José Augusto Toledo of Arias & Muñoz in Guatemala City looks at the regulatory environment in the country’s finance sector
The regulatory framework of the Guatemalan financial services industry was subject to deep reforms from 2002 onward, starting with a package of banking and regulatory laws and regulations (2002-2004), amendments to securities laws (2008), the enactment of the Insurance Activity Law (2010) and most recently in 2012, some updates to the 2002 banking regulations which provided some enhancements to current legislation, based on experiences during the previous ten years. Although still subject to some refinements, these laws are very much up to date and contain some of the best practices recommended by international standards. Securities and commodities regulations still lag behind the sophistication existing in other jurisdictions, even if they contain seldom-used modern financial instruments and concepts. This reflects the lack of depth of the Guatemalan capital markets.
The most important laws and regulations applicable to financial institutions are:
• Banks and Financial Groups Law, Decree 19-2002 of Congress, as amended thereafter
• Private Finance Companies Law, Decree-law 208, as amended thereafter
• Insurance Activity Law, Decree 25-2010 of Congress
• General Bonded Warehouses Law, Decree 1746 of Congress, as amended thereafter
• Securities and Commodities Market Law, Decree 34-96 of Congress, as amended thereafter
• Financial Supervision Law, Decree 18-2002
• Bank of Guatemala Organic Law, Decree 16-2002, as amended thereafter
• Monetary Law, Decree 17-2002
The Commerce Code and the Constitution, as well as other entity and activity-specific laws (mainly for state-owned banks) also contain relevant provisions that regulate some of the entities that are part of the financial services industry. Also, regulation for the prevention of money laundering and the financing of terrorism is applicable to these institutions as well as to some other non-financial activities.
Guatemalan financial institutions can be defined as companies that are engaged in services that are regulated by the Banks Superintendence, which supervises activity related with financial and insurance intermediation, among others. To date, those types of companies are any of the ones described below, whether private, mixed-capital or state-owned:
a) Local banks and branches of foreign banks duly authorised to do business in Guatemala.
b) Private finance companies (sociedades financieras privadas).
c) Bonded warehouses (almacenadoras).
d) Local insurance companies and branches of foreign insurance companies duly authorised to do business in Guatemala.
e) Foreign exchange dealers.
f) Off-shore banking institutions (which have a regulatory treatment different than local branches of foreign banks).
g) Credit card issuers.
h) Financial groups.
Also part of the financial services menu are those participants in the securities and commodities markets, which are overseen by the Securities and Commodities Markets Registry. Although the Registry is not a regulator or supervisor per se, applicable laws do require filing with that office of almost all public activities related to this market, such as public offering of securities and the provision of brokerage-type activities. Private offering thresholds allow for some activities to be carried out legally without registration requirements being triggered. Some of the regulated types of institutions are securities exchanges, brokers (defined as securities and commodities agents) and investment companies.
Hefty penalties, including fines and prison, are provided for in laws dealing with regulated activities, such as financial intermediation, provision of authorised insurance and legally offering securities to the public.
Other financial services companies such as some leasing companies, non-banking credit card issuers not part of a Financial Group and micro-finance institutions remain unregulated although legislation is being proposed for all three types of activities.
Banking activity in Guatemala
Banks in Guatemala (like most corporations in Guatemala) are privately held, with very few of those owned by foreign banking institutions. Banks are generally the entities responsible for a Financial Group, which is a conglomerate of companies related to the bank and for which it is accountable. In other words, a bank that heads a Financial Group must respond to any financial distress that a company member of its conglomerate may be under.
Local banks have in general been spared from the recent financial crisis and from other related troubles mainly because of regulation limiting a bank’s exposure to foreign risks. Sound banking practices have taken hold since the inception of the relatively recent legal framework and the regulator’s continuously increasing professionalisation and breadth of supervision.
The legitimatisation of ‘off-shore banks”’ (as the applicable law defines them) as distinct from formal local branches of foreign banks is limited to those foreign banks incorporated abroad but form part of a Guatemalan Financial Group. These banks grew out of the demand for US Dollar deposits before it was permissible to local banks (2002), while still offering the confidence of dealing with a local financial institution since those banks are wholly owned by the local banks that promote their services, sharing the same corporate image. Slowly, these off-shore banks have become regulated in Guatemala to the point that they are subject to the same obligations as their local counterparts, save for some few particular issues, most notably, income and financial products taxation in Guatemala.
Competition is fierce in the banking market with seven banks (two of which will be merging in the short run) out of a total of 18 banking institutions as of June 2014, having between them almost 90% of the existing market share, based on assets. The biggest of those have ventured outward with branches or wholly owned subsidiaries in the US, El Salvador and Honduras. However, competition has not necessarily meant full benefits to customers, as intermediation margins are still high and local financial institutions are as of yet rated lower in comparison to other banks in other jurisdictions as capitalisation of banks has yet to achieve levels attractive to credit rating agencies, even if their regulatory capital is adequate.
Some of the biggest banks have financed their expansion in a more diversified manner by raising capital through preferred share offerings or by accepting very limited private-equity investments from highly reputable global financial institutions.
Arias & Muñoz
About the author
José Augusto is a partner at Arias & Muñoz since 2006. He is head of the banking and finance department in the Guatemala office and focuses on legal corporate practice in general. He is experienced in local and international banking contracting and regulations, multilateral and multi-jurisdictional financing, local tax issues, mergers and acquisitions. He has also developed his professional practice in real estate projects, as a legal consultant in financial matters, Notary Public, as well as a labour and foreign investment consultant. He counsels local and international businesses both in internal matters as well as any topic concerning investment and financing. He also provides legal counsel in affairs dealing with banking and finances, taxes, labour issues, international business transactions as well as clients' organisation and operations both in Guatemala and overseas.
José Augusto has a Law Degree from the Universidad Rafael Landívar, Guatemala (1997) as well as the degrees of Attorney and Notary Public. He also obtained a Master's Degree in Mercantile Law and Business Management from the Universidad Francisco Marroquín Guatemala (2006).