BSP tightens rules on trust investments of pre-need firms

BSP tightens rules on trust investments of pre-need firms
By Des Ferriols
The Philippine Star 03/17/2006

The Bangko Sentral ng Pilipinas (BSP) has tightened its regulations on pre-need funds, restricting the investments of the pre-need firms’ trust funds in the hope of preventing systemic risks stemming from poorly-managed trust funds.

The move came in the heels of the latest evaluation report of the International Monetary Fund (IMF) which expressed concern over the pre-need industry and suggested that further steps are necessary to contain the problem.

The BSP’s Monetary Board (MB) approved the new regulations governing the acceptance, management and administration of trust funds of pre-need companies, a move prompted by the yet unresolved problems of the College Assurance Plan (CAP).

The BSP said the MB had issued a new memorandum intended to provide greater protection to pre-need planholders by adding more prudential measures in the administration of their trust funds.

The BSP said it has limited the investment choices to low-risk investments such as government securities and fully-secured loans. This provision was put in place in the absence of specific authority and guidelines from the Securities and Exchange Commission (SEC) allowing alternative investments.

The BSP said it would also restrict transactions of the trustee bank not only with its directors, officers, stockholders and related interests or DOSRIs but also those of the trustor pre-need company.

"This is a safeguard against conflicts of interest," the BSP explained.

To further insulate pre-need planholders from prejudice arising from such conflicts of interest, the BSP said the new rules also set qualifications on the capacity of the trustee bank to administer the funds of an affiliated pre-need company.

"In addition to these, the trustees shall still be governed by the core duties of loyalty and prudence in the management and administration of the said trust funds," the BSP said.

The BSP said banks that administer trust fund of pre-need companies have one year to comply with the new requirements. The new rules also cover other financial intermediaries performing trust and other fiduciary business and investment management activities.

The new rules are expected to allay fears that the pre-need industry could ultimately pose a systemic risk to the financial system.

The IMF had recommended greater protection for planholders as well as restrictions on investments and the prohibition against connected lending.

According to the IMF, high commissions and operational costs account for up to 49 percent of a planholder’s contribution and this should also be reviewed by the SEC which has the jurisdiction over pre-need companies.

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