MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) has issued stricter guidelines on related party transactions by ensuring arm’s length transactions in conglomerate- and family-owned banks.
BSP Governor Amando Tetangco Jr. has issued Circular No. 895 laying down the new guidelines strengthening the oversight and control standards for managing related party transactions approved earlier by the central bank’s Monetary Board.
“The BSP recognizes that transactions between and among related parties create financial, commercial and economic benefits to individual institutions and to the entire group where said institutions belong. ln this regard, related party transactions are generally allowed, provided that these are done on an arm’s length basis,” he said in the circular.
According to him, the central bank expects banks, including their non-bank financial subsidiaries and affiliates, to exercise appropriate oversight and implement effective control systems for managing said exposures as these may potentially lead to abuses that are disadvantageous to the bank and its depositors, creditors, fiduciary clients, and other stakeholders.
Under the new rules, higher degree of standards should be applied on transactions between and among the entities within the same group to protect the interest of all stakeholders.
The central bank reiterated that related party transactions are generally allowed for as long as these are done on an arm’s length basis.
The BSP said related party transactions should be conducted in the regular course of business and not undertaken on more favorable economic terms than similar transactions with non-related parties under similar circumstances.
The new guidelines provide that the board of directors should have the overall responsibility in ensuring that transactions with related parties are handled in a sound and prudent manner, with integrity and in compliance with applicable laws and regulations.
The bank regulator added that the board is expected to approve an overarching policy on the handling of related party transactions that should cover the scope of its related party transaction policy, guidelines in ensuring arm’s length terms, management of conflicts of interest, materiality thresholds and limits, whistle blowing mechanisms, and restitution of losses and other remedies for irregular related party transactions.
The new rules require conglomerate-owned banks t to create a related party transaction committee composed of independent directors and non-executive directors, with independent directors comprising majority of the members.
“The said committee shall be responsible for the continuing identification and review of existing relations between and among businesses and counterparties, and for ensuring that related party transactions are processed in the regular course of business, and are priced fairly,” the BSP added.
In addition, the central bank pointed out expectations from the compliance and internal audit functions were set out to strengthen the checks and balances system.
It added the guidelines also endeavor to substantially improve the disclosure and regulatory reporting requirements on related party transactions.
“It is now explicitly required that the annual reports adequately disclose relevant information on the governance of related party transactions and specific details of exposures to related parties,” it said.
The BSP said the new guidelines would apply to all banks including their non-bank financial subsidiaries and affiliates but stand-alone non-bank financial institutions are initially excluded.
The BSP explained the new guidelines were patterned after the principles set out in the Basel Core Principles (BCP) for Effective Banking Supervision issued by the Basel Committee on Banking Supervision (BCBS) as well as the Guide in Fighting Abusive Related Party Transactions in Asia issued by the Organization for Economic Coooperation and Development (OECD).
Taipans and conglomerates control the country’s big banks including BDO Unibank of retail and banking magnate Henry Sy, Metropolitan Bank & Trust Co. of taipan George SK Ty, Ayala-led Bank of the Philippine Islands, Philippine National Bank of tobacco and airline magnate Lucio Tan, Sy-led China Banking Corp., Rizal Commercial Banking Corp. of tycoon Alfonso Yuchengco, Aboitiz-led Union Bank of the Philippines, East West Banking Corp. of taipan Andrew Gotianun, among others.