Fintech 2020

Last Updated March 02, 2020

Honduras

Law and Practice

Authors



Consortium Legal is a firm that has a wealth of expertise in banking and finance, securities, insurance, regulatory compliance, real estate, corporate, taxes, intellectual property, consumer, privacy and data protection and litigation law. The interaction between specialists, along with a business-oriented perspective, offers a comprehensive approach to the challenges and opportunities presented by the fintech sector, the impact that emerging technologies are having on the financial industry and the ways that innovations in digital technologies and changes in consumer practices are disrupting traditional business models and regulations. The firm advises clients on matters related to data protection, regulatory compliance, consumer rights, commercial contracts, tax structuring, M&A, antitrust, employment matters and commercial litigation, enabling clients to navigate an increasingly complex environment at the intersection of finance, technology and regulation.

The fintech industry has received somewhat of a spotlight in the country since a fintech Congress took place in February 2019, organised by the Inter-American Development Bank (IDB). The event was able to summon key players, including established fintechs, traditional banks, co-operative unions and civil society organisations. The Congress served as a setting for launching what became the Board of Financial Innovation, an inter-institutional group made up by the local fintechs, banks, universities and co-operative unions, led by the regulators, the National Banking and Insurance Commission (CNBS) and the Honduran Central Bank (BCH). Since then, around 23 fintech companies have been detected, of varying sizes.

The Board of Financial Innovation is still carrying out ongoing meetings and discussions, as of March 2020. It is expected that regulatory reforms will take place after conclusions and agreements are reached, including the Regulation on Electronic Wallets. Also, much needed regulation framework needs to be issued and a local Association of Fintech Companies is presently in formation.

It’s worth noting that some transnational telecommunication companies and banks have started to offer fintech services. Also, the sector is receiving a continuous boost from start-up competitions and programs, most notably the Honduras Digital Challenge, a competition primarily financed by the World Bank, the IDB and USAID.

Most of the fintech initiatives in the country are related to payments and transfers services, including consumer banking alternatives like mobile wallets, offering options for underbanked costumers. There is a surge of start-ups that follow this model, representing a variety of conditions and platforms.

Some initiatives regarding currency and virtual currency exchange are appearing, as well as alternative or collective financial platforms, but nothing particularly consolidated since there is no solid regulation to support it and incentivise this type of services. There also are a couple of fintech players innovating with services for credit and collateral analysis, being hired by traditional supervised financial institutions.

In Honduras we have the Regulation on Electronic Wallets (Reglamento para la Autorización y Funcionamiento de las Instituciones No Bancarias que Brindan Servicios de Pago Utilizando Dinero Electrónico, Acuerdo No 01/2016 del BCH) for that industry sector, applicable to entities that offer funds transfer services and payment operations for goods and services. There is also the Law of Electronic Commerce (Ley de Comercio Electrónico, Decreto No 149-2014) and the Law on Electronic Signatures (Ley de Firmas Electrónicas, Decreto No 149-2013), which closely resemble the model laws drafted by the United Nations Commission on International Trade Law (UNCITRAL). All the mentioned legislation is being actively applied. However, there is no General Law specific for Fintechs that could include provisions for other industry activities, presently unregulated.

Furthermore, any company should still comply with the general regulations that apply to any company, eg, regarding taxation, consumer protection, data protection, certain cases anti-money laundering and counter-terrorism financing. It must be noted that certain reserved activities, such as money lending, stock brokering or financial collection need to comply with special and traditional regulations, having to obtain authorisations by the National Banking and Insurance Commission (CNBS), as established by the Financial System Law (Ley del Sistema Financiero, Decreto No 129-2004) and the Securities Market Law (Ley del Mercado de Valores, Decreto No 8-2001) and other legislation applicable to lenders that do not perform financial intermediation (in Spanish, Prestamista no Bancario).

Also, even though there are no regulations about crowdfunding or crowd investing, we can understand said practices interpretatively under the Securities Market Law as securities offerings. Likewise, we can understand most cryptocurrencies as securities, when their specific nature fits the description of securities found in the aforementioned law.

Under Article 3 of the Securities Market Law, a security is defined as any title or document that is transferable, including stocks, certificates of participation, bonds, as well as futures, options and other derivatives, and in general all credit or investment instruments and other transferable obligations that the National Banking and Insurance Commission considers as such. Furthermore, regulations regarding public offerings of securities provide a list of the types of securities and when an investment instrument may be presumed as a security.

Therefore, a token may be considered a security under Honduran law, depending on the characteristics of the particular token, and whether the token meets the criteria set forth.

There are no legal restrictions regarding compensation models, therefore, it is up to the particular companies to decide which compensation models it would want to implement.

Considering there are no specific regulations for fintech entities, the variation or contrast consists in the burden of traditional financial regulations for legacy players, which have a structured framework based on international best practices, with the National Banking and Insurance Commission and the Honduran Central Bank as their principal regulators with numerous provisions. 

There is no legislation that allows regulatory sandboxes in Honduras, as of 2 March 2020.

Since there are no specific regulations for fintech players, there are no assigned regulators. However, since many of their activities can be interpreted under existing legislation, it’s worth noting that the principal regulators would be:

  • National Banking and Insurance Commission (CNBS): The entity that supervises financial activities as well as those related to insurance, pensions and securities, including the utilisation and investment of funds and resources provided by the general public. It also monitors that proper systems of anti-money laundering and counter-terrorism financing are in place, as well as ensuring that players have adequate liquidity and solvency and that good practices are taken into account in order to minimise inherent risks of the activities carried out by supervised entities.
  • Honduran Central Bank (BCH): The institution in charge of formulating, developing and implementing the country’s monetary, credit and exchange policies, as well as organising, regulating and overseeing the payment systems.
  • National Telecommunications Commission (CONATEL): The entity in charge of regulating and overseeing the telecommunication operations in the country. Part of their technological network is necessary for the performance of electronic wallets.
  • Income Administration Service (SAR): The local tax collecting agency, in charge of control and verification of tribute payment.

Activities can be outsourced with the vendor that actually provides the service undertaking the responsibility to comply with any applicable regulation. There may be requirements for the hiring entity if the regulators consider it a necessary related party. If the outsourcing is for mere auxiliary functions or technological infrastructure, whatever activities are carried out would need to comply with the general obligations of the hiring party.

There are no mandatory contracts established by law. Outsourcing certain activities may lessen the hiring fintech’s burden of regulation, but an analysis of every specific case should be carried out.

Financial institutions can outsource fintech services as long as these services take into consideration the applicable regulations of the hiring institutions. The only specific provision regarding outsourcing is that contracts need to be celebrated at arms-length.

In the scenario that a fintech company undertakes or offers activities or services regulated by the National Banking and Insurance Commission and the Honduran Central Bank, they are well equipped by law to impose administrative and criminal sanctions in case the entity doesn’t comply with the standing regulations, ranging from fines to a prohibition of carrying out a specific activity, even being able to request the liquidation of the entity in extreme cases. Failing to comply with regulations regarding information and communications protection set forth for traditional supervised institutions would also cause administrative sanctions.

In the case of outsourcing, the hired entity would not be affected by sanctions imposed by the regulators unto the hiring party. However, there are provisions which establish that, within outsourcing contracts, clauses must be included that permit the CNBS to audit the provider or hired party, in certain cases.

Honduras has rigourous anti-money laundering and counter-terrorism financing regulations. There are specific regulations exclusively for supervised financial institutions regarding these matters.

There are other regulations encompassing anti-money laundering and counter-terrorism financing that have a wide application, which include non-banking lending institutions as obliged players. Amid other provisions, these require that the compelled parties name a Compliance Officer before the CNBS and provide both a Compliance Program based on Risk Management and a Manual for Policies and Internal Procedures.

As of 2 March 2020, there is no specific legislation in the country regarding cybersecurity or privacy protection. Also, exclusively for legacy players as supervised financial entities, regulations regarding information and communications protection must be taken into account as they do contain certain provisions about cybersecurity and privacy protection.

Furthermore, the Honduran Constitution recognises the Habeas Data principle which grants the right to a person in Honduras to request and amend information stored in a data base. This obligation is applicable to persons who request and gather the information in Honduras and not abroad.

Based on the constitutional principle above, it is suggested that personal information is treated as sensitive. It is also suggested that an express consent is provided by the counterparties to enable the information to be transferred outside the jurisdiction and to third parties.

Regarding banking secrecy principle in Honduras, it’s embodied in Article 956 of the Honduran Commercial Code which is in force since 1950. This article provides that banking institutions may not disclose information with regards to deposits and other banking operations, to any other person but the depositor, debtor or beneficiary, or any legal representative who has the power to dispose of the account or to intervene in the operation. This same article establishes two exceptions to the principle, allowing third parties to request information. These are the following: a) the judicial authority prior to a court order issued in trial in which the depositor is a party to, or b) any banking authority for tax purposes issues. The article finally establishes that bank officials shall be responsible under the terms of the law for the disclosure of information, and the bank institution shall be obliged to pay the damages caused by such disclosure of information.

From the above concept of bank secrecy, it is understood that financial institutions in general may not disclose customer information to third parties arising out of any financial or banking operation.

However, since 1950, and particularly during the last 20 years, there have been significant changes in the Honduran financial legal system, with regards to specifying the exceptions to the banking secrecy principle, established in the Honduran Commercial Code.

These exceptions allow certain confidential information to be disclosed to authorities upon request, as well as the exchange of confidential information between financial institutions, private and public credit bureaus and regulators. The following, establishes the different cases where no liability is incurred on behalf of the financial institutions by disclosing confidential information:

  • Upon requests of a judicial authority prior to a court order issued in trial.
  • Upon request of regulators for tax purposes issues.
  • The exchange of information between the financial institutions or between the financial institutions and the National Banking and Insurance Commission (CNBS), the Central Bank of Honduras (BCH), and the Insurance Deposit Fund. The exchange of information is also allowed, when complying with treaties signed with regards to cross-border supervision and prevention of money laundering and terrorist financing.
  • The exchange of credit information between financial institutions and private and public credit bureaus.
  • The exchange of information when requested by Anti Money Laundering authorities in order to comply with AML regulations. These regulations provide for financial institutions to supply information and reports to the AML authorities under certain conditions when certain type of transactions occur, subject to criteria pertaining to amounts, regularity and in general when non typical transactions take place. These reports and information are handled with complete confidentiality and no other person asides from compliance officials are aware of them, unless an investigation is opened in which case the investigated party is notified or becomes aware as a consequence of certain actions that may be ordered to secure values or information.

It is important to mention that financial institutions are required by law to send customer credit information to the public credit bureau "Central Credit Information" (CIC), managed by the CNBS. Financial Institutions are not required by law to send or exchange information to private credit bureaus unless they have previously entered into an agreement which governs how the exchange of the credit information will occur. This agreement shall contain provisions with regards to the liability to be assumed by the financial institution as the source and provider of information, in case the information provided by the financial institution to the private credit bureau is illegal, inaccurate, erroneous or obsolete, or has been obtained or given fraudulently.

There is no specific regulation regarding social media tools or communications, as of 2 March 2020. A bill is presently being discussed in Congress related to social media but currently shows no sign of moving forward.

There are no legally mandated reviews taking place for fintech players. There are, however, accounting or auditing firms that may review them, whenever they privately request them to do so. These firms have a valuable incidence, considering that companies, fintech or not, will have to present audited financial statements in the occasion that they want to apply for a loan from a financial institution.

Banks and traditional supervised institutions are also regularly evaluating the market, not wanting to be blindsided by disruptive industry participants.

Certain supervised financial institutions have started to innovate using fintech services. Some are channelling them through separate entities, but others are including them as part of the same company, even though the specific service may not be regulated. Regulators are still taking every new practice into consideration before issuing new regulations, as part of the endeavour being carried out in the Board of Financial Innovation.

It’s worth remembering that it is permitted for supervised institutions to outsource activities to un-regulated fintechs, using technology provided by the latter.

As of 2 March 2020, there are no Fintech players offering robo-adviser services, understanding a robo-adviser as a digital platform that provides automated, algorithm-driven financial planning services with little to no human supervision, especially regarding investment and stock market operations. In any case, they would need to comply with the regulation about Fund Administrators that perform activities in stock markets. Furthermore, there is no specific regulation for robo-advisers nor, to the best of our knowledge, is the technology being used within the limited local stock market.

To the best of our knowledge, the use of robo-advisers has been mostly for credit viability analysis regarding loans, collaterals and related services, not really engaging in stock market activities. This is legally permitted if they comply with the financial regulation regarding credit bureaus and management of credit portfolios.

See 3.1 Requirement for Different Business Models and 3.2 Legacy Players' Implementation of Solutions Introduced by Robo-Advisers.

As of 2 March 2020, to the best of our knowledge there are no online lenders operating in the country, including crowdfunding.

In general terms, there are no tangible differences in regulations for loans in consideration to whom they’re given. Internally, entities may apply different criteria for approving them, in consideration to different factors. There may be, however, differences in regulation regarding who is issuing the loan.

Traditional supervised financial institutions operate under a different framework than lenders that do not perform financial intermediation, also known as non-banking lenders. The former complies with banking regulations issued by the National Banking and Insurance Commission and in compliance with the Financial System Law, whereas non-banking lenders have special regulations composed mostly of usury provisions and reporting requirements of their credit portfolio.

Supervised financial institutions must comply with prudential regulations as well as consumer protection regulations, whereas non-banking lenders (entities that do not perform financial intermediation), only have to comply with consumer protection regulations.

There are no specific underwriting processes required by Honduran regulation for online lenders as of 2 March 2020.

For supervised financial institutions, the main source of funds for loans is from deposits and lender raised capital. In the case of lenders that do not perform financial intermediation, the funds come from the entity's own capital and lender raised capital.

Though there are no crowdfunding platforms operating in the country, they would need to comply with provisions about public and private offerings of securities, in case that they plan to use tokens as a representation of the funding, given that there have been no specific regulations issued for these activities.

Syndication of loans is permitted by Honduran law and actively used by local players. There is no special process for syndicated loans as it follows the same guidelines as all other regular loans.

Processors must use existing payment rails, nevertheless, they may create or implement new payment rails prior to the authorisation of the Honduran Central Bank (BCH), as it is the entity in charge of the payment systems in Honduras.

The regulation regarding currency negotiation contains specific provisions about currency management for remittances. There is also a security tax applicable to foreign transfers.

Fund administrators are regulated depending on their activities. There are provisions for the incorporation of fund administrators, specifically and only when they undertake activities in the stock market. They must be authorised by the National Banking and Insurance Commission. There is also a framework for Mutual Guarantee Funds.

As a general consideration, fund advisers may not impose conditions on fund administrators that contravene what is already narrowly established by investment rules. As of 2 March 19th, 2020, there are no fund administrators operating and only one mutual guarantee fund administrator is operating.

There are no specific regulations that would compel fund administrators to act as gatekeepers as there is no duty to disclose. Nevertheless, there are provisions in anti-money laundering laws that allow persons to act as whistle-blowers and receive special protections in exchange.

Online marketplaces are permitted and considered specifically by the Electronic Commerce Law, as long as they refer to general goods and services, not securities or currencies. In case that they include securities, regulations regarding public private security offerings would apply. There are no regulations regarding cryptocurrency exchanges, as of 2 March 2020, but they could be understood as a securities exchange if they are according to the criteria set forth by the Security Market Law.

The Central American Stock Exchange is the only exchange marketplace authorised for public offerings of securities. Also, it’s worth noting that the BCH carries out currency auctions as well as auctions for government bonds.

In the case of financial institutions, the following regulations exists regarding assets: weighting of assets according to their degree of risk, credit portfolio management depending on the types of securities provided by clients and how to manage assets received in payments due to defaults of loans.

The latter regulation does not apply for non-financial institutions. It is important to note that all entities have to comply with the laws applicable to granting liens and mortgages on fixed or movable assets.

There have been no specific regulations issued regarding cryptocurrencies as of 2 March 2020. Regulators have been waiting to see how the adoption and uses of cryptocurrencies turn out, though this matter is expected to be tackled by provisions that will emerge from the Board of Financial Innovation. These will most likely be in accordance with the Financial Action Task Force’s (FATF) recommendations and statements from 2019.

It’s worth mentioning that the BCH issued a statement, in February 2018, warning users that cryptocurrencies aren’t endorsed by them and that they don’t regulate cryptocurrencies nor do they ensure their use. Thus, any transaction performed using cryptocurrencies are under the responsibility and each user, with the user taking responsibility for the risk.

There have been no specific regulations issued on this matter as of 2 March 2020.

There have been no specific regulations issued on this matter as of 2 March 2020.

There have been no specific regulations issued on this matter as of 2 March 2020.

There have been no specific regulations issued on this matter as of 2 March 2020.

There have been no specific regulations issued on this matter as of 2 March 2020.

There have been no specific regulations issued on this matter as of 2 March 2020.

There have been no specific regulations issued on this matter as of 2 March 2020.

There have been no specific regulations issued on this matter as of 2 March 2020.

There have been no specific regulations issued on this matter as of 2 March 2020.

There have been no specific regulations issued on this matter as of 2 March 2020.

There are no specific rules regarding payment for order flows.

Financial research platforms or its participants are not subject to registration.

Spreading of rumours and other unverified information is not regulated by law.

Conversation curation is not regulated by Honduran law.

There are no specific regulations that would compel platform providers to act as gatekeepers as there is no duty to disclose. Nevertheless, there are provisions in anti-money laundering laws that allow persons to act as whistle-blowers and receive in exchange special protections.

Insurtech is not specifically regulated in Honduras.

According to insurance and reinsurance regulations, different types of insurance will require a particular authorisation from the National Banking and Insurance Commission.

Regtech is not regulated per se in Honduras. They may become subject to regulation depending on the specific service that they provide for financial institutions. 

Regulations regarding information and communications protection include dispositions that are mandatory for contracts celebrated with hired outsourcing entities, regarding data privacy and security standards, as well as the possibility that the outsourcing entities can be audited by the National Banking and Insurance Commission.

There are no specific regulations that would compel regtech providers to act as gatekeepers as there is no duty to disclose. Nevertheless, there are provisions in anti-money laundering laws that allow persons to act as whistle-blowers and receive in exchange special protections.

To the best of our knowledge, as of 2 March 2020, only one legacy player has started to adopt blockchain technology as part of their regular services. Banco Ficohsa became part of the Interbank Information Network developed by JP Morgan, being the first Central American bank to do so in May 2019.

The Interbank Information Network permits the exchange of information related to international payments processed by banks worldwide. Other supervised financial institutions are experimenting internally with blockchain technology but haven’t implement it as part of their day to day services.

There have been no specific regulations issued regarding blockchain as of 2 March 2020. Regulators have been waiting to see how the adoption and uses turn out, though this matter is expected to be tackled by provisions that will emerge from the Board of Financial Innovation.

There has been no specific regulation issued regarding blockchain assets as of March 2020. However, as mentioned, blockchain assets may fall under the description of securities.

Under Article 3 of the Securities Market Law, a security is defined as any title or document that is transferable, including stocks, certificates of participation, bonds, as well as futures, options and other derivatives, and in general all credit or investment instruments and other transferable obligations that the National Banking and Insurance Commission considers as such.

As of March 2020, blockchain has not been specifically regulated, including issuers of blockchain assets.

As of March 2020, blockchain has not been specifically regulated, including blockchain asset trading platforms.

As of March 2020, blockchain has not been specifically regulated, including funds that invest in blockchain assets.

As of March 2020, blockchain has not been specifically regulated, including virtual currencies. 

As of March 2020, blockchain has not been specifically regulated. Issues regarding data privacy would have to comply with the habeas data principle.

Regulations in Honduras inhibit open banking due to the existence of the bank secrecy principle, which limits the information, specifically financial information, that they can share with third parties. 

Due to the limitations of the bank secrecy principle, technology providers are required to sign confidential agreements and are prohibited from sharing financial information with third parties. 

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Law and Practice

Authors



Consortium Legal is a firm that has a wealth of expertise in banking and finance, securities, insurance, regulatory compliance, real estate, corporate, taxes, intellectual property, consumer, privacy and data protection and litigation law. The interaction between specialists, along with a business-oriented perspective, offers a comprehensive approach to the challenges and opportunities presented by the fintech sector, the impact that emerging technologies are having on the financial industry and the ways that innovations in digital technologies and changes in consumer practices are disrupting traditional business models and regulations. The firm advises clients on matters related to data protection, regulatory compliance, consumer rights, commercial contracts, tax structuring, M&A, antitrust, employment matters and commercial litigation, enabling clients to navigate an increasingly complex environment at the intersection of finance, technology and regulation.

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