Alan Thompson

BTA Legal, San José

alan.thompson@btalegal.com

Costa Rica, a small country in Central America with a market-oriented economy and a strong tradition of democracy and respect for the rule of law, was formally invited to join the Organization for Economic Cooperation and Development (OECD) in 2015 and will soon become a member. Other Latin American members include Chile, Colombia and Mexico. As part of the accession process, the country has enacted important reforms to banking laws and regulations beginning in 2019.

Background

In Costa Rica, the Organic Law of the National Banking System (Ley Orgánica del Sistema Bancario Nacional) and the Organic Law of the Central Bank of Costa Rica (Ley Orgánica del Banco Central de Costa Rica), both enacted in 1953, established strong privileges in favour of state-owned commercial banks. Only these banks were allowed to issue checking accounts and have access to the Central Bank’s discount window.

With the passing of time, new statutes were enacted to allow the creation and functioning of other public and private financial institutions, such as savings and loan associations, savings and loan cooperatives, and non-banking financial companies. 

Private commercial banking has grown significantly since the early 1980s, although public banks still largely dominate the market, accounting for 58 per cent of total banking system assets and 55 per cent of total banking sector loans as of March 2020 (OECD, Costa Rica: Review of the Financial System, 2020).

A new Organic Law of the Central Bank of Costa Rica, enacted in 1995, modernised the standards for the operation of the Central Bank and removed most restrictions that previously affected private banks, as well as restrictions on foreign exchange operations, contracts in foreign currency and capital transfers. The law expressly states that foreign exchange regulations imposed by the Central Bank may not limit the free convertibility of Costa Rican currency into other currencies.

Regarding the supervisory framework for financial institutions, there are four supervisory agencies with authority over the financial system in Costa Rica:

• the General Superintendence of Financial Institutions (SUGEF);
• the Superintendence of Pension Funds (SUPEN);
• the General Superintendence of Securities (SUGEVAL); and
• the General Superintendence of Insurance (SUGESE).

All of them are independent agencies, although administratively they are still part of the Central Bank. The four supervisory agencies operate under the direction of a superior board, the National Council for the Supervision of the Financial System (CONASSIF).

Recent legislative action

Amendments enacted as part of the country’s accession process to the OECD include:

• Law 9670, enacted in March 2019, strengthens the Central Bank’s independence by making the position of Central Bank president non-removable except for just cause, extending the term of its appointment, and excluding the minister of finance as a voting member of the Central Bank board of directors.

• Law 9724, enacted in September 2019, amends the Law of the National Banking System allowing local branches of foreign banks to operate in the country, with the same rights and obligations as locally incorporated private banks. There are no restrictions on the participation of foreign investors in private banks incorporated in Costa Rica; in fact, most private financial groups are owned by foreign entities. However, local branches were not permitted. The amendment seeks to reduce barriers to entry and increase competition, although it remains to be seen whether the option of setting up a branch will be attractive to other foreign banks potentially interested in entering the local market.
• Law 9746, enacted in October 2019, amends existing banking and securities laws to allow supervisory authorities to share information with other local and foreign authorities, and grants authorities more access to information from clients and beneficial owners of accounts held in financial institutions. It also increases legal protection to high-ranking officers of the Central Bank and financial supervisory authorities, increases the contributions of financial institutions to the budget of such agencies, and introduces new penalties for legal breaches attributable to financial institutions, their officers, and external auditors.
• Law 9768, enacted in November 2019, grants broader powers to supervisory agencies to carry out consolidated supervision of financial conglomerates. A financial conglomerate’s holding company and all its subsidiaries will now be subject to supervision, both individually and on a consolidated basis.
• Law 9816, enacted in February 2020, creates a Deposit Guarantee Fund and introduces new resolution procedures for banks and other financial intermediaries.
  – Regarding the Deposit Guarantee Fund, cash deposits in financial institutions will be insured for up to CRC6m (approximately $10,000 at current exchange rates) per depositor and per financial entity. Only demand and term deposits are covered. Contributions by financial entities and coverage to depositors are expected to start in October 2021. The Deposit Guarantee Fund will be administered by the Central Bank. It should be noted that state-owned banks additionally enjoy a broad and unlimited government guarantee stated in the Organic Law of the National Banking System.
  ​​​​​​​– Regarding bank resolution, the new law provides for a resolution procedure overseen by CONASSIF prior to court insolvency proceedings. The resolution procedure is commenced with a decision by CONASSIF, once SUGEF has determined that a financial institution is not viable. The resolution procedure may combine several options including: (1) the sale of the entity's business, (2) the total or partial transfer of assets and liabilities to another financial institution, bridge entity or trust or special purpose vehicle, and (3) a recapitalisation.

Other regulatory issues

It is expected that these legal reforms will increase financial sector regulations. In fact, several new regulations have been enacted in recent months in connection with the legal amendments mentioned above, including:

• regulations on branches of foreign banks (Acuerdo SUGEF 29-20);
• updated regulations on money laundering control (Acuerdo SUGEF 12-21);
• regulations on the functioning of the Deposit Guarantee Fund (CONASSIF 1640/05); and
• regulations on new financial institution resolution mechanisms (Acuerdo SUGEF 40-21).

In addition, a bill on financial consumer protection was recently submitted to Congress in line with the OECD agenda.

Another key subject in Costa Rica’s accession to the OECD is the modernisation of competition laws. Law 9736, enacted in November 2019, grants more powers and resources to competition authorities and increases fines against cartels and other monopolistic practices, including those in the financial sector. Authorities recently enacted new specific regulations on merger control in the financial sector (Acuerdo SUGEF 41-21).

Regarding Fintech companies, the OECD has recommended opening entry to these companies with appropriate regulation, including granting Fintech start-ups more access to the payments system administered by the Central Bank (OECD Economic Surveys: Costa Rica 2020).

Without a doubt, Costa Rica's accession to the OECD is triggering significant changes in the country's banking and financial sector regulatory framework. Changes might reach the architecture of supervisory agencies, as calls for institutional reform increase in the context of the country’s large fiscal problem, which has worsened as a result of the Covid-19 pandemic.