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Investor education is not enough

(Article published in the July 12, 2006 issue of Manila Standard Today)

When the Bangko Sentral ng Pilipinas (BSP) issued nearly two years ago Circular No. 447, it set forth the rules and regulations that were to govern the creation, administration and investment/s of Unitized Investment Trust Funds (UITFs).  The BSP made sure that the funds was marketed to the public by competent personnel knowledgeable in the intricacies involved in the “new” trust service. 

Thus, Circular No. 447 provided:

 “To ensure the competence and integrity of all duly designated UIT marketing personnel, all personnel involved in the sales of these funds shall be required to undergo standardized training program in accordance with the guidelines of this Circular. This training program may be conducted by their respective Trust Entities in accordance with the minimum training program guidelines provided by the Trust Officers Association of the Philippines (‘TOAP’). Such training program shall however be regularly validated by TOAP.”

 Forthwith, the TOAP proceeded, in conjunction with its educational arm, the Trust Institute Foundation of the Philippines (TIFP), to craft a syllabus for the required “standardized training program” and started training the industry’s trainors whose mission was to teach personnel directly involved in the marketing of the UITF.  By the end of 2005, about 197 trainors from 45 trust entities were duly certified.   

 For about 20 months since the issuance of Circular No. 447, the trust entities engaged in a hectic campaign to educate their publics.  A survey of the top 5 trust entities, which account for about 85 to 90 percent of the UITFs in the country,  revealed that they had, a total of 58 trainors who had conducted 159 training sessions for 7,211 bank personnel coming from 1,833 branches and head office units.   Including the cost of various continuing education programs that were also conducted, the estimated cost that the trust industry incurred in educating the investors in UITFs amounted to about Php 9 million.

 And yet, in May of this year, despite all the frenetic investor education that had gone before, we saw what some call the “UITF meltdown”.  The value in the UITFs amounted to about just half it was before.  From nearly Php 279 billion by end of April this year, volume went down to about Php 175 billion in just a month.  What happened?  How come, despite all that surfeit of education, the UITF investor did not seem, to use Peter Lynch’s terminology, to have the stomach for the risk that investing, per se,  necessarily involved?

 I submit neither the UITF marketers nor the UITF investors are to blame were solely responsible for the May withdrawals.  To hold the contrary, in my view, is equivalent to blaming the driving schools and drivers for the traffic mess in Metro Manila.  Education by itself, since the Greeks realized that a state led by the Philisopher-King is no more than dream, cannot save the day for the UITF.

 In addition to Education, the UITF needs, picking up from the idol of my boyhood days who directed daily the noon-time traffic in the busy intersection of Juan Luna and Solis-Tecson (now Vicente Del Fiero) streets in Gagalangin, Tondo,  two more “E”s. Namely, Enforcement and Engineering.  For the UITF to stay afloat, both the public regulator and the private players in the trust industry have to work on the investor’s mind (through incessant education), heart (through even-handed enforcement), and feet (though structures controlling action).

 By enforcement, I mean, insisting that both bank and client play by the rules.  The rules, sad to say, are often broken by the clients themselves.  Too often, banks are “victimized” by their clients.  When their investments turn sour, a number clients have been known to capitalize on the aversion that banks have for bad publicity to force a settlement.  It does not help that mass media usually takes the side of the investor against the bank who is invariably portrayed as having anyway, deep pockets.  Those pockets, by implication, are for the picking of the aggressive.  Forgotten is the fact that the money inside really belongs to depositors, not the owners of the bank.

  I submit that regulators ought to be permitted to lay down all the legitimate requirements they could think of as necessary to protect the unwary public.  The whole slew of measures can range from full disclosure to sworn certifications of compliance by the top executive; from close supervision to speedy disposition of administrative complaints. 

 However, once a bank complies with the regulators’ requirements, particularly if the annual regular examination of banks yielded no negative findings, or, if after the findings have been satisfactorily remedied, then the bank should be made immune from all attempts to harass or embarrass it through the media or, even, or congressional and/or senate investigations purportedly done in aid of legislation.

In other words, I suggest that, like St. Thomas More’s England as portrayed in Robert Bolt’s “Man for All Seasons”, the UITF terrain be “planted thick with laws, from coast to coast”, provided that, as in English Theater, he, whether bank or client, who complies with them, could rest assured of being the safest man in the realm.  There ought to be no room by cry-baby investors or sloppy bank service.

 To assist the holy fear of the lord that such strict enforcement instills, there needs to be also proper engineering.  Not the irritating and mindless “no left turns” and road obstructions for the “U-Turn slots” that characterize Bayani Fernando’s management of the flow of traffic on Katipunan road in the Loyola Heights area, but the likes of the Skyway to the South Luzon Express Way.  Albeit too short a stretch as it is now, the Skyway nevertheless gives safe, fast, and reliable access to the southern artery that by-passes the blood-draining traffic below at the Bicutan and Muntinlupa interchanges.

 Trust entities operating UITFs need a similar structure that will give them direct access to liquidity, by-passing the desks of money market dealers.  They should be permitted, for instance, to directly participate in the Philippine Dealing and Exchange Corporation (PDEX), which was recently granted the status of a self-regulating organization (SRO) by the Securities and Exchange Commission (SEC).  With such access, they need not beg their colleagues at the Treasury to either buy or sell their government securities holdings at the price that the latter may wish to dictate.

 Under the Over The Counter Rules now under consideration by the Securities, trust entities ought to have no problems proving themselves as “qualified investors”.  After all, as managers of trusts, they are expected to have, and the BSP ensures that they actually have, the necessary financial sophistication, knowledge, and experience in financial and business matters (Sec. 10. 1(l), Securities Regulation Code) to transact in the exchange without the handholding and protection that a dealer is expected to give its customers.  For this reason, in countries more progressive than ours, trust entities are considered as “professionals” who can hold their own against the dealers in the rough and tough life at the financial exchanges.

 The problem is, soon to be resolved I understood, is that the SEC has not yet to approve the OTC Rules.  Hence, as with a newly-constructed road lying idle, there is still a “Do Not Enter” sign at the UITF’s route to the PDEX.  And everyone is waiting for the cement, in due time, to cure in the sun. 

 Education, alone, will not make the Philippine investor with trusts holding UITF units mature.  But, with enforcement and engineering, there is a big chance he will quickly grow in wisdom and age and thus fully appreciate the benefits of his trustee investing some of his funds in its UITFs.