Another look at trust corporations

SUITS THE C-SUITE By Miguel U. Ballelos, Jr.

Business World (08/03/2015 – p.S1/5)

(Second of two parts)

In our July 13, 2015 column, we looked at some of the general features of a trust corporation, as well as some of the recent changes that were introduced by the Bangko Sentral ng Pilipinas (BSP) on the requirements under BSP Circular No. 710. We now continue with other considerations relating to the establishment of trust corporations.

A critical aspect of conducting a trust business is the reserve requirement. A bank operating a trust business is required to deposit with the BSP, as a basic security deposit, eligible securities equivalent to at least 1% of the book value of the total volume of trust assets. At no time should the basic security deposit be less than P500,000. On the other hand, where the trust business is set up in a trust corporation, the reserve requirement is more stringent, because the required basic security deposit should be equivalent to the required minimum paid-in capital which is currently at P300 million. However, as mentioned in our previous column, following approved changes to the rules on trust corporations, the P300 million required minimum paid-in capital for a trust corporation will be reduced to P100 million.

For banks, additional reserves to be placed with the BSP are required for certain types of trust products, such as peso-denominated common trust funds (CTFs), as well as trust and other fiduciary accounts (TOFAs). Banks are also mandated to appropriate at least 10% of their profits from the trust business to surplus reserves, until such surplus reserves for the trust business equal 20% of the bank’s authorized capital stock. However, under BSP Circular No. 710, these additional reserves and required surpluses are not stated for trust corporations. While it can be construed that these requirements may not apply to trust corporations, this will be given more clarity when an updated circular is released by the BSP.

The reserve requirements for trust entities are in place to ensure the faithful performance of the trust entity of its trust, other fiduciary business and/or investment management activities. Accordingly, it is essential for a trust entity (whether it be a department within a bank or a stand-alone trust corporation) to ensure its ability to comply with the required reserves, not only upon initial set-up but throughout its operations.

Regulatory reporting is another area that needs to be considered. Currently, trust units of banks and quasi-banks submit the audited financial statements of the funds they manage and other reports to the BSP. For a stand-alone trust corporation, however, in addition to the BSP reports, the entity may need to comply with the reportorial requirements of the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). Note, though, that the Regulatory Accounting Principles of the BSP differ in some respects from the Philippine Financial Reporting Standards adopted by the SEC. With regard to the BIR, the tax regime under which a trust corporation will be classified may result in additional forms and reports that it will be required to submit.

Finally, another important aspect which drives a trust business is the distribution channel. Distribution channels are the means by which the entity is able to make its financial services available to the customer. The more traditional distribution channel for trust departments is its network of branches, where a designated customer service representative is on site and can engage potential investors in discussions about the available financial products and services. In this regard, financial institutions with established branch networks have the advantage over new entrants, as they can maximize the points of contact with the customer through the branches.

Nonetheless, indirect channels such as brokers and financial intermediaries may also provide trust businesses with the ability to reach out to the market, which can be observed in the sale of insurance or financial investment products. Furthermore, online distribution channels (through mobile phones) provide another opportunity for new players with little or no available direct distribution channels to compete for market share in the trust business.

Clearly, there are pros and cons that need to be examined for these two business models. To date, banks and quasi-banks with trust licenses granted by the BSP have maintained their operations within their respective trust departments, but with the recent changes, the BSP aims to revive interest in the establishment of trust corporations. The underlying foundation for a successful trust business is fidelity in providing its services. As the name implies, investors deal with a trust entity on the basis of trust — that the entity will be able to grow the investor’s wealth and investments through sound financial knowledge and capability. If the recent rules and regulations on trust corporations achieve the objective of increasing market players and competition in the local capital market, then it will be the investing public that benefits in the long run. The increase in competition can result in more innovative products or services, or in the form of lower service fees. Banks will also continuously look to improve their processes to ensure that they are able to meet the reserve requirements and that they maximize their distribution channels effectively, the resulting benefits of which will be derived by the investing public.

Miguel U. Ballelos, Jr. is a Partner of SGV & Co.