Stringent guidelines are now in place mandating lenders forming part of conglomerates to keep all related party transactions (RPTs) deliberately transparent or face regulatory scrutiny. This was learned on Tuesday from the Bangko Sentral ng Pilipinas (BSP) who formally adopted guidelines meant to strengthen regulatory oversight and control over transactions oftentimes called conflicted.
“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 central bank said.
Under the guidelines, a “higher degree of standards” now hangs overall such related party transactions within the same business group to protect the interest of all stakeholders.
Henceforth, Deputy BSP Governor for the Supervision and Examination Sector Nestor A. Espenilla Jr. said, no more “sweetheart deals” with the banks’ sister companies that in the not so distant past were so immensely favorable the normal lending standards, and risk weights were set aside.
The BSP clarified they do not altogether ban kinship transactions among related entities for as long as these are done on at “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 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 nonrelated parties under similar circumstances,” the central bank said in a statement.
The salient features of the new regulation includes, among others, the approval of an overarching policy on handling related party transactions that should cover the scope of 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 related party transactions.
Also, banks that are members of conglomerates are required to put up an RPT committee composed of independent directors.
Expectations were, likewise, set on lenders’ compliance and internal audit functions.
Banks were, likewise, asked to “substantially improve” the disclosure and regulatory reporting requirements on related party transactions.
“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 BSP said.