Contributed By Consortium Legal
Guatemala has seen a rapid growth of the fintech industry over the past 12 months. In its 2018 Fintech Latin America Report, IDB Invest referenced that Guatemala had four operating fintechs. By the end of 2019 the number had risen to 25 fintechs. As a result, in late 2019 Guatemala's Fintech Association was incorporated for those fintechs operating locally to have a clear representation before the financial regulator (Superintendencia de Bancos de Guatemala, or SBG). The rapid growth of the fintech market during 2019 solidified the position that fintechs hold in the financial services market; however, there is still ample room for growth and diversification of the various verticals in the country.
During the second semester of 2019 the SBG presented its SIB Innovation HUB platform. Through this platform, the SBG seeks to strengthen its relationship with those fintechs operating in the local market, as it considers that digital transformation will be one of its main strategic lines moving forward. Additionally, the SBG, through its Innovation Hub, seeks to evaluate the correct approach with regard to the local regulation of fintechs as fintechs currently operate by applying industry best practices and observing traditional financial regulations and laws when applicable.
The main issues to consider during the next 12 months are the following:
The main business models that currently predominate, both for new and legacy players, are the following:
Fintech businesses operating in Guatemala do not have any specific regulations. However, they must comply with rules and regulations generally applicable to any business enterprise, such as personal data protection, consumer protection, taxation, and civil and commercial law. In addition, fintech businesses must refrain from undertaking the following activities as these are reserved for regulated financial institutions or insurance companies: deposit taking, trusts and the offering of unregistered insurance products. Furthermore, any fintech business that seeks to provide investment services must observe the legislation applicable to said activity as issued by Congress and the corresponding regulation issued by the Securities and Merchandise Market Registry (Registro del Mercado de Valores y Mercancias, or RMVM).
Any activity that implies raising funds from the public, or the offering of unregistered insurance products by an unlicensed entity, amounts to a criminal offence under applicable financial and insurance laws.
It is important to mention that, for the development of certain fintech activities – such as money exchange, remittances or other activities that entail the recurrent movement of funds – fintech companies must be registered before the Special Verification Unit (Intendencia de Verificación Especial, or IVE) of the SBG as required by the Law Against Money or Other Assets Laundering (and its Regulation) and the Law to Prevent and Repress Terrorism Financing (and its Regulation).
In Guatemala, there are no restrictions or limitations as to the compensation models that participants may use to charge customers. As such, general provisions of consumer protection legislation are applicable.
Although there is no specific regulation for the fintech industry, general rules apply as in any business, which are referred to in 2.2 Regulatory Regime.
It must be noted that regulation applicable to fintech businesses differs from that for legacy players in terms of taxation. In Guatemala, financial institution services are not affected by the 12% value added tax (VAT), while fintech services are.
Another difference is the application of prudential measures (capital requirements, provisions, debtor classification and loan reserves) and the market conduct rules (transparency, adequate offer of products and claim management), which are highly demanding for traditional financial institutions, in contrast to the fintech sector. Additionally, AML compliance requirements are substantially enhanced for traditional financial institutions, which generates increased costs in their operations.
Lastly, traditional financial institutions must observe banking secrecy, whilst fintechs are not held to this standard.
In Guatemala, there is no policy for the application of regulatory sandboxes.
In Guatemala, two authorities have jurisdiction in matters of financial services: (i) the SBG as the authority for the supervision of financial intermediation, lending transactions, insurance activities and protection of the financial and insurance consumers; and (ii) the RMVM (Capital Markets Supervisor), which is in charge of the supervision of the securities market.
Under applicable Guatemalan laws, most regulated activities may not be outsourced. There are specific situations where certain activities may be outsourced by financial institutions (mainly data processing and payment processing), but responsibility for such activities remains with the financial institution. Before the activity may be outsourced, the board of directors of the financial institution must approve such outsourcing having verified that it meets the requirements set forth in applicable regulations.
Regarding the convenience of outsourcing functions to a regulated entity, it demands a case-by-case analysis, depending on the functions involved.
There are currently no significant enforcement actions by regulators for the main verticals.
However, it is relevant to point out that the SBG and the RMVM have sufficient powers and authority to initiate actions, through the Public Prosecutors Office, against unregulated entities that perform any activity that requires a licence from said regulators. As mentioned in 2.2 Regulatory Regime, any activity that implies raising funds from the public, or the offering of unregistered insurance products by an unlicensed entity, amounts to a criminal offence under applicable financial and insurance laws.
As mentioned in 2.4 Variations Between the Regulation of Fintech and Legacy Players, AML regulation is highly demanding for legacy players who have several norms and requirements to observe. While most fintech businesses are under the scope of AML regulation, the standard of implementation is less burdensome.
Additionally, legacy players are subject to banking secrecy under applicable financial and insurance laws, while fintech entities are subject to standard and minimal data protection rules.
At the moment, there is no cybersecurity regulation for the private sector.
The use of social media and similar tools is subject to general regulation such as publicity and consumer protection. The objectives of these regulations is to give timely and truthful information to the public, protect consumers' rights to acquire appropriate products and services, as well as to have their claims and queries properly addressed.
Legacy players have a different standard as they must observe, in addition to the above regulations, certain requirements set forth in applicable financial regulations pertaining to the information they must make available to the public regarding their services and products.
Besides those undertaken by the regulators, there are no other mandatory or enforceable reviews by third parties. Auditing firms act in response to industry demand.
Financial and insurance services, if reserved activities, may not be offered or provided by an unregulated entity. Should a fintech desire to offer a regulated product or service, it would need to act through a regulated entity.
In Guatemala, there are no policies or regulations regarding robo-advisers. As such, there is no need for different business models for different asset classes.
As of yet, legacy players have not implemented solutions introduced by robo-advisers.
Once solutions introduced by robo-advisers are implemented, the execution of consumer trades would have to adhere to the norms and regulations issued by the RMVM regarding consumer trades.
Guatemalan financial laws and regulations do not provide a significant differentiation for the provision of loans to individuals, small businesses and others.
However, as provided in 2.4 Variations Between the Regulation of Fintech and Legacy Players,there is a difference between loans granted by legacy players and fintechs, as legacy players are exempt from VAT.
There are no specific underwriting processes required by Guatemalan regulation. The underwriting process may be freely adopted by each industry participant.
Online lenders who are not registered and supervised as a financial institution according to applicable laws may obtain the funds of their loans from the following sources: founders' savings and loans, friends, family, business incubators, peer-to-peer and venture capital.
As noted in 2.2 Regulatory Regime, it is relevant to point out that funds may not be raised from the public, as this would constitute deposit-taking activities and would qualify as criminal offences under applicable financial laws.
Due to the fact that the industry is still developing, there is no evidence of syndicated loans in this matter.
There are no provisions that require payment processors to use the existing payment rails; as such, they may create or implement new ones.
The Law of Free Currency Negotiation (Congressional Decree 94-2000) provides that the disposition, possession, contracting, remittance, transfer, purchase, sale, collection and payment of and with foreign currency may be freely undertaken in Guatemala. As such, the profits, losses and risks derived from said operations are to be incurred upon by the individual or entity who performs such activities. As such, cross-border payments and remittances may be carried out freely in Guatemala.
AML compliance is relevant for those companies that provide remittance payments in Guatemala as they are under the supervision of the IVE.
Fund administrators are regulated by the RMVM. A licence is required to provide services and undertake the activities required to act as a fund administrator. In Guatemala, there are two types of funds: investment funds and investment trusts. Investment funds are managed by regulated agents, whilst investment trusts are managed by financial institutions.
There are no specific contractual terms that fund advisers seek to impose on fund administrators to assure performance and accuracy, nor are there specific terms dictated by the RMVM.
The activities of fund administrators are encompassed in the Securities and Merchandise Market Law (Congressional Decree 34-1996), as it contains the requirements that must be met in order to act as a regulated agent as well as the rights and obligations said agents acquire from their activities.
Generally speaking, under Guatemalan applicable norms, fund administrators are not required to speak up when they see suspicious or unlawful behaviour.
The exception to the above derives from AML obligations, as fund administrators must notify the IVE of any suspicious activity related to AML so that the IVE may investigate the commission of any potential crimes.
As long as the trading platforms do not relate to securities, they can be freely implemented. There is no specific regulation for these platforms.
There are no specific regulations with regard to different asset classes and their treatment.
The emergence of cryptocurrency has not yet resulted in a change in the regulation, nor has it had a significant impact on Guatemala's economy. As of the date of this publication, there are no regulations applicable to cryptocurrencies in Guatemala.
Guatemala's Central Bank has indicated that cryptocurrencies are not legal tender in the country and do not have any financial support. As such, they are not recognised as a currency in Guatemala and do not constitute a means of payment, nor are they considered legal tender.
As such, cryptocurrency platforms in Guatemala operate on an unregulated basis.
There is no specific regulation with regard to listing standards for cryptocurrencies. The listing of securities is regulated according to the terms and conditions of the Securities and Merchandise Market Law.
There is no specific regulation with regard to order-handling rules.
There is no specific regulation on this matter.
There is no specific regulation on this matter.
There is no specific regulation with regard to rules of payment for order flow.
In Guatemala, there are no regulations for the creation and usage of high-frequency and algorithmic trading.
There is no specific regulation with regard to exchange-like platform participants.
There is no specific regulation in this regard.
There is no specific regulation with regard to the best execution of trades.
There is no specific regulation in this regard.
There is no specific regulation regarding rules of payment for order flow.
There is no specific regulation in this regard.
There is no specific regulation with regard to unverified information.
There is no specific regulation with regard to conversation curation.
There is no specific regulation with regard to platform providers as gatekeepers.
Insurance activities in Guatemala are regulated by the Insurance Activity Act (Congressional Decree 25-2010) and its complementary rules. Insurance activities are highly regulated in Guatemala. According to the applicable laws and regulations, an insurance licence in required to undertake insurance activities. Furthermore, only registered products may be offered in country.
The underwriting processes used by industry participants are not specifically regulated. Each industry participant decides on the underwriting process to be used and the risks it is willing to take.
Under Guatemalan applicable laws, there is a wide variety of types of insurance. The most common insurance policies offered are life insurance, health insurance, civil responsibility, all-risk insurance and, most recently, mandatory public transportation insurance. Each type of insurance has its specific set of regulations, treatment and coverage.
Regtech services are not regulated in Guatemala.
Whilst not specifically applicable to regtech, the SBG has issued regulations applicable to legacy players when hiring technology providers. Said regulations contain specific requirements that need to be incorporated in the agreements entered into by tech providers and financial institutions.
In Guatemala, there are no regtech providers.
Certain legacy players have considered implementing blockchain in their financial services. However, none of the market participants has implemented said technology.
Local regulators have expressed their interest in blockchain technology. The SBG, through its Innovation Hub, is in a continuous process of understanding said technology and the implications that its implementation will have on financial services. However, it has yet to provide its official position.
During the second semester of 2019, the Ministry of Finance opened a public tender process for the implementation of blockchain technology to support public procurement processes. The public tender was not awarded due to a lack of bidders.
There has not been any classification of blockchain technology. Therefore, blockchain assets are not considered regulated financial instruments.
There is no specific regulation of issuers of blockchain assets (or related).
There is no specific regulation of blockchain asset trading platforms or secondary market trading of blockchain assets.
There is no specific regulation with regard to funds invested in blockchain assets.
There is no specific regulation on virtual currencies or blockchain assets.
Privacy regulation for financial services in Guatemala is governed by the Law of Banks and Financial Institutions (Congressional Decree 19-2002), which provides for the existence of banking secrecy. Said banking secrecy protects the identity of all individuals and the transactions they undertake. Breaching banking secrecy amounts to a criminal offence. Implementation of blockchain technology by legacy players would need to be in accordance with the terms of banking secrecy.
Unregulated fintech must observe general data privacy regulations when implementing blockchain technology.
Open banking is quite recent in Guatemala and has not been thoroughly discussed, much less implemented. As such, there is no specific regulation that promotes or allows the development of this initiative. Furthermore, banking secrecy as provided in 12.8 Impact of Privacy Regulation on Blockchain may limit the implementation of open banking.
In Guatemala, there is currently no application of open banking.