Mexico: Law on transparency, prevention and measures against misconducts in advertising procurement
On April 30, 2021, the Mexican Chamber of Senators and Deputies passed the Law on “Transparency, Prevention and Measures Against Misconducts in Advertising Procurement”, with 339 votes in favor, 92 against and nine abstentions. The advertising industry has not responded favorably to the passage of this law. On May 3, 2021 the Expansion website reported that the Alliance for the Strategic Value of Brands (AVE - the association that brings together agencies and consultancies in the sector), the Association of Latin American Internet (ALAI), the Internet MX Association and the International Chamber of Commerce, released the following statement critical of the law "This bill is born from ignorance and the ignorance of the senators who propose it”. As reported in Expansion, this group of trade associations also believed the law would lead to decreased inovation in the industry and make the industry a less attractive place to work.
Although this law is a good step towards improving transparency in the Mexican market, FirmDecisions believes there are still actions that advertisers can proactively take to ensure that loopholes cannot be circumvented.
Background in the Mexican market
The argument sent to Congress is based on the lack of clear regulations in the advertising market. In general, advertising agencies are double paid for their services, once by their client and second by the media supplier in which the client’s advertising is placed. Many clients are unaware of their agency’s conflict of interest let alone the scope of the fees paid to their agency by the media suppliers.
Undoubtedly, the most popular case in the last few years related to this conflict is the Tourist Promotion Council of Mexico (Consejo de Promoción Turística de México- CPTM). In September 2019, the Head of the Financial Intelligence Department (Unidad de Inteligencia Financiera UIF) and the Head of the Secretariat of Finance and Credit Public (Secretaría de Hacienda y Crédito Público SHCP), filed a complaint for alleged diversion of resources to the CPTM (which no longer exists), a major advertiser in the Mexican market. Local authorities detected anomalies in the fund’s management of the CPTM, in particular, “superfluous payments” and public funds diverted to private accounts or companies located overseas for more than 96 million Mexican pesos (US$4.8MM).
Main points of the law
Key components of the law are the following:
- Agencies will not be able to buy media to resell them afterwards to advertisers;
- Agencies will only be able to buy media space ordered by the advertiser;
- Agencies can only receive compensation that has previously been agreed with advertisers;
- All discounts made by the media supplier to the agency will be given to the advertiser;
- Neither agencies nor hired third parties can receive compensation, commission, or economic benefit from a media supplier;
- Agencies which provide services to an advertiser cannot provide services to a media supplier at the same time;
- Media suppliers have to issue invoices directly to advertisers and not to agencies, although invoices may be paid by agencies.;
- Media suppliers have to comply with transparency obligations with advertisers: dates and location of the campaign, advertising format, price per unit and fees including any discount offered by the media supplier;
- Agencies will inform the identity of advertisers to the media supplier as soon as possible;
- Agencies will submit a detailed report to advertisers the month following the airing/publication of the advertising;
- Agencies will inform advertisers about their financial relations with the media supplier.
Penalties for noncompliance
The law foresees sanctions for noncompliance, equivalent to fines of 2% of the annual income to:
- The advertiser or agency that does not enter into a contract under the terms of the Law;
- The media supplier that does not send the invoice and complementary information directly to the advertiser;
- The agency that does not deliver the information established in this Law.
In addition, the Law sets fines of 4% of the annual income to:
- The agency that purchases advertising space to subsequently resell to an advertiser;
- The agency that recommends to an advertiser, or hires on behalf of or by order of a media supplier with which it has financial relations, if the agency deliberately communicates to the advertiser false or distorted information on the features of the mentioned media supplier or possible media suppliers;
- The agency, that acting on behalf and by order of an advertiser, receives remuneration, commission or benefit of any kind from any person different from said advertiser;
- The media supplier that pays remuneration, commission or benefit of any kind to an agency acting on behalf of, and ordered by an advertiser or third party used by the agency, for the provision of services to the advertiser, and;
- The agency that provides services directly to a media supplier in terms contrary to regulations of Section 5 of this Law;
- In case of recurrence, the fine imposed could be twice the amount indicated in this section.
Territoriality - Residency
The law applies to advertisers located in Mexico and advertising placed in Mexico media. Not discussed are pan-regional buys managed by an agency in a different country where it is common, be they for Pay TV or programmatic digital, that they are subject to agency volume rebates/benefits.
Also still undecided is how COFECE, the Mexican anti-trust commission charged with supervising, promoting, and guaranteeing free access and competition in the markets, will implement and enforce the law.
FirmDecisions believes that the Law includes many of the transparency requirements featured in multinational advertiser agreements with their Mexican agencies. The law does not recognize however, the significance that the agency’s local parent company plays in Mexico. The law is toothless in the case where the agency is the signatory to the client agreement and the agency’s parent company has media benefits’ relationships with the media suppliers. Essentially, the agency’s parent company can receive media benefits for placements made by the agency and still be in compliance with the new law.
The following recommendations provide advertisers with increased assurance that, in addition to the new law, transparency is at the heart of the advertiser/agency contractual relationship:
- Establish a local agreement which requires compliance with local law;
- Require the agency´s local parent company be a signatory to the local agreement;
- The local agreement should hold agency affiliated companies, working on the account, to the same transparency standards as the agency itself;
- Incorporate a conflict of interest clause in the local agreement. The COI clause should require the agency, its affiliates and local parent, to disclose any conflict of interest with managing the client’s marketing activities.