FREQUENTLY ASKED QUESTIONS: FINANCIAL TECHNOLOGY INSTITUTIONS

With the objective of promoting engagement with stakeholders interested in providing financial services with innovative technological solutions, this Frequently Asked Questions document was developed. It is intended for publication on the CNBV website to provide clarity to the general public and those interested in obtaining more information on what constitutes an Innovative Model and the requirements to request temporary authorization.

For the design of this section, some questions contained in the pages of authorities in other countries were considered, as well as the doubts expressed by those who have approached the CNBV to learn about this type of company.

FREQUENTLY ASKED QUESTIONS

1. What is an Innovative Model?

An Innovative Model is a financial business model that seeks to carry out a reserved activity using innovative technological means or in modalities different from those existing in the market.

Today, there are numerous technological innovations, such as digital onboarding solutions, blockchain, artificial intelligence, among others, but their use by itself does not imply a reserved activity; anyone can use these technologies. The challenge arises when these innovations are employed to carry out reserved activities.

A reserved activity is any financial activity that cannot be carried out by any person other than a financial entity or other subjects who have obtained special authorization or registration to carry it out; otherwise, a crime would be committed. Some reserved activities are the collection of public funds, securities intermediation, or securities administration, which are activities that authorized institutions such as banks, brokerage houses, or investment funds can perform, to name a few.

To learn about some of these activities, see the list of reserved activities.

2. What is an Authorized Company to operate Innovative Models?

These are companies other than Financial Technology Institutions, Financial Entities, or other subjects supervised by the CNBV, which, through innovative technologies, carry out a reserved activity through a temporary authorization by the CNBV to be able to test their product in the market.

This space of temporary authorizations, known internationally as a Regulatory Sandbox, can be seen as a space for experimentation, which allows companies to offer financial services to a limited number of clients, using innovative tools or technological means, in order to test them before offering them to the general public on a massive scale.

To illustrate the above, suppose a company has a solution to administer the portfolio of an investment fund through the use of artificial intelligence. Since the company's solution consists of carrying out a reserved activity (management of securities portfolios of investment funds) with an innovative technological means (artificial intelligence), it could qualify as an Innovative Model. Therefore, the company can approach the CNBV to obtain a temporary authorization, with an ad hoc regulatory framework, that allows it to test its model in a controlled environment without the need to comply with all legal or regulatory requirements applicable to a financial entity from the start and for the duration of the temporary authorization. This is just an example to illustrate how an Innovative Model works, but there are various combinations of products or services that could be tested.

Once the testing period concludes, the company must obtain a definitive authorization to operate as an entity that allows it to carry out the reserved activity on a regular basis. Following the previous example, it could request authorization to operate as an Investment Fund Operating Company.

3. What are the CNBV's criteria for granting a temporary authorization to operate an Innovative Model?

a. That the proposal is an Innovative Model. b. The product to be offered or the service to be provided to the public must be tested in a controlled medium and with a limited number of clients. c. The way in which the reserved activity is intended to be developed must represent a benefit to the client of the product or service in question with respect to what exists in the market. d. The project must be at a stage where the start of operations can be immediate. e. Possess the necessary human, material, and monetary resources to start and maintain the operation of the Innovative Model during the validity period of the temporary authorization. f. Possess the necessary measures to mitigate the risks to which clients will be exposed during the operation of the Innovative Model. g. Have sufficient means, insurance, guarantees, or other mechanisms to compensate clients for damages and losses that may be caused during the validity period of the temporary authorization.

The requirements to obtain a temporary authorization are defined in the Law to Regulate Financial Technology Institutions and its general provisions, which can be consulted at the following links: http://www.diputados.gob.mx/LeyesBiblio/pdf/LRITF_090318.pdf https://www.cnbv.gob.mx/Normatividad/Disposiciones%20de%20carácter%20general%20relativas%20a%20las%20sociedades%20autorizadas%20para%20operar%20modelos%20novedosos%20a%20que%20hace%20referencia%20la%20Ley%20para%20Regular%20las%20Instituciones%20de%20Tecnología%20Financiera.pdf

4. What is the process that a company interested in testing its Innovative Model must follow to obtain its authorization?

Interested parties can contact the CNBV at the email modelsnovedosos@cnbv.gob.mx for an initial approach, in which they can be given guidance and feedback on their model. Once they determine that their model is ready, they must submit their formal application through the General Directorate of Financial Technology Authorizations.

To submit their authorization application, applicants must comply with the documentation and information requirements contained in the Law to Regulate Financial Technology Institutions (“Fintech Law”) and in the general provisions relative to companies authorized to operate innovative models referenced by said Law.

The law and its general provisions can be consulted at the following links: http://www.diputados.gob.mx/LeyesBiblio/pdf/LRITF_090318.pdf https://www.cnbv.gob.mx/Normatividad/Disposiciones%20de%20carácter%20general%20relativas%20a%20las%20sociedades%20autorizadas%20para%20operar%20modelos%20novedosos%20a%20que%20hace%20referencia%20la%20Ley%20para%20Regular%20las%20Instituciones%20de%20Tecnología%20Financiera.pdf

5. Will companies that obtain temporary authorization operate with the general public and without restrictions?

No. Companies that obtain temporary authorization will be subject to the conditions established by the CNBV to operate in a controlled environment, among them, having a limited number of clients, resources, among others.

6. How long does a temporary authorization last?

The testing period is a maximum of two years, with an extension of one more year, at the discretion of the CNBV.

7. What happens when the temporary authorization period ends?

i. In case the tests yield successful results, the company may process, within the same period of the temporary authorization, the definitive authorization of the legal figure under which it will operate definitively, for example, as a credit institution; a brokerage house; an investment fund, among others. To do so, it must adhere to the applicable regulatory framework to obtain the corresponding authorization.

ii. In case the tests have not been successful and the CNBV does not grant the definitive authorization or registration, or if the company decides not to process its definitive authorization, the company must carry out the exit plan established in the temporary authorization.

8. How many clients can the innovative model have during the testing period?

The company must propose and justify a limited number of clients with whom it will operate and validate its model during the validity of its temporary authorization. This limited operating environment must be consistent with the identified potential risks and with the consumer protection mechanisms established in said authorization.

9. Can any person be a client of an innovative model?

Any person who is part of the target market determined by the Authorized Company can be a client, provided that they are informed about the risks to which they will be subject during the testing period and that they give their consent to operate with the company.

10. What are the protection mechanisms that apply to consumers participating in the tests?

The company must obtain the consent of its Clients regarding the transactions they will enter into with them, as well as inform them of the risks to which they are subject thereby.

Likewise, the company will establish the manner in which damages and losses that it may cause to its Clients through the provision of the services it grants during the testing period will be compensated.

11. What happens if the proposed business model or any of its activities fall within the jurisdiction of another financial authority, other than the CNBV?

The applicant must submit their authorization application through that authority whose powers are related to the predominant activity that, according to the Innovative Model, will be carried out, and said authority will forward the file to those authorities that, within their scope of competence, must also authorize any legal or regulatory exception.

To learn about some of the activities that require authorization or registration from the CNBV, refer to the List of Reserved Activities.

12. Can entities already supervised by the CNBV also operate with Innovative Models?

Yes. Supervised entities can also operate with Innovative Models; in this case, to test business models that current provisions prevent them from performing.

Interested entities must contact their supervisor directly, who will guide them on the process to follow and the documentation and information to present, as stated in Article 87 of the Fintech Law. In these cases, the temporary authorization has a maximum validity of one year, extendable by another year.

In case of doubt, please write to modelsnovedosos@cnbv.gob.mx

13. Under what conditions can the CNBV revoke the temporary authorization granted to Authorized Companies?

The temporary authorization may be revoked by the CNBV, after a hearing of the interested company, when: i) it ceases to comply with any of the requirements applicable to it; ii) in case there are unexpected risks for Clients; iii) when it fails to deliver any of the reports it is obligated to deliver; iv) if it carries out operations, activities, or services different from those contemplated in its temporary authorization, and v) if the company so requests, provided there are no pending liquidation operations between its Clients.

14. How can I know if a company has authorization to operate as an Innovative Model?

The CNBV publishes the details of those companies that have temporary authorization in a public registry located on its website. This registry contains, among other information: the company's name or corporate name; date of incorporation; general description of the Innovative Model; target market or maximum number of Clients to whom the product or service in question will be offered; among other information.

The innovative model registry can be consulted at the following link: https://www.cnbv.gob.mx/fintech/Paginas/default.aspx

15. Will Authorized Companies be supervised by the CNBV during the period covered by the temporary authorization?

Yes. Authorized Companies must periodically deliver information to the CNBV regarding the operation of the Innovative Model, the risk situations that have arisen and how they were resolved, the progress of their testing plan, and the progress of actions taken to obtain the definitive authorization or registration at the end of the temporary authorization.

16. Will the CNBV determine the legal and regulatory requirements that prevent the company from operating its business model, and consequently, resort to requesting a temporary Innovative Model authorization?

No. The CNBV can provide guidance and general information on the legal and regulatory requirements of the financial sector applicable to the Innovative Model, but it is the responsibility of the applicant to determine the legal and regulatory impediments that are an obstacle to operating their model and, based on this, justify their temporary authorization.

17. What type of innovative models can be tested?

There is a wide variety of financial models that could be tested in the sandbox! It all depends on the creativity and business opportunities that stakeholders see! In the following links, you can see some examples of innovative models that are being tested in other jurisdictions:

UK Sandbox (FCA) https://www.fca.org.uk/firms/regulatory-sandbox/cohort-1

Colombia Sandbox (SFC) https://www.superfinanciera.gov.co/publicacion/10099575

List of Reserved Activities*

The following table shows some of the reserved activities that, to be carried out, require registration or authorization from the CNBV. Some activities can be performed by different types of entities; for example, the collection of funds.

*IMPORTANT: This is not an exhaustive list of reserved activities in the Mexican financial system, and is presented for illustrative purposes only. Before starting to operate a financial business model, confirm with your legal advisor that you are not carrying out a reserved activity.

SECTOR	Reserved Activities by Financial Laws	Entities that can perform said activity
BANKING	Banking and credit service (collection of funds in the national market for their placement to the public through loans or credits, leaving the intermediary obliged to cover the principal and, if applicable, the financial accessories of the collected funds)	Multiple banking institutions.
POPULAR SAVINGS AND CREDIT	Financial intermediation to collect funds from the public for their placement to the public, through loans or credits, leaving them obliged to cover the principal and, if applicable, the financial accessories of the collected funds.	Popular Financial Companies
	To collect funds or monetary resources and place them through loans, credits, or other operations with their members.	Savings and Loan Cooperatives
	To collect resources through loans from their members, who in turn place them in credits among the same members.	Credit Unions
STOCK MARKET	Intermediation with securities, that is, acts to put supply and demand of securities in contact; celebration of operations with securities on behalf of third parties as a broker, agent, or with any other character, or negotiation of securities on one's own account with the general public or with other intermediaries acting in the same way or on behalf of third parties.	Brokerage houses or other intermediaries
	Asset administration services for investment funds.	Investment Fund Operating Companies
	Distribution of investment fund shares	Investment Fund Share Distributing Companies
	Service consisting of the study, analysis, opinion, evaluation, and determination of the credit quality of securities	Rating Agencies
	Service of calculation, determination, and provision or supply of updated prices for the valuation of securities, financial derivatives in markets recognized by financial authorities or indices, as well as the sending of information related to said activities	Price Providers
	Acquisition and habitual and professional sale of securities and other assets with resources coming from the placement of the shares representing its social capital, offering them to an indeterminate person, through financial intermediation services.	Investment Funds
	Provide access to trading systems that allow putting supply and demand of securities registered in the National Securities Registry other than those reserved for stock exchanges and shares not registered in the RNV, centralizing bids for the celebration of operations.	Companies that administer systems to facilitate operations with securities
	Analysis and issuance of individualized investment recommendations, or administration of securities portfolios making investment decisions on behalf and for the account of third parties.	Investment Advisors
ORGANIZATIONS AND AUXILIARY ACTIVITIES OF CREDIT	Receipt of resources in national or foreign currency with the sole object that, according to the remitter's instructions, they are transferred abroad, to another place within national territory, or to be delivered, in a single payment, at the place where they are received, to the designated beneficiary.	Money Transmitters
	Purchase, sale, and exchange of foreign exchange with the general public. Currency Centers
FINANCIAL TECHNOLOGY INSTITUTIONS (FINTECH)	To put people of the general public in contact, so that among themselves they grant collective financing, through the internet or any other electronic or digital communication medium.	Collective Financing Institutions
	Issuance, administration, redemption, and transmission of electronic payment funds, through the internet or any other electronic or digital communication medium.	Electronic Payment Fund Institutions