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Capital regulation compliance is a big challenge.
What are some of the biggest challenges facing the banking & finance sectors in Mexico?
Capital regulation compliance is a big challenge and banks have to discriminate and be extremely cautious about which clients to serve and how to interact with their clients and business opportunities may be lost due to these pressures.
General security in Mexico and in the banking system, worldwide antitrust issues and the sluggish penetration of the banking system for the general population presents both a challenge and an opportunity.
Many Mexican banks are foreign subsidiaries, and subject to regulation by the Mexican government as well as the government of the bank’s home jurisdiction. It is difficult for both the foreign bank and the Mexican subsidiary to have all of the information needed to remain in compliance with all of the applicable laws. There is a constant tension between the foreign and Mexican regulators and the home office versus the subsidiary office.
Branches do not provide full service as in other countries. There is a high concentration of fund managers in banking institutions with large volumes and lots of accounts.
In January 2014 the government enacted a comprehensive overhaul of financial regulations with the aim of improving regulation of financial intermediaries, creating greater certainty for lending, and clarifying ambiguities in the bankruptcy laws. What have the effects of this overhaul been for business? What more is needed?
There have been a couple of large financial reforms but more are needed.
The insolvency and bankruptcy courts are not always as supportive of these reforms as they could be. Some reforms are successful while others are not. Reforms face challenges including a slow court system. The length of time to deal with insolvencies is too long.
Lending activities are another example. Some reforms promote lending while others do not. The net effect of the reform is not yet clear. For a solvent entity, the additional cost to comply with regulations is high. The reforms that enhance consumer protection are positive for the community.
The Antitrust Commission in Mexico and OECD created a study in competition and advised that regulators should strive to create more competition. While this is a positive reform, it does not really support more lending. The general enforcement by courts of the reform is disappointing.
Structural reforms are positive but will take time to show results.
Have expectations around structural reforms been overinflated, given the performance of the peso recently? Why?
The value of the peso is independent of structural reforms. The Central Bank policies, the sharp reduction in oil prices and the U.S. Federal Reserve policies as well as the U.S. economy are what influence the value of the peso.
The structural reforms are positive but will take time to show results. One of the main issues depressing the economy now is the unforeseeable negative effect of tax reforms.
Mexico has very good investment potential. Its reforms open many possibilities.
What is the current climate of investment in Mexico? What is drawing in fresh investment? What is repelling it?
Mexico has very good investment potential. Its reforms open many possibilities. The Mexican economy is a shining example compared to many others. Although there may be issues with corruption, security, reform enforcement etc., the investment climate is still superior to other countries. It may not be perfect, but other countries’ investment climates are the same or worse. Many investors that look at Mexico for investment opportunities continue their search in other countries and then circle back to ultimately choose to invest in Mexico.
In the wake of the financial crisis, what business trends do you foresee dominating the legal landscape in the next five-10 years? How do you predict the Mexican legal market will respond?
Business trends include an innovative business climate and creative avenues to investment.
Transaction compliance and anticorruption in the past has been seen as superficial. Now, investors are analyzing more deeply the corruption aspect of a transaction. They know the trend is to tolerate less corruption.
Antitrust compliance is a growth area of the law, both in new transactions and for existing companies. Companies are being investigated regarding pricing, competition and the sharing of information.
Another trend is that more and more contracts use Mexican law as the governing law as opposed to U.S. law. As the Mexican legal system strengthens, the choice of Mexican governing law will increase.
This interview was originally published in GC Grapevine.