BSP enhances monitoring of related party transactions of banks

The Bangko Sentral ng Pilipinas (BSP) released Circular No. 895 Series of 2015 dated Dec. 14, 2015, which provides for the guidelines on related party transactions of banks and their non-bank financial subsidiaries and affiliates. Through the issuance of Circular No. 895, the BSP imposed on banks, including their non-bank financial subsidiaries and affiliates, the duty to put in place and implement oversight and control systems for managing related party transaction exposures.

Under Circular No. 895, related parties cover three groups, namely: the bank’s subsidiaries as well as affiliates and any party the bank exerts direct/indirect control over or that exerts direct/indirect control over the bank; the bank’s directors, officers, stockholders and related interests (DOSRI), and their close family members, as well as corresponding persons in affiliated companies; and third, such other person/juridical entity whose interest may pose potential conflict with the interest of the financial institution (FI).  In defining what a related party transaction consists of, Circular No. 895 provides for a broad interpretation to include outstanding transactions entered into with an unrelated party that subsequently becomes a related party. Further, under the circular, there is disputable presumption of control whenever there is ownership or holding – direct or indirect – of 20 percent or more of a class of voting shares of a company.

Aside from providing the definitions of related parties, related party transactions and determination of control, Circular No. 895 likewise introduced amendments to the duties and responsibilities of the bank’s/financial institution’s board of directors and the disclosure and regulatory reporting requirements of banks, to name a few.

Circular No. 895 requires the board of directors to adopt and approve a group-wide related party transaction (RPT) policy which shall encompass all entities within the banking group. The said RPT policy shall cover not only transactions that give rise to credit and/or counterparty risks, but also those that could pose material/special risk or potential abuse to the bank/financial institution and its stakeholders.

Further, the RPT policy to be adopted shall, among others, provide clear guidelines in ensuring the RPTs are conducted at arm’s length terms, provide for measures to identify and prevent or manage conflicts of interest, identify materiality thresholds and excluded transactions, whistle blowing mechanisms and measures for restitution of losses and other remedies for abusive RPTs or those not engaged at arm’s length terms. The circular likewise mandates the creation of an RPT Committee, especially for banks that are part of a conglomerate, which will monitor and evaluate RPTs and oversee the implementation of the system for identifying, monitoring, measuring, controlling and reporting RPT including, periodic review of RPT policies and procedures.

Circular No. 895 likewise introduced amendments to the disclosure and regulatory reporting requirements of banks. Pursuant to Circular No. 895 and the requirement to adopt a group-wide RPT policy, banks are required to adequately disclose their RPT policy in their annual reports. Further, in addition to the required reports on DOSRI and transactions with subsidiaries and affiliates under existing regulations, universal/commercial banks which are part of conglomerates are now required to report all entities in the conglomerate structure and likewise disclose the beneficial owners of shareholdings that are in the name of PCD nominee corporation. The report on conglomerate structure shall be submitted within 30 calendar days after the end of every calendar year. Aside from this report, banks are also required under Circular No. 895 to submit a report on material exposures to related parties including the material RPTs of their non-bank financial subsidiaries and affiliates within 20 calendar days after the end of the reference quarter starting with the quarter ending March 31, 2016. In this connection, the circular provides that supervised non-bank financial subsidiaries and affiliates are expected to report their material RPTs to the parent bank, which in turn shall report the same to the BSP. It should be noted, however, the aforementioned reportorial requirement on conglomerate structure is not applicable to branches of foreign banks. Moreover, the governance principles including the adoption of group-wide RPT policy shall be complied with by the branches of foreign banks only to the extent possible since these entities have a distinct organizational set-up.

BSP has been crafting measures to keep the Philippine banking industry strong. In the exercise of its power as the body having jurisdiction, supervision and control over banks, this BSP circular provides guidelines on related party transactions for purposes of good governance for banks to observe. It is noteworthy, however, that although there is a requirement to maintain the RPTs at arm’s length, the BSP merely provided in general terms the guidelines. It did not provide a specific methodology to determine whether the RPTs are at arm’s length. On this point, it did not even make reference to Revenue Regulations No. 02-2013 (RR No. 02-2013), dated Jan. 23, 2013, otherwise known as the Transfer Pricing Guidelines. Admittedly, RR No. 02-2013 is a revenue authority promulgation for purposes of tax reporting of income arising from related-party transactions. Besides, there are significant differences between this BSP circular and RR No. 02-2013 such as the definition of the term “related party.”

Nevertheless, we trust this BSP circular will be the first step towards achieving the BSP’s objective to prevent related parties from taking advantage of their RPTs that could be detrimental to the bank and its depositors, creditors, fiduciary clients and other stakeholders.

Hana Kamille A. Escueta is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice and Tier 1 leading tax transactional firm in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity

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