BSP strengthens oversight standards on related party transactions

The Monetary Board (MB) recently approved the guidelines strengthening oversight and control standards for managing related party transactions (RPTs).  The BSP issuance is in recognition of the unique landscape of the Philippine financial industry largely composed of banks that are either part of conglomerates or small network of businesses owned by the same family group. The guidelines highlight that while transactions between and among the entities within the same group create financial, commercial, and economic benefits, higher degree of standards should be applied to protect the interest of all stakeholders.  It is emphasized that RPTs are generally allowed for as long as these are done on an arm’s length basis.

 

Arm’s length as described in the issuance refers to the process involved in handling the transaction as well as the economic terms of the transaction.  In this regard, RPTs 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.       

 

Consistent with the principle that the tone of governance should come from the top, the guidelines provide that the board of directors, as an oversight body, shall 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 board is expected to approve an overarching policy on the handling of RPTs that should cover the scope of its RPT 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 RPTs.

 

Further, Banks that are part of conglomerates are required to create an RPT Committee.  The RPT Committee shall at all times be entirely 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 RPTs are processed in the regular course of business, and are priced fairly.

 

In addition, expectations from the compliance and internal audit functions were set-out to strengthen the checks and balances system.  The guidelines also endeavor to substantially improve the disclosure and regulatory reporting requirements on RPTs.   It is now explicitly required that the annual reports adequately disclose relevant information on the governance of RPTs and specific details of exposures to related parties.  

 

The issuance applies to all banks, including their non-bank financial subsidiaries and affiliates, but initially excludes stand-alone non-bank financial institutions.  These are 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); and Guide in Fighting Abusive Related Party Transactions in Asia issued by the Organisation for Economic Co-operation and Development (OECD). 

 

The guidelines were earlier approved by the Financial Sector Forum (FSF), an inter-agency voluntary body comprised of the BSP, Securities and Exchange Commission, Insurance Commission, and Philippine Deposit Insurance Corporation.  As agreed upon by the member-agencies of the FSF, they will adopt the RPT guidelines in their respective supervisory jurisdictions. – Bangko Sentral ng Pilipinas