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Espenilla:  The shape of trust regulations to come

(Article published in the Apr 9, 2008 issue of Manila Standard Today)  

For those in my generation steeped from our youth in the myth of freedom from state interference with one’s private affairs, “regulation” is, despite the clear counting error, a four-letter word.  Regulation, according to our sophomoric creed, is per se a sort of mark of Cain, a public reminder of a basic societal flaw.  Many decades, however, have passed since those days when we had the solution to all the world’s problems, and today, we are in, these later days of shrinking zones of privacy, a retiring, if not a disappearing breed. 

        Grudgingly, at least on my part, we concede that today’s leaders, both in the private and public sectors, take the need for and benefit of government regulation for granted (and in many specific instances, I again grudgingly concede, rightly so).  It was not surprise therefore that it was to a listening  and not just hearing audience that BSP Deputy Governor Nestor A. Espenilla, Jr. delivered his keynote address on “SUSTAINING MARKET CONFIDENCE: TRUST INDUSTRY CHALLENGE.”

Espenilla hurled his challenge to the lead players of the trust industry on the occasion of the first General Membership Meeting of the Trust Officers Association of the Philippines (TOA) held at Hotel Intercontinental Manila in the evening of 31 March 2008.  Coincidentally, their bosses at the Bankers Association of the Philippines were meeting at about the same time at Makati City’s Shangri-la Hotel, less a few steps away pondering on how to meet a challenge of a different kind. Someday, I hope to be able to express my views on that challenge after the dust has cleared and the bodies are counted.

Espenilla noted that assets under the management of the trust industry went over one trillion pesos last year.  This impressive, if not critical, mass was achieved after a period of steady climb, marked only by slight dip in 2006, over the last ten years. (Details of the trust industry’s growth may be downloaded from the TOAP’s website, www.toap.org.ph.)  In contrast, when I started my specialization in that field at Far East Bank and Trust Company more than 37 years ago, trust assets over one billion was an impossible dream. 
 










     

Having amassed such placing power in its hands, the trust industry now rightfully occupies a place in the country’s financial sector sun and, necessarily, owns a spot in the banking regulator’s radar screen.  TOAP’s general membership meeting was thus a timely opportunity for the regulator and the regulated to bare their cards.

Transparent as always, Espenilla gave the industry a glimpse of what were in BSP’s drawing board, mostly driven by the industry’s unprecedented reach, breadth and depth. As expected, the measures unveiled were all in the continuum of reforms being undertaken by the BSP under the thrust of modernization mandated under its charter and the complementary revisions of the banking laws, primarily the General Banking Law. 

Coming at the heels of (a) direct trust department access to the Special Deposit Account set-up accepted by the BSP as part of its liquidity management tools; (b) calibrated foreign exchange liberalization, notably enabling trust institutions to seek BSP authorization to invest abroad over the US$30 million permitted to individuals; (c) licensed activities in derivatives; and (d) adoption of investor protection principles and practices of client suitability, transparency, and disclosure, the reforms to be put in place are understandably cut from the same cloth.

The foremost of these coming reforms is directed at keeping the market players fit and trim.  The BSP, says Espenilla, will soon be adopting of basic standards on trust administration and risk management guidelines.  These will put flesh into the Prudent Man Rule articulated generally in Section 80 of the General Banking Law, requiring a trust entity (the new name for a trust corporation and trust department of a bank) to “administer the funds or property under its custody with the diligence that a prudent man would exercise in the conduct of an enterprise of a like character and with similar aims.”

A close second addresses the concern of the market goer’s protection. The monetary authority’s market-driven thinking on this issue, in sharp contrast with the control attitude that is common to  other regulators in general, is vintage BSP. The BSP is considering and in many cases will likely accept favorably many of TOAP’s suggestions on the marketing, operation, and governance of the Unitized Investment Trust Funds (UITFs).  For most individuals just graduating in financial sophistication from deposit-type of savings vehicles and still unprepared to battle it out by themselves in the risk-laden game of investments, the UITF, with its singular characteristic of fiduciary underpinnings, is perhaps the most logical collective investment outlet.  Predictably, therefore, in this area, the regulatory stance, I believe, would be similar to holding the string when flying a kite: not pulling too hard as to either break it or force the kite to dive to the ground; at the same time not giving too slack as to lose the lifting energy of the wind.

The third category of reforms intends to keep the market place clean.  A new financial reporting package, consonant with the adoption of international accounting standards, will be put in place. “The requisite increased transparency in reporting of financial condition and performance of trust operations of banks and financial institutions,” Espenilla hopes, “will further stimulate corporate governance within the industry.” 

          Finally, the regulator itself is reforming itself.  To remove subjectivity in the assessments of its constituency of trust entities, the BSP is set to roll-out a new trust rating system, similar to the CAMELS rating applied to banks.  The objective is to set up an objective and a structured framework, internally at the BSP, for assessing the comparative performance of trust entities, as distinguished from the bank proper, given their special fiduciary responsibilities.

Capping his keynote remarks, Espenilla had commendations for TOAP. Says Espenilla, “As I close, I would like to take this opportunity to commend the TOAP for collaboratively partnering with the BSP.  Instituting reforms are always difficult endeavors.    We both aspire for the same goal - building a healthy financial system that creates opportunities for all.  Together we make the task manageable. Hand in hand, let us continue promoting the development of our financial system, sustaining market confidence through improved quality and variety of financial services, and bringing the trust industry to greater heights.  We remain confident of the bright future ahead of our domestic capital market.”

          About 99 percent of Espenilla’s audience were young turks who will undoubtedly lead the trust industry in the next five years (I dare predict) to its next trillion pesos in assets managed; the 1 percent were those who were their counterparts in TOAP’s early years and thanks to genetics and modern medicine are still standing.  Among the latter was Atty. Lauro “Larry” Jocson, still present on the ground, listening to what is happening, and despite a light forward lean, actually hearing what is being said.  Also, observing, I am certain, but up there in a celestial address where there are no investment losses nor client complaints, was Victorio “Terry” Gomez, of what was then known as the SolidBank. He lead the group that laid the foundations of the trust industry current moorings.

To the two of them, after Espenilla and his young audience had filed home, I silently raised at the Hotel Intercontinental’s Gambrinus (or was it Le Boulevaider?), a glass dutifully paid for by trust middle aged stalwarts, Ador Abrogena and Noli Enumerable, (or, maybe they paid for my two shots, I can’t remember now), of single malt from the highlands of a faraway region where golf and trust once began.
 

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