The Monetary Board approved new guidelines on the establishment and operation of Trust Corporations (TCs). These guidelines effectively update key components of Circular No. 710 issued in January 2011.
TCs are entities that are duly authorized by the BSP to engage in funds management under either a trustor-trustee arrangement or an agency type of agreement. Unlike existing trust units of banks and non-bank financial institutions, however, TCs are organized as a corporation with its own capital and management structure.
“Having an entity primarily performing trust activities that is separate from the bank or NBFI proper has been a prudential policy direction of the BSP, starting from Circular No. 710”, BSP Governor Amando M. Tetangco, Jr. notes. He further points out that “these guidelines not only follow through on that policy direction but further enhances the governance arrangements which should be of value to the clients of a trust corporation”.
Under the new guidelines, the existing Trust Rating System developed by the BSP will be revised to consider “capital adequacy” as an additional component in evaluating the operations of a trust corporation. The Trust Rating System is an assessment tool of the BSP to comprehensively and uniformly evaluate the administration of fiduciary activities of trust entities.
In addition, the duties and responsibilities of the management and staff of TCs have been expanded to highlight the implementation of a sound risk management system as well as corporate governance practices. Likewise, these individuals must possess the qualities and qualification that can assure the performance of trust functions in an expert and professional manner.
Adjustments have also been made with respect to the handling of the minimum capitalization of TCs. From a minimum capitalization of Php100 million at inception, TCs are provided a 5-year transition period within which to increase their capital to Php300 million. This added flexibility recognizes that TCs will build-up their operations during the transition period.
“We appreciate the value of aligning capital growth with the expansion of the operations of TCs up to a desired threshold but we also need to highlight that the high-bar of governance for TCs is in place from the outset”, Governor Tetangco said.
A trust corporation will not be subjected to credit-related prudential controls applicable to bank operations such as the single borrowers’ limit (SBL) and loan accommodations to directors, officers, stockholders and their related interests (DOSRI). To prevent any abuse, the guidelines reiterate the policy that banks and non-bank financial institutions which choose to provide trust services must do so only either through their trust department or through a subsidiary or affiliate trust corporation.
The approved guidelines is a major liberalization initiative of the BSP that increases competition in the asset management business while enhancing governance standards. The establishment of trust corporations is expected to increase market players. At the same time, the investing public can expect to benefit from more innovative trust products and services.