Trust entities must create internal audit function – BSP

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is set to require trust entities to regularly conduct an internal audit to assess their respective operational management, risk management, compliance and other control functions.

In a draft circular, the BSP said it would require a trust corporation to have a permanent internal audit function to examine, evaluate and improve the effectiveness of risk management, internal control and governance processes of an organization.

The regulator said there is a need for an independent, objective assurance and consulting function via an internal audit.

It also said the proposed amendments to the Manual of Regulations for Non-Bank Financial Institutions (MRNBFIs) would allow the internal audit function of a trust corporation belonging to a banking group or a group of NBFIs to be covered by the group internal audit unit.

Under the proposed amendments, trust entities belonging to a group of financial institutions could either establish their own internal audit unit or through the parent bank or NBFI.

“A trust corporation belonging to a banking group or a group of NBFIs shall establish its own internal audit function or have the group internal audit function perform the internal audit activities of the trust corporation,” the BSP stated in the draft circular.

If the internal audit function is established centrally by the parent bank or NBFI, the BSP said the board of directors of the trust corporation should conduct a periodic self-assessment of the effectiveness of internal control, risk management and governance systems and processes in the trust corporation and report the results thereof to the group internal audit function.

This, according to the BSP, would ensure that the scope of internal audit activities is adequate considering the size, risk profile and complexity of operations of the trust corporation.

The regulator also said the group internal audit function should likewise inform the trust corporation’s board of directors of the results of internal audit conducted.

In cases when the risk assessment of the trust corporation’s board of directors or of the BSP differs from the risk assessment of the group internal audit function, the trust corporation’s board of directors or the central bank may require the group internal audit function to subject the trust corporation to an immediate or more frequent internal audit.

The BSP said the engagement of the services of the group internal audit function by a trust corporation belonging to a banking group or a group of NBFIs should not fall under the outsourcing framework.

It added the head of the group internal audit function should define the internal audit strategies, methodology, scope and quality assurance measures for the entire group if the parent bank or NBFI of the trust corporation is supervised by a regulatory authority of banks, and insurance companies or investment companies.

The regulator said the board of directors of the trust corporation would remain ultimately responsible for the performance of the internal audit activities.

Despite the impact of the COVID-19 pandemic, the total assets of the trust industry grew by nearly 17 percent to P4.63 trillion in end- 2020 from P3.97 trillion in end-2019, following the expansion in financial assets and deposits in banks of the universal and commercial banks.

Likewise, investment in debt and equity securities remained high, indicating a balancing act between safe-haven investments and higher-yielding instruments among trust entities.

The trust industry reported a 9.6 percent increase in earnings to P6.3 billion in end- 2020 due to the rise in fees and commissions of trust entities.