BSP asked to let banks cross-sell fund products

Banks have asked the central bank to allow them to sell third-party funds, a move that would further liberalize local bond and equity markets. "Allowing banks to sell funds from other banks will create a more open market. Banks will have to perform better to be able to attract clients because investors will now have access to a wider range of fund products," Ma. Lourdes T. de Vera, president of the Trust Officers Association of the Philippines (TOAP), said in an interview. The proposal seeks to set up an "open architecture" for funds, where banks can cross-sell collective investment schemes, or unit investment trust funds (UITFs) as they are called in the Philippines, managed by the trust departments of other banks. According to a 2005 paper by global research firm Cerulli Associates, Inc. cross-selling of collective investment schemes is a common practice in developed markets. "The range of venues or distribution channels through which an investor can access investment funds has been expanding since the 1980s and each channel may offer different levels of service," the research firm said. And with the growth of distribution channels, many fund management companies have abandoned the traditional model of proprietary single-channel distribution strategies in favor of multi-channel distribution, it added. Ms. de Vera said the practice of cross-selling would improve liquidity and deepen capital markets as more investors put their money in these funds. There are 19 banks licensed to sell around a hundred different UITFs. Ms. de Vera noted that once approved, other banks might start offering funds to their clients. "This is one way of encouraging more people to invest. People will no longer be limited to just one bank," she said. But TOAP officials said the Bangko Sentral ng Pilipinas (BSP) is asking for more time to study the proposal. UITFs are embroiled in a controversy after concerns over rising US interest rates prompted a massive sell-off of emerging market assets, causing a sharp drop in the value of local funds. UITFs are a relatively new product in the Philippines. They are not deposit products and are thus not insured by the Philippine Deposit Insurance Corp. Earlier, the central bank said it might require trust officers in charge of marketing and selling UITFs to undergo a strict accreditation process to protect investors from financial risks and investment malpractice. UITFs are collective investment schemes that pool the funds of small investors into a larger fund. They are controlled by professional managers who can access superior investment opportunities not normally available to retail investors. Investors share in the gains and losses depending on their share in the pool. Right now, all UITF marketing personnel of trust entities are only required to undergo training to ensure that they are competent and of good integrity. Investors who have put their money in these products might have lost as much as 10% of their principal, the central bank earlier said. That is equivalent to P30 billion to P45 billion based on an estimated P300 billion worth of UITF funds in the market now. UITFs accounted for P122 billion of the trust industry’s total assets in 2005. Bank regulators have been telling banks’ trust departments to be more transparent in selling UITFs by informing clients that UITFs are not risk-free. While trust products like UITFs are perceived to be risk-free, trust departments should explain to the public that this is not a deposit with a guaranteed return. Trust departments are bank units tasked with managing the funds entrusted to them by clients. The clients sign a trust agreement with the banks, which promise to deliver the best possible returns. -Karl Lester M. Yap / Business World