In line with the thrust of the BSP to implement regulatory reforms geared towards an effective risk-focused supervision, the Monetary Board, in its meeting held on 23 May 2013, approved the adoption of the revised Trust Rating System, an assessment tool to comprehensively and uniformly evaluate the administration of fiduciary activities of all trust entities1 .
The Trust Rating System is one of the several assessment tools developed to complement BSP’s on-site examination. Similar tools were developed earlier to assess compliance with anti-money laundering rules as well as the quality of corporate governance in banks and other supervised institutions. Just this month, the BSP adopted the Compliance Rating System which will be used to evaluate the effectiveness of the compliance system in mitigating business risk of a bank and other supervised institutions.
The Trust Rating System was first adopted in 2008. However, there was a need to re-calibrate the rating system to remain effective in assessing the risk management practices of trust entities in light of the evolving sophistication and complexities of fiduciary activities. The revisions include, among others: a shift from a 5-point to a 4-point rating scale, incorporation of relevant regulatory issuance after the adoption of the Trust Rating System, integration of the risk assessment framework, and imposition of enforcement actions based on existing regulations.
The revised Trust Rating System takes into consideration key factors essential in the operations of a trust entity and at the same time evaluates risk management practices and capability to handle relevant exposures in its fiduciary dealings. Under this rating system, the BSP endeavors to ensure that all trust entities are evaluated in a comprehensive and consistent manner, and that proper supervisory attention is focused on those engaging in fiduciary business that are not consistent with sound fiduciary principles.
Trust entities will be assigned a composite rating based on the evaluation and assessment of five essential components of an institution's fiduciary activities: 1) Capability of board of directors, trust committee and senior management responsible in the administration of fiduciary business; 2) Soundness of operations, controls and audits; 3) Adequacy of compliance with governing instruments, applicable laws, rules and regulations and sound fiduciary principles; 4) Prudent management of fiduciary assets; and 5) Earnings performance.
Composite and component ratings are assigned based on a numerical scale of 1 to 4. A rating of “4” indicates strongest performance and risk management practices, and the least degree of supervisory concern. On the other hand, a rating of “1” indicates the weakest performance and risk management practices and, therefore, warrants the highest degree of supervisory attention. Although the composite rating bears a close relationship to each component ratings assigned, it is not derived by computing an arithmetic average of the component ratings. Similar with the other assessment tools, the BSP shall assess which areas place the greatest impact on safety and soundness of the trust entity. Enforcement actions to be imposed on institutions will be based on existing regulations and are directed to address the underlying causes of the weaknesses/deficiencies and violations of BSP rules and regulations.
The revised Trust Rating System will be adopted in examinations commencing 1 July 2013.
1 A bank or a non-bank financial institution, through its specifically designated business unit, to perform trust functions authorized by the BSP to engage in trust and other fiduciary business under Section 79 of R. A. No. 8791 (the General Banking Law of 2000) or to perform investment management services under Section 53 of R. A. No. 8791