Since the global financial crisis, there has been a growing consensus on the importance of international standards and codes, particularly on elements of good governance for financial regulators.
Specific reforms are to:
1. Pursue sustained capacity building for financial regulators.
This shall be done together with the passage of amendments to strengthen the legislative mandates of the BSP, SEC, IC and CDA charters.
2. Harmonize regulatory and supervisory oversight through cooperative arrangements among domestic and international financial regulators.
3. Promote mechanisms and processes such as stronger cooperative arrangements among domestic and international regulators of the financial system to address the growth of financial conglomerates.28
4. Develop the risk-based capital adequacy (RBCA) framework for providers of financial services and products under SEC and IC regulation and supervision.
Risk-sensitive approaches for determining minimum capital requirements for non-bank financial institutions will afford stronger protection to clients, and induce providers to better manage risk.
5. Promote market discipline and price discovery through effective corporate governance framework for all supervised and regulated financial institutions.
a) Expand the scope of duties and responsibilities of the Board of Directors and officers of supervised and regulated financial institutions of BSP, SEC, IC and CDA to make them fully accountable to shareholders and the public for their decision-making processes.
Table 6.5. Legislative and Regulatory Priorities for the Financial System
| Phase 1 (2011-2012) | Phase 2 (2011-2014) | Phase 3 (2011-2016) |
| • Cooperative Code • CISA • CIMS • PERA • REIT • MSME • Agri-Agra • FRIA | • BSP Charter • Securities Regulation Code • IC Charter • CDA Charter • Corporation Code | • Financial Stability Framework • Financial Sector Neutrality Tax • Payment System Act • CISL • Chattel Mortgage Law • Central Registry for Movable Assets |
b) Reinforce the proper rules governing the selection and appointment of officers, trustees and members of the Board of all supervised and regulated financial institutions of BSP, SEC, IC and CDA to effectively deal with interlocking directorships and connected party lending at the onset of increasing cross-ownership and growth of financial conglomerates in the Philippines. For government pension funds,29 adopt a merit system including a clear and de-politicized appointment process for the boards of directors of these funds;
c) Continuously align local accounting and reporting standards30 with international standards and best practices; and
d) Extend the use of corporate governance scorecard to all supervised and regulated financial institutions in the Philippines to promote a deeper culture of fairness, accountability and transparency in financial transactions and reporting.
D. Establish a strong legal framework for financial sector development.
An enabling regulatory and legal environment for financial sector development must give priority to financial stability, supervisory oversight, inclusive finance and capital market development. These reform priorities, however, require legislative support, which can be achieved only through close coordination with both houses of Congress and through active participation in the legislative process.
Reform priorities shall be phased in every two years based on the following considerations:
Phase 1 - Legislative and regulatory reforms with existing legal and regulatory framework but saddled with some implementations issues between 2011 and 2012.
Phase 2 - Legislative and regulatory reforms in the process of implementation or enacted between 2011 and 2014; and
Phase 3 - Legislative and regulatory reforms in the early developmental stage between 2011 and 2016.
1. Establish a framework for financial stability to limit the costs of financial distress to the economy in times of crisis by adopting a macro-micro approach to supervision.
Reforms shall be pursued to:
a) Include an explicit financial stability objective in the charters of financial sector supervisors. This will set a coordinated objective and shared responsibility among supervisors and regulators of the financial sector to keep the domestic financial system in good shape.
b) Adopt a macro and micro prudential approach to supervision. The existing micro-prudential approach needs to be supplemented with macro-prudential policies to ensure the resilience of the financial system. A consolidated and risk-based approach to supervision should be implemented to effectively supervise financial institutions and the financial system as a whole.
c) Improve existing macro and micro surveillance tools and technology. There is a need to upgrade examination approaches, revise or update rating systems of financial institutions, and implement necessary infrastructure for data and information warehousing. Technology must be harnessed to improve micro- and macro-surveillance of financial sector developments and other financial stability issues. Some innovations that can be immediately explored are the active use of online surveys in-between examinations for macro and micro economic and financial variables, and the pursuit of new information-sharing agreements with knowledge-based participants such as the non-bank sector such as cooperative, CSO,31 NGO, informal, services and other corporate sectors, including inputs from national consultations.
d) Continue to align the existing regulatory and supervisory framework with international standards and practices. In the banking sector, elements of Basel II that have not been fully implemented, including features of the recently released Basel III reform package, should be adopted to promote convergence with the global regulatory framework for a more resilient banking system.
e) Provide institutional support for financial stability. Exchange of information and coordination among domestic and overseas regulators should be strengthened. Projects formulated by Financial Sector Forum members should be reinforced. These measures will ensure harmonized regulation throughout the system. The establishment of a more permanent and dedicated institutional support for financial stability shall be explored.
f) Strengthen financial safety nets, such as the establishment of a crisis management framework for the financial system. A crisis management framework that is anchored on crisis prevention and crisis resolution is essential. This should provide liquidity and restore normality in the most expedient and transparent manner during a crisis.
2. Strengthen the supervisory oversight of financial regulators to enable them to keep pace with the increasing sophistication of the global financial services industry.
Specific reforms shall be pursued to:
a) Strengthen BSP's role as a supervisor of the financial system primarily through the amendment the BSP Charter (RA 7653).
b) Reinforce the SEC's role as capital market regulator primarily through the amendment of the Securities Regulation Code (RA 8799);
c) Strengthen the IC as an independent and effective regulator of the insurance industry. An amendment of the Insurance Code (PD 1460, as amended); and
d) Strengthen the organization and regulatory or supervisory functions of the CDA to cover cooperatives engaged in savings and credit operations. This will be accomplished by amending the CDA's Charter (RA 6939, as amended).
3. Provide a legal framework for the acceptance of movable assets as collateral.
Specific reforms shall be pursued to:
a) Review and amend the more than century-old Chattel Mortgage Law in the Philippines.32
b) Establish a central registry of moveable assets offered as collateral, which are currently recorded in separate registries for real estate mortgages, chattel mortgages and quedans.
c) Review the rules on other collateral items such as quedan.
4. Provide an adequate legal framework to encourage greater investor participation, address financial taxation and effective oversight of the national payments systems.
Specific reform strategies are primarily geared at expanding non-bank initiatives through the passage of some important capital market development bills such as:
a) A Collective Investment Schemes Law (CISL) to broaden investor participation in the securities market, including participation by Overseas Filipinos;
b) A Financial Sector Tax Neutrality Act (FinTax) to minimize distortion costs in financial transactions; and
c) A Payment System Act (PSA) for the effective oversight of the country's national payment and settlement system.
5. Create an environment for the efficient operations of cooperatives in the Philippines following the enactment of the Cooperative Code (RA 9520) on February 17, 2009.
The cooperative sector together with non-bank microfinance institutions33 has been involved in grassroots development and financial inclusion in the Philippines for the past decade. There is a lack of an effective legal framework and supervisory oversight. However, has led to the fragmentation of developmental efforts and a poor database on the actual performance and contribution of the sector.
6. Empower the IC to effectively supervise and regulate pre-need companies, including, among others, reviewing the management of pre-need companies for better-protection of plan holders and beneficiaries following the enactment of the "Pre-Need Code" (RA 9829).
7. Address funding and other operational requirements for the establishment of the Central Credit Information Corporation to improve the ability of financial institutions to access credit history data for debtors, thereby bringing down the money and time cost of loan underwriting following the signing into law of the Credit Information System Act (RA 9510) on October 31, 2008.
Alongside this, there is a need to develop a system to monitor, control and manage collaterals submitted by banks and other financial institutions as security for their loans. One example of such system is the Collateral Information and Management System (CIMS) to be implemented within the BSP, which should allow authorized users to obtain information electronically on the status of collateral documents, particularly the collateral positions of borrower banks and end-borrowers.
8. Introduce alternative savings and investment products through the following specific reforms:
a) Encourage voluntary personal savings and investments through the establishment of a multi-pillar retirement income structure as embodied in the provisions of Personal Equity and Retirement Account Act of 2008 or PERA Law (RA 9505) enacted on August 22, 2008.
b) Address the needs of the resurgent real estate industry by providing funds for infrastructure projects, widening access to investment in real estate projects, broadening the participation of the public, including OFs, in the ownership of real estate, and protecting the investing public from abuses of real estate investment trusts pursuant to provisions of the Real Estate Investment Trust or REIT Act of 2009 (RA 9856).
9. Establish a policy framework in support of the government's social agenda of reducing poverty through mandated credit to certain sectors of the economy such as MSMEs and the agriculture sector.
Specific reform strategies shall be pursued to:
a) Strengthen and encourage the growth and development of micro, small, and medium-sized enterprises (MSMEs) in all productive sectors of the economy, particularly rural and agro-based enterprises, through the effective implementation of the Magna Carta for MSMEs (RA 6977, as amended).
b) Enhance the access of the rural agricultural sector to financial services and programs that increase market efficiency and promote modernization in the rural agricultural sector through the implementation of the Agri-Agra Reform Credit Act of 2009 (RA 10000), passed into law on February 23, 2010.
10. Expand investor and creditor protection mechanisms cognizant of recent demands of modern banking and finance standards through the following specific reform measures:
a) Introduce improvements in company registration and monitoring rules or procedures, including the institution of stiffer penalties for corporate malfeasance through the amendment of the Corporation Code of the Philippines (BP 68); and
b) Ensure an effective and efficient rehabilitation of liquidation of debtors as embodied in the Financial Rehabilitation and Insolvency Act (FRIA) of 2010 or Republic Act No. 10142 which was lapsed34 into law on July 19, 2010.
11. Empowerment of Filipino consumers through strong consumer protection mechanisms and financial literacy or education programs.
a) Promote greater financial literacy of the population, including those in the countryside and OFW-rich areas abroad by encouraging the participation of non-government and private sector organizations in the delivery of financial education programs; and
b) Strengthen consumer protection by improving the implementation of existing consumer protection laws and regulations on transparency, disclosure, consumer assistance and redress or grievance mechanisms.
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28 In its 2010 FSAP Report, the IMF cites financial conglomerates as an important feature of the Philippine economy. About 60 percent of bank assets and 75 percent of effective market capitalization of listed companies belong to conglomerates. Cf: International Monetary Fund (April, 2010). Philippines: Financial System Stability Assessment Update. IMF Country Report 10/90. Washington, D.C.: International Monetary Fund
30 The Philippines aligned its accounting and reporting practices with international accounting standards and international financial reporting standards with the adoption of Philippine accounting standards and Philippine financial reporting standards in 2005.
31 Refers to civic-oriented organizations.
32 The country's Chattel Mortgage Law or Act No. 1508 was enacted on July, 1906. The law defines chattel mortgage as a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is perfomed according to its terms, the mortgage and sale immediately become void and the mortgagee is thereby divested of his title.
33 Microfinance NGOs and microfinance-oriented banks offer loans, savings facilities, housing, community development projects e.g., insurance products in partnership with license insurance companies to less privileged Filipinos particularly in depressed and remote areas in the countryside.
34 Op.cit.