The Consumer Finance Law Review: Mexico
A historical event key to understanding Mexico's current system and financial consumer protection policy is the 1994 recession, often referred to as the 'Tequila crisis'. The crisis derived, among other factors, from Mexico's lack of international reserves, which prompted the local currency to suffer great devaluation. To resolve the crisis, the Mexican government was forced to implement severe measures, including passing several key reforms and new regulations, establishing the autonomy of the Mexican Central Bank, and adopting a floating exchange rate.
During the crisis interest rates sharply increased whereas the value of Mexico's currency fell steeply, resulting in many abusive practices by financial institutions. As financial institutions grew again and the system recovered, the authorities became aware of the abusive practices and observed the necessity to develop consumer protection policies. This led to the enactment of the Law to Protect and Defend Financial Services Users in 1999 and the creation of the National Commission for the Protection and Defence of Users of Financial Services (CONDUSEF).
Originally CONDUSEF was designed to be an ombudsman in financial consumer protection that could conciliate disputes between institutions and consumers, with the capacity to formulate unbinding recommendations without being authorised to impose any sanctions. But a weak organism without any real enforcement powers could not fully pursue a protection purpose. Therefore, several efforts have been made since then to turn CONDUSEF from an ombudsman into a real authority with specific and full regulation and supervision powers.2
In 2000, Congress passed a reform to require financial institutions to maintain specialised units for the attention of consumers (UNEs). These units were designed to provide answers to requests and claims filed by consumers. In 2002, the Secured Credit Transparency Law was enacted, bringing many useful and protective concepts such as total annual cost (CAT) and implementing mandatory incorporation of certain clauses in standard-form contracts. In 2004, the first Transparency and Financial Order Law was enacted. This was a major step in regulating fees, eradicating some discriminatory practices and implementing an obligation to register fees before the Mexican Central Bank.
In 2007, a new Transparency and Financial Order Law was enacted. It created several registries including those for fees and standard-form contracts. It also required financial institutions to offer some basic products and regulated electronic transactions. In 2009, many consumer protection authorities were transferred from the National Banking and Securities Commission (CNBV) to CONDUSEF, who received regulation, inspection and sanctioning authority. In 2010, the Central Bank was vested with the power to authorise and modify the fees charged by the financial institutions to clients, as well as the applicable procedure and regulation for releasing collateral loans upon payment, and the authority to publish interest rates for comparative purposes.
The financial reform of 2014 brought about many changes, and it was the most important reform in the evolution of the consumer protection process.3 The key changes from a consumer finance perspective were the following:
- CONDUSEF was vested with powers to issue and publish recommendations to financial institutions;
- CONDUSEF was authorised to represent financial users in class actions against financial institutions;
- a Bureau for Financial Institutions was created under the supervision of CONDUSEF to provide consumers with information on the performance of financial institutions including claims initiated against them and sanctions imposed;
- CONDUSEF was vested with powers to determine which clauses are abusive under standard-form contracts and to order institutions to remove them; and
- a general prohibition against tied sales was included.
Fintech continues to be one of the hot topics for consumer finance in Mexico – as in many other parts of the world. On 8 March 2018, Mexico became the seventh country in the world to regulate fintech by enacting LITF (as defined in Section II). This law aims to build a regulatory framework that will:
- encourage the development of innovative financial services;
- increase the level of competition and financial inclusion; and
- place Mexico at the forefront of the fintech industry.4
The LITF regulates two types of financial technology institutions (FTIs):
- crowdfunding institutions, which connect people so that investors can fund investment seekers through mobile applications, interfaces, websites, or any other means of electronic or digital communication; and
- institutions dedicated to e-money, offering issuance, management, accountability and transfer of electronic payment services.5
Moreover, the LITF regulates virtual assets, which are defined to be account units that are electronically recorded and used by the public as a payment method for all types of legal transaction, and can be implemented only through electronic means. The Mexican Central Bank will determine, through general provisions, the virtual assets that fintech institutions can use.
The LITF also introduced a temporary authorisation plan for entities wishing to perform financial services under new methods. These temporary authorisations aim to promote a low-risk environment for investors using tactics similar to the sandbox schemes that have been deployed in other locations such as the United Kingdom, Australia and Singapore.
Under the LITF and its secondary regulations, all new fintech entities in Mexico require operational authorisation from CNBV, and any existing fintech entities operating in Mexico at the time LITF was enacted were bound to complete their filing before 25 September 2019. Although in May 2019 there were approximately 500 fintech platforms, which were identified by the CNBV, operating within Mexico, approximately 201 are placed within the regulatory scope of the LITF, which as of August 2020 only 90 have filed an authorisation request to the CNBV.6 Almost all the applications are still being reviewed by the CNBV. Operating without a licence may result in severe civil and criminal penalties that include fines up to 150,000 unidades de medida y actualización (UMA) (approximately 13 million Mexican pesos).
Legislative and regulatory framework
The main statutes governing payment, deposit and lending services are the following:
- the Law to Protect and Defend Financial Services Users (LPDUSF), the main objective of which is to protect and defend the rights and interests of the public users of financial services rendered by public, social and private institutions and also provides all the powers and authorities granted to CONDUSEF;
- the Credit Institutions Law (LIC), the main objective of which is to regulate the banking and credit services and the organisation and functioning of all credit institutions as well as all operations that such institutions can perform, the protection of the public's interests and the terms on which the Mexican State will exercise its supervision of the Mexican banking system;
- the Transparency and Financial Order Law (LTOSF), the main objective of which is to regulate all fees, exchange rates and all other aspects related to financial services, including the granting of facilities by financial institutions and by non-financial institutions;
- the Secured Credit Transparency Law, the main objective of which is to regulate all financial activities and services provided for the granting of secured loans for housing purposes (facilities for the acquisition, construction, refurbishment or refinancing of housing);
- the General Law of Negotiable Instruments and Credit Transactions, the main objective of which is to regulate all negotiable instruments and credit transactions including, among other things, deposits and lending transactions; and
- the Financial Technology Institutions Law (LITF), the main objective of which is to regulate the financial services, organisation and operation of FTIs, and any financial services foreseen by special regulations that are offered or rendered through innovative models.
The Mexican financial system is a well-developed system in which several regulators take part.
The first regulator that needs to be mentioned is the Ministry of Finance and Public Credit (SHCP). It is in charge of planning, coordinating, evaluating and protecting the financial system.
There are two supervisory commissions. The first one is the CNBV, which has general powers of regulation and supervision over most financial entities, including FTI. The CNBV regulates capital requirements, mandatory reserves, anti-money laundering and know-your-customer policies and generally the operations of credit institutions. The second one is CONDUSEF, which primarily acts to protect financial consumers. It pursues financial education and financial transparency for consumers to make informed decisions on the products offered on the Mexican financial system, whether through traditional means or by new technologies. It also protects consumers' interests through regulation and supervision of financial institutions – including FTIs – and provides assessment and legal services for the defence of their rights.7
In order for CONDUSEF to reach its objectives, it has been vested with powers that can be classified into three categories:
- regulation powers over: standard-form contracts; account statements; marketing and advertisement; transaction receipts; sound financial practices; offering and commercialisation of products; and supervision, inspection and surveillance;
- consumer protection powers over: the complaints process; corrective and sanctioning measures; initiating class actions; the conciliation process; legal assessment and defence; and the arbitration procedure; and
- transparency powers over: comparison of fees; evaluations regarding standard-form contracts, cover letters of contracts, web pages, account statements, brochures, information and advertisements; comparison of products and services; publishing fines and reports of evaluations; and overseeing several registries for public consultation.
There are five kinds of complaint processes regulated by CONDUSEF. These are in addition to court procedures. Two may be filed first before the financial institution (for example, banks, investment funds, bonding institutions, general bonded warehouses):
- claims filed before UNEs, in terms of the procedure foreseen by Article 50 bis of the LPDUSF; and
- claims filed before the financial institutions, under the terms of Article 23 of the LTOSF whereby the consumer has 90 days to file the claim, the financial institution has 45 days to submit its answer and 45 days to submit documentation.8
The other three may be filed directly before CONDUSEF:
- electronic procedure. The costumer makes a visit to CONDUSEF's offices and files its printed claim. Later on CONDUSEF notifies and makes the corresponding requirements to the financial institution through a homologated electronic system;
- conciliation procedure. In terms of Article 60 and the subsequent provisions of the LPDUSF, the procedure starts by filing a claim to CONDUSEF and within the next 20 days a hearing is scheduled to be held. After the hearing, an opinion is issued by CONDUSEF. If required, CONDUSEF can also issue a technical opinion depending on whether the contractual obligation not complied with by the financial institution is considered to be valid and enforceable and this report may later be submitted to the competent courts; and
- arbitration. In terms of Article 73 of LPDUSF, this is a voluntary procedure that must be agreed by both parties to appoint CONDUSEF or a third party to act as an arbitrator to finally settle their dispute.
Separately and acting as an independent and autonomous entity, we have the Mexican Central Bank in charge of monetary policy, issuing currency, promoting and developing a sound financial system, regulating intermediation and financial services and determining alongside the SHCP the Mexican exchange policy. The Mexican Central Bank has two types of powers regarding consumer protection.9 The most important is regulation over fees charged, interest rates, exchange rates, credit cards and banking operations. The second regards transparency, specifically the power to publish comparative studies of economic terms among the different products offered.
Finally, alternative lenders (i.e., non-financial institutions) are supervised and regulated by the Consumer Protection Agency (PROFECO). The LTOSF grants PROFECO fewer powers and authorities than those granted to CONDUSEF and only with respect to non-financial institutions. PROFECO has issued its own regulations on standard-form contracts that are applicable to alternative lenders (non-financial institutions).
Even though financial inclusion has increased 37 per cent since 2012, cash continues to be the most important payment method in Mexico. The number of people who do not have their own bank account in Mexico is significant. According to the statistics of the most recent financial inclusion survey published by the National Council for Financial Inclusion (Consejo Nacional de Inclusión Financiera), as of March 2020, only 37 per cent of the population have an account with a financial institution.10 The CNBV and the Mexican Central Bank are very much concerned with this and over the last decade have made considerable efforts to increase banking penetration in Mexico. Some of these measures have included launching simplified bank accounts with transactional and balance limits but that may be opened remotely, such as first and second level accounts that are addressed in Section IV. Others regard facilitating mobile payments and the inclusion of new payment methods such as CoDi, which will be addressed below. At the same time, cash payments are being limited and controlled under anti-money laundering and counterterrorism provisions.
Credit and debit cards are also recognised payment methods but their penetration level is still very far from that of cash. Credit cards may be issued by almost any lending financial institution (banks and multiple purpose financial entities), while debit cards may only be issued by banks and in a limited manner by other financial institutions authorised to take retail deposits. Stored-value cards, which are similar to debit cards, may now be issued by FTIs, specifically by e-money institutions.
To date, non-financial institutions may only issue closed-loop prepaid cards that are not cash-redeemable. Open-loop cards (i.e., those that may be used with different merchants) and cash-redeemable cards may be deemed to be retail-deposit-taking activities, which are limited to banks and a limited number of financial institutions, including FTIs.
Cheques are also used as payment methods although the new banking generation is relying more on electronic payments and card payments. In Mexico, the number of transactions involving cheques suffered a 7 per cent decrease between 2010 and 2017 according to the statistics of the most recent financial inclusion report published by the CNBV.11
Electronic transfers are also common payment methods. Banks are required to offer this service to their clients. Certain fees may be charged for interbank transfers. The Electronic Interbank Payment System (SPEI) is the most-used system for these means.12 SPEI is a system developed and managed by the Mexican Central Bank that allows the public to generate online transfers almost instantly. The Mexican Central Bank clears and settles these transactions and it works very efficiently. To use the SPEI platform, users must have a standardised bank key (known as a CLABE) and the account number of the receiver's debit card or their mobile phone number (if the account has been previously linked). FTIs may also provide electronic-transfer services outside the SPEI system.
Mobile banking is a payment method regulated under the General Provisions Applicable to Credit Institutions (the General Provisions) issued by the CNBV, which defines it as an electronic banking service accessed through a mobile phone number linked with the account.13 This payment method is subject to the limitations set forth on account levels referred to in Section IV. Mobile banking is highly regulated in terms of authentication, identification and security procedures, among others.
The General Provisions contain several provisions that ensure credit institutions establish sufficient safety measures and security controls for the information used through electronic devices, such as the express consent of the user for hiring this service, a provision in the agreement specifying the maximum amounts allowed per operation, mechanisms to identify the user and grant access, and procedures to cancel the service, among others.
Under the same regulations, mobile payments are defined as those performed through a mobile limited to an equivalent of 1,500 unidades de inversión (UDIs) per day (approximately 9,905 Mexican pesos). The regulation of mobile payments is lighter than the regulation of mobile banking to foster financial inclusion by simplifying low-value payments.
Moreover, digital collection (known as CoDi) is the latest electronic payment method developed by the Mexican Central Bank.14 It is designed to reduce the use of cash and promote competition, while incorporating larger sections of the population into the formal financial sector. CoDi is a system that applies QR codes and near-field communication (NFC) technologies to operate immediate cashless money transactions between buyers and sellers for the purchase of low-cost goods and services, using the existing SPEI platform.15
In order to partake in CoDi, buyers need an account with a financial entity (a SPEI participant) and a smartphone connected to the user's bank's application. Correlatively, sellers require either physical QR codes next to their products or digital ones and a smartphone to send those codes. CoDi's operation is designed to be initiated by sellers that will generate and send buyers a charge for goods or services through electronic messages. Buyers will then receive these messages on their mobile devices – through their own bank's applications – and will identify, verify and, if applicable, accept the charges. Once accepted, the buyer's bank will immediately validate the transfer and liquidate the amounts for the transaction.
Unlike most electronic money transactions, transfers made through CoDi are:
- free of banking commissions;
- can be done at any time of the day and on any day of the year; and
- will be processed almost immediately. The downside is that this payment method only processes transactions up to a maximum of 8,000 Mexican pesos. 16
On a final note, it is expected that both the application of LITF and the implementation of CoDi will increase bank penetration by introducing consumers to simple technology to save, raise money and pay for their everyday needs, which may eventually lead to the unbanked population having greater trust in banking institutions.
ii Recent developments
As a result of the current regulations, security measures were imposed to both credit and debit cards to avoid their cloning by replacing the use of the magnetic stripe on cards with a chip. This led to the issuance of new cards and several modifications made by the institutions in order to adapt all their automated teller machines (ATMs) and points of sale (POS) nationwide. As a consequence of the above, any institution that agrees to perform operations with cards without a chip at their ATMs or POS assumes liability for all risks and must bear any costs arising from cloning such unrecognised charges reported by the cardholder.
Another key development was the issuance of the General Rules for Payment Networks. Before the issuance of these rules, card payment networks were mainly unregulated. These rules regulate the following:
- The terms and conditions of the payment networks, which among other things:
- permit the inclusion of new participants in networks on a non-discriminatory and competitive basis in respect to pricing, operational, technical and contractual conditions;
- permit the resolution of conflicts of interest between the participants in networks;
- allow transparency of the content available to potential participants in networks; and
- guarantee the integrity of the payment networks, the continuity of the operation and security of the information without creating barriers to entry.
- Participants in networks, by establishing the inclusion of certain provisions on the agreements executed among them, such as:
- an itemised description of the services, conditions and standards of the services provision;
- terms and conditions (including economic terms and consideration) of the services provided in the agreement;
- equal and non-discriminatory treatment; and
- production of account statements.
- Interchange fees, which shall be included in the conditions for the participants and duly registered with the Mexican Central Bank observing the procedure and requirements set forth for such means.17
Also related to payment networks, a few years ago several complaints from the participants of the credit and debit card payment market over the lack of transparency and competition regulation in clearing houses were filed. A clearing house (switch) is an entity authorised by the Mexican Central Bank to act as the central entity or operator of a centralised processing mechanism through which authorisation requests, payments authorisations, payment rejections, returns, adjustments or other financial obligations related to card payments are exchanged between acquirers and issuers, including clearing.
In response, the Mexican Central Bank, seeking to ensure competition within the sector, issued the Rules Applicable to Clearing Houses for Card Payments with the objective of combating barriers to entry, avoiding price distortions and improving security systems. Among the prohibitions set forth in the regulations, all exclusivities, discriminatory practices and charging of fees not authorised by the Mexican Central Bank were forbidden.18
Undoubtedly, CoDi is the most recent development that will impact financial inclusion and change consumer finance. Although CoDi was released at the end of September 2019, since 23 November 2020 more than 6.218 million accounts have been validated, and from 30 September 2019 to 23 November 23 2020 over 948,956 transactions were made through CoDi.19
Deposit accounts and overdrafts
The Mexican Central Bank in exercise of its regulatory powers issued the general provisions contained in Disposition 3/2012.20 Four types of local-currency deposit accounts are identified and regulated. Each represents a different level that depends on the balance and transactional amounts in the account. This classification is relevant to determine the different means available to withdraw them from such accounts and requirements to open them, including know-your-customer requirements. The higher the level the more difficult it is to open and access such accounts.
The first level belongs to those accounts in which the amount of resources deposited over a monthly period is limited to be under 750 UDIs (approximately 4,952 Mexican pesos). The balance of these accounts can never exceed 1,000 UDIs (approximately 6,603 Mexican pesos). The holders of these accounts are only able to withdraw their resources using debit cards. All other transactions through mobile phones or electronic devices other than ATMs or POS remain prohibited for level 1.
The second level belongs to those accounts in which the amount of resources deposited over a monthly period is limited to under 3,000 UDIs (approximately 19,811 Mexican pesos) without any limit on the balance in the account. The key feature of these accounts is that according to anti-money laundering regulations they may be opened remotely (i.e., without the need to visit a branch).
The third level belongs to those accounts in which the amount of resources deposited over a monthly period is limited to under 10,000 UDIs (approximately 66,038 Mexican pesos) without any limit on their balance. These have fewer know-your-customer requirements than level four accounts but more than level-two accounts.
Accounts in levels two and three are entitled to use all withdrawal means except cheques.
The fourth and last level has no limit on deposits or balance, but the level of scrutiny and the requirements to open these accounts is the highest. Only these accounts are current accounts, allowing for all withdrawal methods, including by cheques.
Another type of deposit account is the deposit account for foreign currency on sight. These accounts are only available to entities and not to individuals except in limited circumstances.
Deposit insurance with respect to bank accounts is provided by IPAB. IPAB is a decentralised public organisation that, subject to certain restrictions, guarantees the amounts of deposits and credits up to 400,000 UDIs per account holder (approximately 2.64 million Mexican pesos).21
Another important topic is what are known as basic products. Every bank that receives local currency sight deposits is required by law to offer individuals a basic deposit account product for sight deposits, savings or payroll that should be free from any fees or charges. These basic products are subject to maximum monthly deposit limits because their main objective is to aid consumers with lower incomes.
ii Recent developments
In an effort to increase banking penetration, a few years ago the CNBV authorised the establishment of bank agents. They are now an important channel to offer payment products. Convenience stores, such as OXXO, are the most remarkable example of bank agents. Bank agents can open bank accounts and perform certain banking services on behalf of banks. To date, the number of banking agents exceeds 48,387, which implies a growth by 8 per cent compared with the previous year, with a municipal coverage of 74 per cent and a demographic coverage of 98 per cent. The operations most frequently carried out by such bank agents were deposit transactions.22 Banks require certain authorisations to engage a non-financial institution as an agent.
An important recent development is the option for account holders to link their mobile number to their account. This serves the purpose of expanding electronic transfers by providing a friendly alternative to traditional electronic banking services. Mobile communication penetration is high in Mexico so the rationale behind this change was to increase banking penetration by relying on a tool that is widely known and used by Mexican customers. This has proven beneficial in other jurisdictions. The linking process is determined by each institution, made through SMS and limited to only one account per mobile number.
Finally, it is noteworthy that during 2017 the provisions regarding basic deposit products, contained in Disposition 22/2010 issued by the Mexican Central Bank, were amended to include a procedure to cancel accounts on which the minimum amounts are not being observed, and certain know-your-customer requirements.23
Credit cards are means to withdraw from a credit facility. An individual or entity that is granted a credit card needs to execute a credit facility agreement with the bank or lending institution. Credit facility agreements are regulated by the LTOSF and secondary regulations issued by CONDUSEF for financial institutions and PROFECO for non-financial institutions.
Credit cards, as a withdrawal means, are also regulated by the Mexican Central Bank and specifically by the provisions of Disposition 34/2010, which was modified to include important security measures and benefits to credit card users.24 Moreover, important rules for the protection of consumer interests were set out in the Disposition, such as:
- entities can execute credit facility agreements with banks or lending institutions but credit cards can only be issued to individuals;
- credit cards are non-transferable and must only be issued and delivered upon request of the holder;
- all credit cards must be delivered unactivated; and
- the institution issuing the credit card must take out insurance that covers the amount of the debt in the event of the holder's death.
Similarly to what occurs with deposit accounts, every financial institution that offers revolving credit facilities linked to credit cards to the public is required by law to offer individuals basic credit card products that shall be free from any fees or charges. These basic products are subject to a certain credit limit and carry special requirements because their main objective is to aid consumers with lower incomes.
Another topic to be discussed with respect to credit cards is regulation on interest rates contained in the LTOSF and the general provisions contained in Disposition 14/2007 issued by the Mexican Central Bank.25 The main provisions may be summarised as follows:
- all credit must have one interest rate only. This means that only one ordinary interest rate and, if applicable, only one default interest rate can be provided under a credit agreement. As an exception to this rule, different rates are allowed when several interest periods are provided, although each interest period cannot be less than three years;
- the calculation methods for interest rates may be freely determined by the parties using one of the following options: a fixed rate; a variable rate using only the reference of alternate rates mentioned in the Disposition; and a floating band rate with a maximum fixed limit;
- rates can only be unilaterally modified by the credit institution for revolving credit facilities with prior written notice given at least 30 days before it becomes effective, in order that clients may decide whether or not they intend to continue;
- as a general rule, credit interest can only be charged after the contract becomes effective and is in arrears, therefore charging interest in advance is forbidden; and
- for most credit, banks must allow anticipated payment of loans and debts.
Similar to the regulations for interest rates mentioned above, according to the general provisions contained in Dispositions 22/201026 and 36/201027 issued by the Mexican Central Bank there are also several principles that need to be observed regarding fees:
- institutions can only charge one fee per event;
- alternative fees are forbidden;
- no fees can be charged for the cancelation of financial services;
- fees must be properly registered and published; and
- in order to modify fees a special process has to be observed.
ii Recent developments
Mexico has been rated by private institutions as having one of the highest rates of credit card fraud in the world. The number of claims in this regard has rapidly increased and, despite preventative efforts, the reported number of cases is still high and increasing. As of December 2019, more than 9.02 million claims were filed before the CONDUSEF in respect of electronic frauds and 68,650 in respect of identity theft. These figures reflect an increase of 36 per cent and 110 per cent, respectively, against the same period of 2018.28
At present, identity theft is prosecuted as generic criminal fraud under the Federal Criminal Code. However, a bill that will introduce special rules and distinguish identity theft from fraud has been approved by the House of Representatives and is still under review by the Senate. This bill contemplates a penalty of one to six years in prison and a fine of 400–600 times the minimum daily wage for persons found guilty of identity theft.29
Furthermore, on 29 August 2017, the CNBV published the Resolutions that Modify the General Rules Applicable to Financial Institutions. These resolutions require financial institutions to verify information and documentation filed by users and customers with different government bodies in order to assure the identity of each prospective customer.
The modified rules provide the criteria for customer identification. These know-your-customer guidelines are independent from existing anti-money laundering regulations.
The modified rules are divided into:
- Section A, which contains provisions regarding the identification and performance of on-site transactions;
- Section B, which contains provisions regarding identification means for remote transactions; and
- Section C, which contains supplementary provisions regarding the general identification of transactions.30
Likewise, on 12 October 2020, the CNBV published the Resolutions that Modify the General Rules to implement additional legal requirements and measures to prevent, mitigate or detect any possible fraudulent behaviour, or both, or actions related to identifying theft.31
On a final note, the CNBV as well as the Mexican Central Bank and the CONDUSEF have published a series of provisions applicable to the financial institutions with the purposes of preventing and addressing the covid-19 pandemic in Mexico.
These measures must be observed by financial institutions, including banks, multiple purpose financial entities, credit unions and other regulated entities to maintain the flow of capital into the Mexican economy and reduce the economic impact of covid-19. Provisions 22/202032 (as amended by Provisions 41/2020,33 issued by the CNBV and the Mexican Central Bank, seek to continue to develop the financial system in Mexico by establishing that financial institutions are not compelled to collect the minimum payments established in the credit card provisions from October 2020 to January 2021, as long as the underlying loans do not have a maturity date past 31 January 2020 and the abstention to the payment of the minimum amount has been agreed by the financial user and the corresponding user.
A few decades ago, granting instalment credit was only based on the amount of assets or collateral that the borrower had. This was an unhealthy practice that hindered most people's access to credit and resulted in institutions wasting considerable time, effort and money on collection practices because many of the credits defaulted.
As a result of the above, a new regulation was issued to determine eligibility criteria that have to be met by the borrower in order to access credit. Relevant factors to take into account for lenders are: the borrower's payment capacity; the borrower's solvency and assets; level of debt; credit history; and job stability.34
The LTOSF and the secondary regulation issued by CONDUSEF for financial institutions and PROFECO for non-financial institutions regulate instalment credit from a consumer perspective. Some of the main rules are described below.
Loan agreements executed through a standard-form contract (as the term is defined in Section VIII) must have a cover letter that contains the total annual cost (CAT). CAT is defined as an annual percentage indicator obtained after measuring the 'all-in' financing cost. In other words, it needs to include all costs, expenses and applying fees, helping consumers to compare the different products offered by institutions. This provision is also applicable to credit card facility agreements.
An amortisation schedule must be provided by the lender, which details the balance of principal and interest, the date and amount for each payment to be made bearing in mind that interest can only be charged for the duration of contracts and any charges in advance are forbidden for most credits. This statute also introduced the obligation of institutions to receive anticipated payments as amounts destined to reduce principal and early payments that are exhibitions made in advance to avoid default. If prepayments are made the institution has the obligation to issue a new amortisation schedule.
Furthermore, as a result of the reforms passed (discussed above), the Unregulated Financial Company for Multiple Purposes (SOFOM ENR), which is one of the most-used vehicles for micro-financing purposes, was placed under a new regulation that required it to be registered under CONDUSEF supervision. Therefore, these entities changed from being 'unregulated' to being 'lightly regulated'.
ii Recent developments
As a result of the new supervision powers of CONDUSEF over the multiple SOFOM ENR companies, in 2015, CONDUSEF revoked 1,449 registrations of these institutions for violations of transparency and anti-money laundering regulations, while during the first half of 2019 CONDUSEF issued 1,471 sanctioning resolutions against SOFOM ENR companies. Currently almost 1,712 multiple SOFOM ENR companies are active, of whom 1,362 have a compliant status before the CONDUSEF. As of August 2019, CONDUSEF has imposed approximately 6,583 sanctions against financial institutions, from which 2,271 sanctions representing the 34 per cent were imposed against multiple SOFOM companies and 2,666 sanctions representing the 40 per cent per cent were imposed against credit institutions. 35 Finally, as of June 2020, approximately 53,259 claims against multiple SOFOM ENR companies have been filed before the CONDUSEF and 65 final sanctioning resolutions have been imposed against these companies.36
During the past years, the number of credits granted by financial institutions under the supervision of the CNBV slightly increased. For the period ending on 31 December 2019, the total number of executed agreements was 59.7 million, which represents an increase of 3.2 per cent with respect to 2018. Furthermore, 93 per cent of such credits were granted by credit institutions.37
Mortgage credit in Mexico greatly increased between 2009 and 2019. For the period ending on 31 December 2019, almost 1.48 million mortgage credits were granted, which represents a 1 per cent increase over 2018 with 1.46 million credits.38
On a final note, as to the new series of provisions issued by the CNBV with the purpose of preventing and addressing the covid-19 outbreak in Mexico, the CNBV published, through Provisions 16/2020, 39 special accounting measures applicable to banks, allowing them to restructure loans without the need to classify them as 'past due loans' for accounting purposes, as long as certain requirements are met. The restructures may imply:
- the payment of principal or interest, or both, can be partially or totally deferred for up to four months, with the possibility of extending such term for two additional months; or
- freezing the outstanding balance without the accrual of interest provided the relevant loan was non delinquent as of 28 February 2020.
More recently, on 14 October 2020, through Provisions 066/2020,40 and on 13 November 2020, through Provisions 081/2020,41 the CNBV amended the aforementioned rules related to loan restructuring during the pandemic. The terms of the restructure were broadened to allow haircuts, interest reductions and extension of payment terms beyond the four months that the original accounting measures provided. The restructures must be completed before 31 January 2021 to apply these benefits.
Consumer protection laws have implemented several registration requirements to make information publicly available to consumers. Below is a description of some of these registration requirements:
- SIPRES – the registry in charge of providing public access to corporate and general information of the financial institutions under CONDUSEF supervision, such as their domicile and minimum capital stock.
- RECA – the registry implemented for financial institutions to submit all their standard-form contracts so that consumers can be informed and have access to the content of the different contracts used by them.
- REUS – a registry to which consumers submit their information when they do not desire to be disturbed by any merchandising or advertisement communications from financial entities.
- RECO – the registry of all fees that institutions under CONDUSEF supervision charge, it was established for transparency purposes and it functions in a parallel way to that under the supervision of the Central Bank.
- REUNE – this registry serves as a directory of all UNEs.
- REDECO – the registry providing information regarding collection agencies that assist financial institutions on the collection process and it was created as a database to include all of their relevant information so that anyone could easily file a complaint for abusive practices.
Collection practices were recently regulated by the issuance of rules for collection agencies by CONDUSEF.
Deriving from the 2014 reform, CONDUSEF now has the power to determine which clauses are considered to be abusive in the standard-form contracts of financial institutions and to order financial institutions to remove them. For such effects, CONDUSEF defines: (1) a standard-form contract as a document unilaterally drafted by a financial institution for the purpose of implementing non-negotiable consistent general terms and conditions to be applicable for one or several products, operations or services with consumers; and (2) an abusive clause is a clause that brings imbalance between the rights or obligations of the parties harming the consumer.
The following are some of the abusive clauses detected and banned by CONDUSEF's General Provisions:
- clauses establishing early termination if borrower defaults an obligation unrelated to the contract (cross-defaults);
- clauses allowing the institution to terminate the contract early without prior notification;
- clauses that unreasonably restrict consumers' rights;
- clauses that impose a penalty, charge or fee for early or anticipated payments; and
- clauses allowing the modification or restriction of the contract without the prior consent of the consumer, unless such modification is in the consumers' favour.42
In collection practices, it was observed that collection agencies often used names that resembled public institutions, used confidential or private numbers that rendered it difficult to identify them, threatened and intimidated debtors or their relatives, and tried to collect debts from third parties. In response, the authority prohibited those practices, created the aforementioned REDECO and implemented a system to file claims to impose sanctions for these types of abuses and practices.
Although, on 30 September 2018, the United States, Canada and Mexico agreed on a new North American treaty to replace NAFTA, on 10 December 2019, these three countries amended the draft and after negotiations, finally drew up the United States–Mexico–Canada Agreement (USMCA), which has now been signed by each country's representatives. On 1 July 2020, the USMCA became effective among its members. The agreement further promotes a healthy, competitive financial market between the three countries. Owing to the execution and ratification of the USMCA by its signatories, the Mexican finance sector is expected to continue to grow.
As for consumer protection, CONDUSEF is expected to increase its defence actions, continue its supervision duties and extend its regulation, especially on the fintech sector. According to the aforementioned figures, the free legal defence programme of CONDUSEF is also expected to keep increasing its scope and ensuring positive results.
Finally, through the implementation of CoDi – and without the cost of usual banking commissions – small and local businesses have been actively participating in more cashless transactions, which has encouraged competition and allowed a broader financial inclusion. It is worth mentioning that by removing cash from day-to-day transactions, money laundering and tax evasion will decrease.
1 Federico De Noriega Olea is a partner and Maria Aldonza Sakar Almirante is a senior associate at Hogan Lovells.
2 More information on this topic is available at: https://www.centerforfinancialinclusion.org/client-protection-in-mexico.
3 Full text at: https://www.dof.gob.mx/index.php?year=2014&month=01&day=10.
A brief summary of such reform is also available at: http://www.anterior.banxico.org.mx/disposiciones/marco-juridico/resumen-de-las-principales-reformas-al-sistema-fin/%7BDEA1CFA3-A9CE-26BD-E068-3A89D38EB92C%7D.pdf.
4 More information available at: https://www.gob.mx/shcp/articulos/el-sector-fintech-y-su-regulacion-en-mexico.
5 Full text of the LITF is available at: http://www.diputados.gob.mx/LeyesBiblio/pdf/LRITF_090318.pdf.
6 Official figures obtained from: (1) https://www.cnbv.gob.mx/Inclusi%C3%B3n/Documents/Reportes%20de%20IF/Reporte%20de%20Inclusion%20Financiera%209.pdf; (2) https://www.gob.mx/cnbv/articulos/cnbv-recibio-85-solicitudes-de-autorizacion-para-operar-como-institucion-de-tecnologia-financiera; (3) https://www.gob.mx/cms/uploads/attachment/file/589090/Informe_Anual_2019.pdf; and (4) https://www.milenio.com/negocios/cnbv-fintech-suman-90-solicitudes-operar-mexico.
7 Full text of the LPDUSF that regulates CONDUSEF is available at: http://www.diputados.gob.mx/LeyesBiblio/pdf/64_090318.pdf.
8 Full text of the LTOSF can be found at: http://www.diputados.gob.mx/LeyesBiblio/pdf/LTOSF_090318.pdf.
9 All the Mexican Central Bank's authorities are regulated under the Law of the Bank of Mexico, available at: http://www.diputados.gob.mx/LeyesBiblio/pdf/74.pdf.
10 More information is available at: https://www.gob.mx/cms/uploads/attachment/file/546751/Informe_18_Sesion_Ordinaria_CONAIF.pdf.
11 Full text of the 2018 CNBV's 9th financial inclusion report found at (1) https://www.cnbv.gob.mx/Inclusi%C3%B3n/Documents/Reportes%20de%20IF/Reporte%20de%20Inclusion%20Financiera%209.pdf; and (2) https://www.gob.mx/cms/uploads/attachment/file/581089/Panorama_IF_2020.pdf.
12 More information on SPEI is available at (1) https://www.gob.mx/condusef/articulos/conoce-las-nuevas-disposiciones-para-el-uso-de-spei?idiom=es; and (2) https://www.banxico.org.mx/marco-normativo/normativa-emitida-por-el-banco-de-mexico/circular-14-2017/%7BA06FBFEE-06BB-F249-32FC-25B334B2A744%7D.pdf.
13 Full text of General Provisions Applicable to Credit Institutions issued by CNBV is available at: https://www.cnbv.gob.mx/Normatividad/Disposiciones%20de%20car%C3%A1cter%20general%20aplicables%20a%20las%20instituciones%20de%20cr%C3%A9dito.pdf.
14 Additional information at: (1) https://www.banxico.org.mx/publicaciones-y-prensa/presentaciones/%7B1CA33D18-A38C-EE29-41BF-6302A641D617%7D.pdf; and (2) https://www.banxico.org.mx/publicaciones-y-prensa/miscelaneos/%7BCB1171B9-4806-04EF-D191-C57F6A082B35%7D.pdf.
15 Additional information at: https://www.banxico.org.mx/sistemas-de-pago/d/%7BA21AA19F-C855-9E64-98A4-832D9A51B2B0%7D.pdf.
16 Additional information at: https://www.banxico.org.mx/sistemas-de-pago/d/%7BC501F0E5-FC10-666F-C849-8C369FEE510F%7D.pdf.
17 Full text of the General Rules for Payment Networks is available at:https://www.banxico.org.mx/marco-normativo/normativa-emitida-por-el-banco-de-mexico/reglas-conjuntas-redes-de-medios-de-disposicion/%7B794002B6-5DA6-BEBA-08AD-F210963C1E11%7D.pdf.
18 Full text of the Rules applicable to Clearing Houses for Card Payments is available at: https://www.banxico.org.mx/marco-normativo/normativa-emitida-por-el-banco-de-mexico/circular-4-2014/%7BACFFA66B-A970-23AD-1A29-C2387897381C%7D.pdf.
21 Additional information can be found at: https://www.gob.mx/ipab/acciones-y-programas/preguntas-frecuentes-ahorradores.
22 Data obtained from: https://www.gob.mx/cms/uploads/attachment/file/581089/Panorama_IF_2020.pdf.
29 Full text of this bill is available at: http://www.senado.gob.mx/64/gaceta_del_senado/documento/74998.
30 Further information regarding these modifications can be found at: https://www.internationallawoffice.com/Newsletters/Banking/Mexico/Hogan-Lovells-BSTL-SC/National-Banking-and-Securities-Commission-amends-general-rules-for-credit-institutions-to-curb-identity-theft.
31 Additional information can be found at: https://www.cnbv.gob.mx/Normatividad/Disposiciones%20de%20car%C3%A1cter%20general%20aplicables%20a%20las%20instituciones%20de%20cr%C3%A9dito.pdf.
32 Additional information can be found at: https://www.banxico.org.mx/marco-normativo/normativa-emitida-por-el-banco-de-mexico/circular-22-2020/%7BF24EFF46-361D-B40C-2A6A-B9E114B60B5F%7D.pdf.
33 Additional information can be found at: https://www.banxico.org.mx/marco-normativo/normativa-emitida-por-el-banco-de-mexico/circular-22-2020/%7B43F55F1A-EB59-ACFC-C037-5684F3D2A922%7D.pdf; (ii) https://www.banxico.org.mx/marco-normativo/normativa-emitida-por-el-banco-de-mexico/circular-22-2020/%7B29880DF3-C29B-52F8-1DB5-2170C829A75F%7D.pdf.
34 Article 65 of LIC, full text available at: http://www.diputados.gob.mx/LeyesBiblio/pdf/43_040619.pdf.
35 Additional information can be found at: https://www.condusef.gob.mx/documentos/estadistica/estad2019/multasporsector2019.pdf.
36 Additional information can be found at: https://www.buro.gob.mx/general_gob.php?id_sector=0&id_periodo=27.
37 Statistics available at: https://www.gob.mx/cms/uploads/attachment/file/581089/Panorama_IF_2020.pdf.
38 Statistics available at: https://www.gob.mx/cms/uploads/attachment/file/581089/Panorama_IF_2020.pdf.
39 Additional information can be found at: https://www.gob.mx/cms/uploads/attachment/file/543439/Comunicado_CNBV.pdf.
40 Additional information at: https://www.gob.mx/cms/uploads/attachment/file/585512/Comunicado_de_Prensa_066_Nuevas_facilidades_regulatorias.pdf.
41 Additional information at: https://www.gob.mx/cms/uploads/attachment/file/592191/Comunicado_de_Prensa_081_PIR.pdf.
42 Full text of the General Provisions available at: https://www.gob.mx/cms/uploads/attachment/file/78266/disposiciones-clausulas-abusivas.pdf.