Anotherlookattrustcorporations

http://www.bworldonline.com/content.php?section=Economy&title=anotherlookat
trustcorporations&id=111830

SuitsTheCSuiteMiguelU.Ballelos,Jr.
PostedonJuly20,2015

(Part1of2)
InJune,theMonetaryBoardapprovedthenewguidelinesontheestablishmentand
operations of standalone trust corporations in the Philippines. While a new circular
containing the said guidelines has not yet been released by the Bangko Sentral ng
Pilipinas (BSP), the guidelines are not entirely new as the BSP published rules and
regulationsgoverningtrustcorporationsinJanuary2011throughBSPCircularNo.710.
TheissuanceispartoftheBSPsinitiativestowardsliberalizationandcapitalmarket
reform.

Thepreviousguidelinesdefineatrustcorporationasanentitywhichbasicallyperforms
thesamefunctionsofatrustdepartmentofabank(orofanonbankfinancialinstitution
with a trust license). It can engage in trust or other fiduciary business, investment
managementactivities,actastrusteeoradministeranytrustorholdpropertyintrustor
on deposit for the use and benefit of others, and/or act as a financial consultant,
investmentadviserorportfoliomanager.

However,atrustcorporationisaseparatelyincorporatedentity.Accordingly,anonbank
entity,suchasaninsurancefirmormutualfundcompany,cannowestablishandoperate
atrustentity,subjecttotheapprovaloftheMonetaryBoardandincompliancewiththe
requirementsofBSPCircularNo.710.

Banksandnonbankfinancialinstitutionsmaycontinuetoconducttheirtrustbusiness
throughtheirexistingtrustdepartmentsortheymayspinofftheirtrustoperationsintoa
standalone trust corporation, which can be their subsidiary or affiliate. The rules
reiterate,howeverthataninvestingfinancialinstitutioncannotengageinatrustbusiness
usingbothchannels,topreventanypotentialabuse.

Certainly,therearepotentialincentivesforbanksornonbankfinancialinstitutions(quasi
banks)toestablishtrustcorporationsthatareseparateentities.Herearesomeofthese
incentives.

Forone,theassetsofthetrustcorporationdonotformpartoftherelevantexposuresof
thebankorquasibankforpurposesofcalculatingtheSingleBorrowersLimit(SBL)as
well as the ceilings foraccommodations todirectors, officers, stockholders andtheir
relatedinterests(DOSRI).Thisisbecause,asaseparateentity,thecreditrelatedrisks
relatedtotheSBLandDOSRIlimitsarenolongercarriedbythebank/quasibank,but
arebornebytheinvestorswhoplacedtheirinvestmentsinthetrustcorporation.
Inaddition,trustcorporationsaresubjecttolowersupervisionfees.Currently,allbanks
(except for rural and cooperative banks) and quasibanks are assessed an annual
supervisionfeeof1/28of1%ontheaverageassessableassetsoftheprecedingyear,
whichincludestheirrespectivetrustdepartmentaccounts.Meanwhile,atrustcorporation
issubjecttoanannualsupervisionfeeof1/32of1%ontheaveragemonthlybalanceof
its assets under management. The potential cost savings may entice banks with
particularlylargetrustbusinessportfoliostoconsideraspinoffofitstrustoperationstoa
standalonetrustentity.

Tofurtherspurinterestintheestablishmentoftrustcorporations,theMonetaryBoard
adjustedtheminimumcapitalizationrequirements.Previously,atrustcorporationwas
requiredtoputupaminimumpaidincapitalofP300millionatinception.Thenew
guidelineshavereducedthistoP100millionatinception,butiscoupledwithafiveyear
transitionperiodwithinwhichthetrustcorporationshouldeventuallyincreaseitscapital
toP300million.Theloweringoftheminimumcapitalrequirementsisnotonlyintended
forbanks,butalsoforothermarketentrantswhodesiretoengageinthetrustbusinessbut
findthepreviousP300millionrequirementtoorestrictive.

ThenewguidelinesalsoprovidethattheexistingTrustRatingSystem,whichisusedby
the BSP to comprehensively and consistently evaluate the performance and
administration of the fiduciary activities of trust entities, will be revised to include
capital adequacy in assessing trust corporations. The key factors that are currently
takenintoconsiderationbytheTrustRatingSystempertaintomanagerialcapability,
operationalcapacity,compliance,assetmanagementpractices,andearningsperformance.
Since a trust corporation has a capital structure which is separate from its parent
bank/quasibank, maintaining an adequate capital base is critical to sustaining its
operations.

Allinall,theBSPexpectsthatthesenewguidelineswillattractmoreplayerstothe
market,whichmayresultinmoreinnovativetrustproductsandservices beingmade
availabletotheinvestingpublic.

Banks and quasibanks are thereby encouraged to take a closer look at the potential
impactofthenewsetofguidelinestotheirexistingtrustbusinesses,asitcanpresentboth
an opportunity and a challenge in the current business environment. There is an
opportunityforbanksandquasibankstorevisittheircurrentorganizationalstructureand
decidewhethermaintainingtheirtrustactivitiesinatrustdepartmentorthroughastand
alone trust corporation is more efficient in achieving its goals. The new challenge,
however,istofigureouthowbankscancopewiththeperceivedincreaseincompetition,
especially from nonbanks, as these entities may present different perspectives and
strategiesonhowtotapintoinstitutionalassetsinthelocalcapitalmarket.

In our next installment we will look into other considerations relating to the
establishmentoftrustcorporations,suchascertainaspectsofregulatoryreportingand
compliance. We will also explore further on the potential implications of these
regulationstotheinvestingpublic.

MiguelU.Ballelos,Jr.isaPartnerofSGV&Co.

Anotherlookattrustcorporations
SUITSTHECSUITEByMiguelU.Ballelos,Jr.
BusinessWorld(08/03/2015p.S1/5)
(Secondoftwoparts)

In our July 13, 2015 column, we looked at some of the general features of a trust
corporation,aswellassomeoftherecentchangesthatwereintroducedbytheBangko
SentralngPilipinas(BSP)ontherequirementsunderBSPCircularNo.710.Wenow
continuewithotherconsiderationsrelatingtotheestablishmentoftrustcorporations.

A critical aspect of conducting a trust business is the reserve requirement. A bank

operatingatrustbusinessisrequiredtodepositwiththeBSP,asabasicsecuritydeposit,
eligiblesecuritiesequivalenttoatleast1%ofthebookvalueofthetotalvolumeoftrust
assets.AtnotimeshouldthebasicsecuritydepositbelessthanP500,000.Ontheother
hand,wherethetrustbusinessissetupinatrustcorporation,thereserverequirementis
morestringent,becausetherequiredbasicsecuritydepositshouldbeequivalenttothe
required minimum paidin capital which is currently at P300 million. However, as
mentioned inourprevious column,following approvedchanges tothe rules ontrust
corporations,theP300millionrequiredminimumpaidincapitalforatrustcorporation
willbereducedtoP100million.

Forbanks,additionalreservestobeplacedwiththeBSParerequiredforcertaintypesof
trustproducts,suchaspesodenominatedcommontrustfunds(CTFs),aswellastrustand
otherfiduciaryaccounts(TOFAs).Banksarealsomandatedtoappropriateatleast10%
oftheirprofitsfromthetrustbusinesstosurplusreserves,untilsuchsurplusreservesfor
thetrustbusinessequal20%ofthebanksauthorizedcapitalstock.However,underBSP
CircularNo.710,theseadditionalreservesandrequiredsurplusesarenotstatedfortrust
corporations.Whileitcanbeconstruedthattheserequirementsmaynotapplytotrust
corporations,thiswillbegivenmoreclaritywhenanupdatedcircularisreleasedbythe
BSP.

Thereserverequirementsfortrustentitiesareinplacetoensurethefaithfulperformance
ofthetrustentityofitstrust,otherfiduciarybusinessand/orinvestmentmanagement
activities.Accordingly,itisessentialforatrustentity(whetheritbeadepartmentwithin
abankorastandalonetrustcorporation)toensureitsabilitytocomplywiththerequired
reserves,notonlyuponinitialsetupbutthroughoutitsoperations.

Regulatoryreportingisanotherareathatneedstobeconsidered.Currently,trustunitsof
banksandquasibankssubmittheauditedfinancialstatementsofthefundstheymanage
andotherreportstotheBSP.Forastandalonetrustcorporation,however,inadditionto
theBSPreports,theentitymayneedtocomplywiththereportorialrequirementsofthe
SecuritiesandExchangeCommission(SEC)andtheBureauofInternalRevenue(BIR).
Note, though, that the Regulatory Accounting Principles of the BSP differ in some
respectsfromthePhilippineFinancialReportingStandardsadoptedbytheSEC.With
regardtotheBIR,thetaxregimeunderwhichatrustcorporationwillbeclassifiedmay
resultinadditionalformsandreportsthatitwillberequiredtosubmit.

Finally,anotherimportantaspectwhichdrivesatrustbusinessisthedistributionchannel.
Distributionchannelsarethemeansbywhichtheentityisabletomakeitsfinancial
servicesavailabletothecustomer.Themoretraditionaldistributionchannelfortrust
departments is its network of branches, where a designated customer service
representative is on site and can engage potential investors in discussions about the
available financial products and services. In this regard, financial institutions with
establishedbranchnetworkshavetheadvantageovernewentrants,astheycanmaximize
thepointsofcontactwiththecustomerthroughthebranches.

Nonetheless, indirect channels such as brokers and financial intermediaries may also
providetrustbusinesseswiththeabilitytoreachouttothemarket,whichcanbeobserved
inthesaleofinsuranceorfinancialinvestmentproducts.Furthermore,onlinedistribution
channels(throughmobilephones)provideanotheropportunityfornewplayerswithlittle
or no available direct distribution channels to compete for market share in the trust
business.

Clearly,thereareprosandconsthatneedtobeexaminedforthesetwobusinessmodels.
Todate,banksandquasibankswithtrustlicensesgrantedbytheBSPhavemaintained
theiroperationswithintheirrespectivetrustdepartments,butwiththerecentchanges,the
BSPaimstoreviveinterestintheestablishmentoftrustcorporations.Theunderlying
foundationforasuccessfultrustbusinessisfidelityinprovidingitsservices.Asthename
implies,investorsdealwithatrustentityonthebasisoftrustthattheentitywillbe
abletogrowtheinvestorswealthandinvestmentsthroughsoundfinancialknowledge
and capability. If the recent rules and regulations on trust corporations achieve the
objectiveofincreasingmarketplayersandcompetitioninthelocalcapitalmarket,thenit
willbetheinvestingpublicthatbenefitsinthelongrun.Theincreaseincompetitioncan
resultinmoreinnovativeproductsorservices,orintheformoflowerservicefees.Banks
willalsocontinuouslylooktoimprovetheirprocessestoensurethattheyareabletomeet
thereserverequirementsandthattheymaximizetheirdistributionchannelseffectively,
theresultingbenefitsofwhichwillbederivedbytheinvestingpublic.

MiguelU.Ballelos,Jr.isaPartnerofSGV&Co.