(Article published in the Apr 30, 2008
issue of Manila Standard Today)
Even after many years of having left the stratospheric lectern of Philosophy and living amidst the grimy ground of Law, I am unable to shake off my collegiate fascination for Hegelian dialectics. That is my best characterization of the dynamics that account for the state of the trust industry at this time as the torch passes from past president Marily de Vera of the Banco De Oro Universal Bank to incumbent Raul Diaz of the Philippine Bank of Communications.
Bangko Sentral ng Pilipinas Deputy Governor Nesting Espenilla sums up the ascent and the synthesis thus:
“The trust industry has steadily scaled new heights. From a single trust entity then, we now have about 47 active players in the industry. From basic and “pure” trust services, we find the trust practitioners offering their expertise through a wide array of services and wealth management products to the public.
The year 2007 was a milestone for the trust industry as assets under management crossed the 1 trillion peso mark. This now represents almost a third of total on-balance sheet deposits.”
The record of the De Vera
years, 2006 and 2007 when Marily was TOAP’s president, speaks of the dynamic
interplay of thesis and antithesis between the regulator and the regulated,
both playing roles alternately at various stages of the progression. The
current of regulations relating to the Unit Investment Trust Fund (UITF),
which is the trust industry’s prime mass product today, represents the
present, though obviously not for long, synthesis.
This month of April two years ago, the assets managed by the trust industry in UITFs was nearly Php 279 billion. Then the hot summer sun bore down on the industry, precipitating what was then labeled as the “UITF meltdown”. The value of UITF assets by the end of May dropped to barely Php 175 billion. The heat was caused by a number of factors, primarily the depressing impact of the rise in interest rates on the UITFs marked-to-market assets, but like the summer, it too, the trust industry maintained, shall eventually pass.
What the UITF needed was access to the cooling waters from BSP’s ever flowing well. In order words, ability to directly place funds with the BSP’s special deposit accounts, a facility that was opened by the monetary authority to serve as one of its tools in controlling the country’s money in circulation. Not that that window was closed to trust funds. Trust departments had been able ever since to course their placement through their own banks’ money market desks. But that entailed some friction costs, particularly from desks that had their own profit targets to me, and the friction, in the summer of '06, added to the heat.
The natural bureaucratic response to this request is negative. After all, funds held in trust are for practical purposes not belonging to the banks. Why should their owners have the facility open to banks?
But after a year of ardent advocacy and persistent persuasion, TOAP was able to convince the BSP that, indeed, giving trust departments a direct line was better than forcing them to go through the trunk line. In a sense trust funds are bank funds, because trustee banks are the legal their owners.
Thus, on 08 May 2007, DepGov Nesting Espenilla issued a memorandum (M-2007-011) informing the trust departments under his supervision, and all of them are, that they may henceforth directly access the special deposit account facility therefore opened by the BSP to the bank’s treasurers, and issued guidelines to implement the enabling Monetary Board Resolutions No. 433, dated April 19, and 518, dated 03 May. As a by-product, BSP gained a better tool to read the money pulse with its fingers directly holding the trust industry’s hand
But the SDA was, like any ordinary bank deposit, subject to the ubiquitous 20% final withholding tax that many trust accounts pay as a matter of course. Since a number of trust accounts, particularly qualified retirement plans, were, however, income tax exempt, TOAP had to take a step towards a special arrangement for them. Back it went to the BSP.
Again, the knee-jerk reaction ought to be “no”. But the BSP was sympathetic to its constituency. Addressing the industry’s concern, and at the same time being able to titrate even more finely the money flow, Gov. Amando Tetangco, Jr. issued M-2007-038 in November of last year. He finely tuned the manner of placing funds trust funds with the SDA and announced the guidelines on how tax exempt entities funds could be identified thereby keeping their income free from the final and withholding tax of 20%. That measure, incidentally, enabled the BSP to cast a wider net on the money supply.
The proposing and giving-in, however, was not a one way street. On 08 January of this year, the BSP issued major revisions to its regulations on UITFs, all geared towards greater investor protection, by requiring UITFs to make clearer disclosures and adopt more customer-related processes. Under Circular 593, the underlying plan that governs the investment of a UITF must expressly disclose its orientation in its brand or product name as a money market fund, or an equity fund or a balanced fund.
Plan rules are to disclose both the general and specific risks that the investor faces when getting into the fund. No longer sufficient though still required are, among others, the usual advisories that, like any investment, the values of one’s holdings may go up or go down for any particular period and that previous record is not a guarantee of future performance. The dangers of losing (or winning) specific to the type of fund an investor is buying into are to be told to in greater detail and in plain language, please.
In addition, the trustee is required to apply a suitability test for every client to whom a fund is offered or explained. At the minimum, the trustee must determine the financial sophistication of the client and tell him of such assessment. It may not be flattering to the client; but at least, he is told objectively what his strengths and weaknesses are as an investor. The process is a continuing one: clients are told to inform the trustee of circumstances occurring after he had made the investment that would enable the trustee to update
The normal reaction of the industry ought to have been outright refusal. After all, among other reasons, a more enlightened clientele is more demanding.
But the trust industry took Circular 593 in stride, neither missing a beat nor singing off key. The new rules did not hit them like a lightning bolt in a clear sky. It was preceded by hours of meetings, open discussions, and frank exchange of views. This resulted in agreement in the ends and in the means.
I have no doubts that the Diaz board will maintain this dynamic cooperation with the BSP. Five members of last year’s board are also in this year’s. The body of trust practitioners, flowing like a river with natural attrition taking out some and normal growth bringing in others, remains the same.
More important, the music both the BSP and TOAP hear is not that of the BSP alone or of the TOAP exclusively. In fact, both step to the beat of the same drummer out there, as each one pursues the same objective of, as articulated by Nesting, “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.”
Like dancers performing on stage, BSP and TOAP move not for themselves, but for the very same ones whom they serve.