Wednesday, September 30, 2015

More incentives for stand-alone trust corporations

In an effort to encourage more banks to spin off their trust operations, thereby allowing Bangko Sentral ng Pilipinas (BSP) to better supervise the activities of trust entities, the Monetary Board issued BSP Circular No. 884 on July 22 concerning the guidelines on the establishment and operation of trust corporations. The new circular aims to increase the competition in the asset management business by introducing provisions authorizing foreign entities to purchase, own or acquire voting stocks of trust corporations.

Trust corporations essentially performs the same functions as the trust departments of banks by engaging in trust, other fiduciary business and investment management activities, as trustee. These are stock corporations authorized to administer any trust or hold property in trust or on deposit for the use and benefit of others, and/or act as a financial consultant, investment adviser or portfolio manager.

While as early as 2011, the BSP allowed the establishment of stand-alone trust corporations by banks and non-bank entities through BSP Circular No. 710, the July 22 BSP report on entities with trust authority shows that banks continue to manage trust operations through their trust departments. Based on the report, the BSP has granted authority to engage in trust business to 40 banks compared to just seven non-bank financial intermediaries.

The new circular does not prohibit banks to continue conducting its trust operations through its departments, but it provides incentives and relaxed some rules in a bid to address the reservations of banks and non-bank entities in establishing stand-alone trust corporations.

For instance, under the new circular, the Monetary Board may now authorize foreign banks and regulated non-bank foreign entities engaged in finance, asset management and other similar activities acceptable to the BSP to purchase, own or invest in up to 100% of the voting stock of stand-alone trust corporations. However, only qualified foreign banks and regulated non-bank entities may acquire more than 40% of the voting stock of trust corporations. Further, only widely-owned and publicly listed foreign banks and regulated non-bank foreign entities may acquire controlling interest in trust corporations.

Meanwhile, individuals and non-regulated corporations are allowed to invest in up to 40% of the voting stock of a trust corporation. But in case of foreign individuals and non-regulated foreign corporations, their investments are subject to an aggregate ceiling of 40% of the trust corporation’s total outstanding voting stock.

BSP Circular No. 884 likewise relaxed the rules on minimum capital requirements of trust corporations. They are now allowed to have an initial paid-in capital of only P100 million at the time of incorporation compared to the P300 million required capital under the old circular. They are given a five-year transition period to increase their capital to P300 million which is expected to give trust corporations enough time to expand its operations and afford the higher capital requirement.

Another incentive under the new circular is the reduction of the basic security deposit requirement to not less than P500,000 or 0.03% to 0.2% of the book value of the assets under management, whichever is higher, depending on the trust rating of the trust corporation. Prior to the issuance of this circular, trust corporations are required to deposit with the BSP eligible government securities for the faithful performance of its activities equivalent to the required capital of the trust corporation or at least P300 million, significantly reducing the resources it could use in the trust operations.

The BSP circular also introduced a new provision which permits trust corporations to establish branches and marketing offices upon prior approval of the Monetary Board. Although these entities are only allowed to carry out its trust and other fiduciary operations in its principal place of business as specified in its articles of incorporation, the branches and marketing offices may promote and present the trust corporation’s products to a wider customer base.

Based on the new guidelines, trust corporations would not be subject to reserve requirements and other credit-related prudential controls applicable to bank operations such as the single borrowers’ limit and limit on loan accommodations to directors, officers, stockholders and their related interests.

Based on the foregoing, the new rules and regulations provided significant incentives and benefits to existing and potential market players. The question is whether these would be enough for BSP to achieve its objectives of attracting more market players, increasing the competition in the trust business and inducing development of new trust products and services for the benefit of the investing public.

Shiree Amor P. Roma is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).

sproma@accralaw.com

source:  Businessworld

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