SEC, BSP agree on joint audit of non-bank financial institutions

The Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas(BSP) have agreed to conduct joint examination of entities they both regulate to ensure an effective and efficient supervision of the financial sector.

Under the proposed memorandum of agreement, the SEC and BSP will conduct joint inspections of non-bank financial institutions (NBFIs) to ensure that regulatory gaps do not occur. This will be an addendum to the memorandum of understanding signed by the BSP and SEC last July, which outlines cooperative arrangements to more efficiently share supervisory responsibilities and information for those entities that fall under the jurisdiction of both agencies.

The move is expected to minimize the cost of supervision and standardize the regulatory and operational reports filed with both the SEC and BSP.

The SEC and BSP have dual control over some areas and activities of investment houses. Investment houses which are subsidiaries or affiliates of banks are under the BSP because of their direct effect on their parent companies. On the other hand, the BSP has no responsibility over investment houses’ securities regulated activities while commercial paper registration and underwriting is left with the SEC.

Under the current system, the examination of a banking group is conducted separately without any coordination by the BSP’s Supervision and Examination Department and the SEC’s Markets Regulation Department.

Based on the proposed procedures, the BSP, at the start of every year, shall furnish SEC its annual program of examination for NBFIs. Upon receipt of notification, the SEC shall, within a reasonable period of time, inform the BSP whether or not it will join the examination. Should the SEC decide not to participate in the examination, it may nonetheless request the BSP to look into certain aspects of operation of the entity to be examined.

The BSP and SEC have also agreed to consult each other on their respective findings, extend technical assistance and provide information which could assist the agency exercising primary jurisdiction over the entity in assessing the risk exposure of the regulated entity and in implementing its mandate of protecting the interests of the investing public.

When a concerned agency discovers that a regulated entity violated the law, rules and regulations implemented by its counterpart agency, the concerned agency shall refer the violation to the counterpart agency for the imposition of the appropriate penalty.

Moreover, the SEC and BSP have agreed to enforce uniformity in the submission of regulatory and operational reports for dually regulated entities by the end of 2004.

The risks of a fragmented regulatory system, particularly the presence of regulatory gaps and absence of coordination between regulatory agencies, became evident with the failure of Urban Bank in 2000.

The failure of Urban Bank was attributed to the problems of its investment house subsidiary, Urbancorp Investments Inc. Urban Bank was one of the smallest commercial banks before it was downgraded to a thrift bank last March 2000 because it was unable to meet the new capitalization requirement.

Urbancorp operated as an investment house without quasi-banking functions and engaged in trust operations. Owing to a significant real estate exposure, the company suffered liquidity problems, forcing its investors to preterminate their holdings.

Urban Bank, in turn, suffered heavy withdrawals due to the loss of public confidence following its downgrade and the pretermination of Urbancorp.’s placements.

Failure to detect problems in Urbancorp has been attributed to some lapse in supervisory oversight, which in turn arose from confusion in the proper assignment of regulatory function over investment houses between the BSP and the SEC.

Noting the string of failures in several investment houses, the BSP has shifted to a coordinated approach and consolidated supervision of banks. It has reorganized its supervision examining sector to upgrade its supervisory capacity given the increasing complexity of the banking groups’ organizational structure and business activities.

The BSP’s efforts to move towards consolidated supervision of banking groups and towards a coordinated approach to supervising financial conglomerates are in line with the core principles identified by the Basle Committee on Banking Supervision in 1997.

The Philippine Institute for Development Studies, the research arm of the National Economic Development Authority (NEDA), said changes should be made in the system of supervision and regulation of the financial sector to effectively monitor corporate frauds or failures.

Apart from Urban Bank, Orient Bank also failed in the aftermath of the Asian crisis as a result of fraud and mismanagement.

The PIDS said the consolidation of the financial sector supervision could be a solution to eliminate gaps in regulatory coverage.