Q&A: Should Mexico Impose New Regulations on ‘Sofipos’?

Q: Mexico’s financial regulator, CNBV, is considering new rules for popular financial societies, or Sofipos, following the government’s seizure of Ficrea SA, whose collapse amid an alleged fraud led to losses for some 6,000 savers. New regulations could include changes to asset concentration limits, CNBV’s vice president said earlier this month. Do consumers face increased risk putting their money in Sofipos as compared to banks? Do consumers in Mexico have enough protection from fraud involving Sofipos? What kinds of reforms are needed in the industry?

A: Melissa Diaz and Marta Garcia, associate attorneys at Diaz, Reus & Targ, LLP:

«Today, millions of Mexicans turn to Sofipos, microfinance institution alternatives to private banking, after being excluded from the traditional banking system, given the tough requirements that banks place on their customers. However, fraud scandals like Ficrea raise questions about the reliability and safety of these institutions. The Institute for Protection of Bank Savings protects traditional bank customers’ savings up to $145,000. However, due to Sofipos’ volatility and high costs, Sofipos customers’ savings are only secured up to $9,000 through a specially designated protection fund, as provided by the ‘Savings and Popular Credit Act.’ With a fraction of the protection banks’ consumers enjoy, Sofipos’ consumers face an increased risk putting their money in Sofipos rather than banks. The government seeks to reform the insufficient protection with an increase of up to $108,000 in protection. However, reforms and appropriate legislation will not work if not accompanied by proper operation and supervision, especially by enforcement of the laws, without exception. Ficrea is a clear example of this. The government overlooked rating companies’ warnings of the dangers of the liabilities owned by Ficrea and failed to intervene when Ficrea grew abnormally, while giving much higher interest rates than its competitors. Mexico will have to work to keep pushing its economic growth and to boost consumer confidence after the Ficrea defrauding scheme. Success in both economic growth and boosted consumer confidence will depend on whether the government can balance enacting the appropriate legislation and, more importantly, enforce the proper supervision of Sofipos.»

This Q&A was first published in Inter-American Dialogues Latin American Advisor | Financial Services, January 15-28, 2015 Edition. Access the full edition PDF here…