The Definitive Guide: Mexican FinTech Law, a look 3 years after its publication
Author: Carlos Valderrama (more information here)
Nowadays there are multiple fintech regulation and based on that fintech start ups have obtained approval to operate as a financial technology institution, that have had an exponential growth and have generated a greater financial inclusion, but Do you know how it all started?, What is a financial technology institution, a crowdfunding institution or an electronic payment fund? What was the influence of the Mexican Banking Association (ABM) or our central bank in the process?, Which financial entity has been authorized and what do they think about the process?, What happens if you carry out activities regulated by the so called FinTech Law in the FinTech industry? What is the status of the collaborations between a FinTech company or FinTech firms and a financial entity or traditional banks or a financial institution or Mexican Banks?, What kind of technology can be applied in a FinTech institution through an innovative model? Find out the answer to these and other questions in connection with the Mexico's FinTech law in company of Legal Paradox®.
Was a FinTech Law necessary?
Although the FinTech Law was published on March 9, 2018 (more information here), its drafting started back in 2016. Even if we go further, the related work actually started since 2014 with an intense collaboration between the FinTech ecosystem and the financial regulator.
It all started once upon a time when players such as Prestadero (disclaimer, Prestadero is a client of Legal Paradox®), Bitso, the Mexican Crowdfunding Association (AFICO also a client of Legal Paradox®), among others, recognized that the activity they were performing could be found in a gray a rea since it was possible to argue that it was actually a regulated financial activity reserved to authorized financial entities.
The implication of the above could be brutal and the consequences fulminant for a FinTech sector that was just starting and that in 2016 had only 158 participants in its ecosystem according with the FinTech radar of Finnovista, but that was already positioned as the largest FinTech market in Latin America (more information here). The above, since the consequences could result in million dollar fines and even the real possibility of up to 15 years in prison which, for Startups led by entrepreneurs recognized in other countries as great innovators, implied a real risk since they were being investigated for possible illegal money raising.
Indeed, during 2017, around 35% of Mexican FinTech were being investigated for the possible performance of regulated transactions or financial activities that were reserved to authorized financial entities. Given the situation, there was an obvious need for self-regulation, which is why AFICO, together with Legal Paradox®, built regulatory criteria from the sector for the sector itself in order to generate a system based on international best practices. Moreover, we were convinced that it was of vital importance to have legal certainty and to know what could be done and what could not be done. Therefore, as a guild, we approached the financial regulator and asked, almost begged, to be regulated.
Fortunately, we had a responsive financial regulator who patiently took more than 270 meetings with us as a ecosystem to explain what we were doing, what were the risks, how they were mitigated and why our activity represented something different within the financial regulatory world, financial intermediaries and more importantly, why it was desirable and even necessary to allow these activities to generate greater financial inclusion, competition, as well as greater penetration of financial products and services in Mexico.
At the end of the day, our aim was to establish how to leave the gray line and move into the major leagues, as well as to what extent regulation was going to help us and not to kill us in the process.
In that context, we should remember that in 2018 we were starting from a reality in which Mexico displayed a highly concentrated financial services market where the supply of products and services was largely dominated by the traditional financial sector, in particular by BBVA. Because of this, evidently the influence of the banks, and in particular the Mexican Banking Association and our Central Bank, was tremendous as they were concerned that regulatory arbitrage would be generated, i.e. the possibility of FinTech competing with them with lower rules and barriers of entry.
On the other hand, and like the rest of the international financial sector, Mexico has a strong financial regulation that in many cases inhibits the generation of disruptive innovation in the sector, imposing a strong barrier of entry and inefficiencies in the system that are reflected in a lack of competition and high cost for the user of financial products and services.
It was under such environment that the Law to Regulate Financial Technology Institutions (called the FinTech Law) was interestingly signed in the framework of the inaugural session of the 81st Banking Convention and published on March 9, 2018. The Mexican FinTech Law was one of the first regulatory bodies created specifically to promote innovation, the transformation of traditional banking and credit financial services that would even allow the possibility of incorporating exponential technology such as Artificial Intelligence, Blockchain, collaborative economies and peer-to-peer financial services in secure regulatory spaces.
The FinTech Law was based on the following principles:
1. Financial Inclusion, which seeks to bring financial services closer to people and sectors that have not traditionally been part of the financial system.
2. Principle of innovation, to provide tools to increase the use of financial services.
3. Principle of consumer protection, in order to take care of the client by establishing defense mechanisms and verification of minimum standards.
4. Principle of preservation of financial stability, which seeks to provide a general framework for authorization and supervised operation, prudential rules for financial, operation, market, technological, corporate governance and accounting risks.
5. Healthy competition, which promotes greater diversity and new distribution channels for financial services, cost reduction and improvement in the provision of services.
6. Prevention of money laundering and terrorist financing.