). In this regard, it is worth noting that, as a general rule, the granting of credit in Mexico is not a regulated activity and can be performed by any person: certain financing activities are regulated by Mexican law and are subject to the surveillance and authorisations of domestic regulators (e.g. minimum capitalisation, governance controls and disclosure of information).
Some traditional banks have realised and understood the potential opportunities that come from such an unattended market and the current digitalisation trends that derive from them and other financial intermediaries offering similar products to those that have been developing in the non-banking financial sector.
As part of the efforts and trends targeting financial inclusion, Mexico was the first Latin American country to regulate financial technology by the enactment of the Law to Regulate Financial Technology Institutions (Ley para Regular las Instituciones de Tecnología Financiera, or “Fintech Law”). The Fintech Law mainly regulates the rendering of financial services through technological platforms and innovative instruments, such as crowdfunding, electronic payment mechanisms, cryptocurrencies and a regulatory sandbox for innovative technologies in the financial sector. Furthermore, financial technology entities (including electronic payment entities and electronic funding entities) are now considered as part of the financial system and, thus supervised by Mexico’s main regulator in the banking and securities sectors, the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or “CNBV”).
It is also worth noting that the Mexican federal administration is now going into its second year under the leadership of President Andrés Manuel López Obrador (“AMLO”) and a majority in Congress of his left-wing political party, MORENA. The executive branch, with the support of the legislative majority of MORENA have passed, among others, significant reductions in government salaries and budgets, which have clearly affected the quality of the banking and credit regulators, such as the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or “SHCP”) and the CNBV. Except for its sanctioning area, the CNBV seems not to be in the new government’s priorities; thus, it is foreseeable that such agency continues to suffer regular budget cuts within this administration, hence negatively affecting the overall quality of this regulator, as well as its general function and operations.
Also, it is important to mention that some fractions within the MORENA group have been trying to push certain amendments to the financial legal system, which could impact the business of banking institutions in Mexico. Moreover, while Mexico has profited so far from the trade wars between the USA, China and Europe and an apparent successful renegotiation of NAFTA in the form of USMCA/TMEC, significant concerns about Mexico’s current administration’s public policies have been increasing throughout local and foreign investors and a negative effect in the Mexican economy continues to be seen.
Mexico has a complex banking regulatory architecture, comprised of several federal agencies and diverse legislative and executive regulations.
Mexican regulators have different functions and attributions when it comes to regulating the financial sector and, in particular, the banking industry. The main banking regulators in Mexico are the SHCP and the CNBV. The CNBV is an independent agency of the SHCP. Among their many roles and functions, they serve as the primary supervisory authority over banking activities and regulates the organisation and operation, among others, of the following entities:
- Financial Groups (Grupos Financieros).
- Banking or Credit Institutions (Instituciones de Crédito).
- Brokerage and Trading Firms (Casas de Bolsa).
- Investment Funds (Fondos de Inversión).
- Issuers of Securities and Publicly Listed Companies (Emisoras Bursátiles).
- Non-Bank Banks (Sociedades Financieras de Objeto Múltiple, or “SOFOMES”).
- Credit Auxiliary Entities (Sociedades Auxiliaries de Crédito).
- Savings and Loans Institutions (Sociedades de Ahorro y Crédito Popular).
- Rating Agencies (Agencias Calificadoras).
- Fintech Firms.
In addition to the CNBV, other relevant regulators in the Mexican banking sector are:
a) The Institute for the Protection of Bank Savings (Instituto para la Protección del Ahorro Bancario, or “IPAB”), which is the main supervisory authority in the protection of bank savings.
b) The National Commission for the Protection and Defense of Financial Services’ Users (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros, or “CONDUSEF”), which mainly protects financial services’ customers.
c) The National Insurance and Bonds Commission (Comisión Nacional de Seguros y Fianzas, or “CNSF”), which is responsible for the operation, organisation and supervision of insurance companies and bonds activities.
d) The National Commission of the Retirement Savings System (Comisión Nacional del Sistema de Ahorro para el Retiro, or “CONSAR”), which is in charge of regulating the Mexican retirement savings system.
Further to the federal agencies aforementioned, which are all dependent from the executive branch, another relevant player in Mexico’s banking regulation bodies is the Mexican Central Bank (Banco de México or BANXICO). BANXICO is an autonomous body created by constitutional mandate, the main purpose of which is to provide Mexico’s economy with its national currency (Mexican Peso), to procure the purchasing power of such currency and to promote the healthy development of the financial system, including a proper functioning of the payment systems within Mexico.
With respect to the main legislation governing the banking sector, Mexico’s legal framework is comprised of the following principal statutes (among others less relevant):
i) Ley de Instituciones de Crédito (“LIC”), which mainly regulates banking services and the organisation and operation of banking institutions.
ii) Ley del Mercado de Valores, which mainly regulates the securities market.
iii) Ley para Regular las Agrupaciones Financieras, which mainly regulates the organisation and operation of financial groups.
iv) Ley para la Transparencia y Ordenamiento de los Servicios Financieros, which mainly regulates transparency in financial services, particularly with respect to commissions and fees charged by financial entities.
v) Ley General de Organizaciones y Actividades Auxiliares de Crédito, which mainly regulates the organisation and operation of services and activities ancillary to financial services.
vi) Ley de Transparencia y de Fomento a la Competencia en el Crédito Garantizado, which mainly regulates transparency in financial services competition and secured credit.
vii) Ley para Regular las Sociedades de Información Crediticia, which mainly regulates the organisation and operation of credit bureaus and credit scores.
viii) Ley de Sistemas de Pagos, which mainly regulates the operation of payment systems.
ix) Ley de Sistemas de Ahorro para el Retiro, which mainly regulates financial services related to retirement.
x) Ley de Ahorro y Crédito Popular, which mainly regulates the protection of bank savings of the underserved gap of the population.
xi) Ley de Fondos de Inversión, which mainly regulates investment funds.
xii) Ley de Uniones de Crédito, which mainly regulates the organisation and operation of credit unions.
xiii) Ley de Protección y Defensa al Usuario de Servicios Financieros, which mainly regulates the financial services customer protection.
xiv) Ley General de Títulos y Operaciones de Crédito, which mainly regulates negotiable instruments and certain special credit transactions.
xv) Ley General de Sociedades Mercantiles, which in general regulates commercial and business entities (and applies to private banking institutions).
As indicated above, in addition to the main legislation provided above, there is also a large body of secondary regulations, which sets forth supplementary and more specific provisions. The main comprehensive collection of secondary provisions applicable to banking institutions are contained within the Disposiciones de Carácter General Aplicables a las Instituciones de Crédito, known in Mexico as the Circular Única de Bancos, or “CUB”.
The Mexican political and economic landscape is always expected to be fairly uncertain by nature, and as a result, a slowing-down of Mexico’s economy is now underway, raising significant concerns for local and foreign investors to which the banking industry is no exception.
Furthermore, certain groups within the MORENA party have recently been trying to push through Congress certain regulations seeking to eliminate several commissions charged by retail banking institutions in Mexico. In the event MORENA succeeds at this proposal, it is expected that the banking industry in Mexico will suffer a large detrimental impact, given that, according to CONDUSEF, 30% or so of retail banking institutions’ income originates from banking commissions.
On another topic, the United States-Mexico-Canada Agreement (USMCA or TMEC, the latter for its acronym in Spanish) has finally been approved and ratified (including through the applicable process via Congress) by Mexico and the United States, leaving just pending the approval by the Canadian Congress. Even though the USMCA is not particularly focused on matters of banking regulation, it is expected that once the Agreement is ratified and enters into full force and effect, some of the existing uncertainty in the region will be cleared out, which may have a positive impact on business and the private industry in general; a light in the not very bright panorama for our country and its economy.
Moreover, in recent years, Mexican banking regulators have tried to align to international standards, mainly after the issuance of the Basel Accords. Part of such efforts include taking relevant steps towards the implementation of a consolidated supervision model (e.g. re-balancing and re-distribution of certain functions and authorities among the different regulators). Mexico was one of the first countries to subscribe to Basel III and gradually implement it into its financial system. In line with this, Mexico was granted the grade of “compliant” by the Basel Committee on Banking Supervision (“BCBS”) in March 2015.
Another recent development worth mentioning is the fact that last year, through a joint effort by BANXICO, the SHCP and the CNBV – a new electronic payment system – was implemented through the use of “QR codes”. This system, known as CoDi (Digital Collection), represents an important effort by Mexican regulators to increase financial inclusion and reduce the cash economy.
Likewise, there has also been a rise in non-banking financing alternatives and financial inclusion, specifically in the fintech sector, deriving in Mexico becoming a pioneer in the Latin-American Region for fintech regulation. In March 2018, the Fintech Law (Ley para Regular las Instituciones de Tecnología Financiera) was enacted. While many of the relevant secondary regulations are still in the works, this has allowed several smaller corporations to provide financing to both entities and individuals. The Fintech Law arises with the objective of regulating financial services provided by financial technology institutions; the purpose of the regulations is to supervise transactions made through technological platforms and promote financial inclusion and innovation via new technologies to provide financial services to more people in easier ways than those of traditional banking. The main areas regulated and covered by the Fintech Law are, among others:
a) Means of payment and transfers.
b) Financial services’ infrastructure (including customer and risk profile assessment, fraud prevention, identity verification, banking APIs, payment method aggregators, among others).
c) Financial software solutions (accounting, invoicing and financial management).
d) Blockchain developers, intermediaries and digital asset markets.
e) Disruptive financial institutions.
f) Crowdfunding web platforms.
As a consequence of the enactment of the Fintech Law, the regulators (particularly the CNBV) are facing a new regulatory and operational challenge for its due implementation amongst the existing financial services platforms, affecting the already saturated workforce of the CNBV.
Rules governing corporate governance and internal controls’ matters applicable to private banking institutions in Mexico are mostly provided by the LIC and the CUB.
In general, banking institutions’ capital structures are divided into two series of shares: Series “O”; and Series “L”. Subject to the specific bank, Series “O” shares will have full corporate and economic rights, while Series “L” shares will have limited corporate rights (e.g. voting restricted to certain specific matters like mergers, spin-offs, transformations, dissolutions, etc.) but may also grant preferential dividends to their holders.
With respect to governance matters, such rules are mostly focused on the integration and authority of the board of directors and committees, as well as on the appointment and authority of the CEO and other officers.
Regarding the board of directors, applicable rules provide that: (i) such corporate body must be comprised by five to fifteen members, of which at least 25% must qualify as independent; and (ii) its members must have acceptable technical aptitudes, trustworthiness and a satisfactory credit score. Likewise, there are statutory mechanisms that preclude certain persons from acting as directors of banking institutions (e.g. convicted felons for financial crimes), or that prohibit certain directors from voting when they have a conflict of interest. Also, the board of directors is responsible for approving the objectives, guidelines and policies regarding loan origination and management, which must be consistent, compatible and complementary with those set forth for the process to identify, measure, control, reveal and manage risk. The board of directors of banking institutions has all the necessary powers and authorities to represent the bank and lead its business. On a related note, the board of directors is liable to the shareholders’ meeting as the supreme corporate body of the banking institution, and the statutory auditors are in charge of evaluating the performance of the internal control system of the banking institution.
Management of banks is also entrusted to a chief executive officer (“CEO”), who must be an individual who resides in Mexico for tax purposes, with a recognised moral reputation and at least five years’ experience in senior decision-making positions. The CEO is in charge of the elaboration and presentation of policies for the correct application and utilisation of the human and material resources of the entity, including the consideration of their efficient use, restrictions on misuse, oversight and control mechanisms. The individual performance of the CEO is overseen by the board of directors, and it is required for the CEO to provide all exact information and data to assist such body in the making of relevant decisions.
Internal auditing functions of retail banking institutions in Mexico fall firstly on a statutory body comprised of at least two statutory inspectors (comisarios), each of which shall be appointed by the shareholders. Such committee is responsible for general surveillance matters, such as:
i) Requesting monthly reports from the board of directors, including financial information.
ii) Overseeing the entity’s operations.
iii) Submitting its annual report to the shareholders’ meeting, which includes its opinion on accounting and information policies, as well as the sufficiency and adequacy of certain criteria.
The statutory inspectors must comply with certain requirements, such as technical aptitudes, trustworthiness and a satisfactory credit score, as well as ample knowledge and experience in financial, accounting, legal and administrative matters.
In addition to the board of directors, the CEO and the statutory inspectors, the management of Mexican banking institutions is aided by an audit committee for consultation purposes. As with the statutory inspectors, the members of the audit committee must be selected for their aptitudes, experience and professional prestige, and at least one of its members must have experience in the fields of auditing and internal control. The members of the aforementioned committee will be selected by the board from amongst the specific banking institution’s directors by nomination of the chairman. Such committee must be comprised of at least three members, of which a majority, must be independent. The rights, obligations and authorities of the audit committee are contained in the CUB.
Likewise, banking institutions have a risk committee, the purpose of which is to manage and assess the risks to which they are exposed, as well as to ensure that the operations of the bank comply with the applicable internal regulations and statutes.
Finally, banking institutions must engage an external auditor for the purposes of auditing and certifying financial information (mainly financial statements). External auditors must be independent, must hold a degree in public accounting and must be partners in the auditing firm engaged by the banking institution, among other requirements. Engagement of external auditors, their requirements and the nature of the services to be rendered, are governed by the Disposiciones de Carácter General Aplicables a las Entidades y Emisoras Supervisadas, also known as Circular Única de Auditores Externos, issued by the CNBV.
The CNBV is entitled to order the removal or suspension of any board members or relevant officers in certain particular cases.
Regarding compensations of banking institution’s officers and employees, applicable laws and regulations provide for ordinary and extraordinary types of compensation. The ordinary is comprised of their salary, benefits and fixed remunerations; while the extraordinary is comprised by other kinds of variable compensation, based on results. Mexican law does not provide limits or maximums with respect to compensation of banking officers and employees. Banking institutions may also have a compensation committee, which is the body responsible for overseeing the compliance of these compensations pursuant to Mexican law.
Banking institutions in Mexico are subject to minimum capitalisation requirements depending on the specific activities they perform. Mexican full-service banking institutions are required to subscribe and pay a minimum fixed capital stock of 90 million investment units (unidades de inversion, or “UDIs”), which amounts to approximately 30 million USD. In the case of private banks that limit their purpose to a shorter scope of activities, the relevant requirement is 54 million UDIs, which currently amounts to approximately 18 million USD. This allows for the existence of smaller so-called “niche” banks specialised in particular sectors (e.g. trustee services).
The CNBV is given with discretionary authority pursuant to Mexican law to grant or deny licences to any banking institutions based on their service nature and capitalisation requirements.
In addition to the minimum capitalisation requirements applicable to banking institutions in Mexico, such entities must have a fixed corporate capital. Having a fixed corporate capital obliges banking institutions to submit and approve all corporate capital variations by means of a shareholders meeting or resolution with much more strict standards, implying in addition an amendment to its corporate by-laws that need to be formalised before a local notary public.
Liquidity Requirements
The liquidity requirements applicable to retail banking institutions are mainly set forth in the Disposiciones de Carácter General sobre los Requerimientos de Liquidez para las Instituciones de Banca Múltipe. The foregoing statute sets forth the different rules to calculate the applicable liquidity coverage ratio which, subject to specifics, is calculated as computable liquid assets (activos líquidos computables) over total net outward cash flow (flujo neto total de salida de efectivo). The purpose of this ratio is to require banking institutions to have sufficient liquid assets to cover the outward cash flow for a specific period of time – similar to the requirement of Basel III. In calculating the aforementioned ratio, banks must include, among others: all transactions (individually and on a consolidated basis) including those carried out by financial subsidiaries; all transactions registered in the balance sheet; and the expected cash flow arising from transactions with derivatives. The foregoing requirement also promotes transparency in the financial sector given that retail banking institutions must report their liquidity coverage ratio to BANXICO.
Leverage Ratio
Required leverage ratio in Mexico is 3%. Such ratio must be calculated as basic capital over adjusted assets, without considering subsidiaries or SPVs, and considering operations within Mexico and abroad, in terms of the formulas set forth in the aforementioned statute.
Capital Adequacy
Pursuant to the LIC, retail banking institutions must evaluate, at least on a yearly basis, if their capital would be enough to counteract potential losses derived from the risks to which such institutions are subject under different scenarios, including those arising from adverse economic conditions. Banking institutions that do not pass the relevant tests must present an action plan with the capital forecasts that would, as applicable, allow them to cover such losses.
Deposit-Taking Activities
Pursuant to Mexican law, only banking institutions and certain popular financial entities (Sociedades Financieras Populares, or “SOFIPOS”) are allowed to receive cash deposits from the general public for depositing into checking accounts. While other financial intermediaries and issuers of registered securities are allowed to receive funds from the general public on a professional or on its ordinary course of business and to promote the same via massive communication tools, cash deposit-taking for checking accounts remain exclusively for banking institutions and certain SOFIPOS.
Lending Activities
As mentioned before, general lending activities in Mexico are not a regulated matter under applicable law and can be carried out by any person within the Mexican territory. However, and as previously discussed, certain financing activities are regulated in Mexico; which would require certain registrations and/or authorisations from Mexican financial regulators and will be subject to the supervision of such regulators.
Investment Services
Mexican banking institutions are allowed to perform and provide fiduciary and investment advisory services, as well as to offer limited securities brokerage services to their customers (please refer to the “Proprietary Trading Activities” section below).
Proprietary Trading Activities
Pursuant to Mexican law, banking institutions are allowed to transact with securities, subject to the limitations provided by the LIC and the Securities Market Law of Mexico (Ley del Mercado de Valores). Nonetheless, banking institutions are not authorised to underwrite in securities and have limited authority to provide brokerage services to their clients, which typically are provided by a broker-dealer affiliate entity called Casa de Bolsa. This role must be organised and authorised by the CNBV.
Protection and Defence of Users & Transparency of Financial Services
By means of the Ley de Protección y Defensa a los Usuarios de Servicios Financieros and the creation of the National Commission for the Protection and Defense of Financial Services’ Users (“CONDUSEF”), the Mexican legal framework seeks to promote, assess, protect and defend the rights and interests of users of financial services before the financial entities, act as a neutral arbitrator and provide a fair field in the relationship between them.
Some of CONDUSEF’s main functions are the following:
a) attend consultations from users and financial entities;
b) perform conciliatory procedures between users and institutions;
c) perform arbitrations;
d) provide legal orientation and assessment for the users of financial services;
e) issue recommendations to the executive branch; and
f) review and, if applicable, modify the forms of agreements used by financial institutions with their customers.
Furthermore, pursuant to the Ley para la Transparencia y Ordenamiento de los Servicios Financieros, Mexican law provides: (i) rules for the commissions and fees charged by financial institutions for purposes of clarity and transparency and to protect the interests of the public; (ii) additional requirements to the forms of agreements used by the financial entities with their customers; and (iii) the need to disclose the annual and total cost of financing of any credit, loan or finance product offered by a financial entity (known as Costo Anual Total, or “CAT”).
Protection to Bank Savings
In addition, by means of the Ley de Protección al Ahorro Bancario (“LPAB”) and the creation of the Institute for the Protection of Bank Savings (“IPAB”), Mexican law provides a system for the protection of bank savings to any person that carries out “secured transactions” within a banking institution. Per the applicable regulations, the IPAB acts as joint obligor of the banking institutions with respect to deposits and loans received from the public for up to an amount of 400,000 UDIs, which amounts to approximately 136,000 USD. Such obligation from the IPAB is also appliable in the event of liquidation, suspension of payments or bankruptcy of a banking institution.
Regulatory Framework on AML
The Mexican legal framework provides for specific rules applicable to banking institutions in order to prevent transactions aiming to finance terrorism and money laundering.
The LIC and other secondary provisions set forth the means and procedures to prevent and detect acts, omissions or transactions that could favour, help or cooperate with any of the aforementioned activities, which are also listed as criminal activities pursuant to the Federal Criminal Code (Código Penal Federal). Some of the standard requirements include know-your-customer obligations (“KYC”), suspicious activity reporting to the SHCP and the CNBV, training and capacitation of banking institutions’ staff, the use of automatised systems and the establishment of internal structures for compliance purposes within the banking institutions.
Outsourcing (Third-Party Providers)
Banking institutions are allowed to hire third-party services that are required for their operations. In the last two decades, different amendments have been passed in the applicable legal framework with respect to the hiring of third parties, providing additional authority to the CNBV to order the complete or partial suspension of any such services. In addition, the CNBV is entitled to request, through the relevant banking institution, information and documents regarding the services to be provided and to perform inspections and audits, as well as to order additional measures deemed necessary to secure the continuity of the services that banking institutions render to their customers.
Any operations carried out by third parties must be done on behalf of the banking institutions, who will be deemed responsible before their customers for any operations performed by such service providers.
