The central bank’s Monetary Board has ordered all banks to strengthen their oversight over related party transactions (RPTs), making their boards responsible for ensuring that such deals be made on an arm’s length basis.
Fairness across all financial transactions is necessary given that the local banking industry is largely composed of firms that are either part of a conglomerate or a family-owned business network, the Bangko Sentral ng Pilipinas (BSP) said on Tuesday.
“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,” the central bank said in a statement.
The policy-making Monetary Board approved new RPT guidelines, which also cover banks’ non-bank financial subsidiaries and affiliates. Standalone non-bank financial institutions have been initially excluded.
The central bank said that while transactions between and among entities within the same group offered financial, commercial and economic benefits, a higher degree of standards should be applied to protect the interest of all stakeholders.
Conducting these deals on an arm’s length basis includes fairness in the process involved in handling the transaction as well as the economic terms, it noted.
Bank boards, as an oversight body, will have overall responsibility in ensuring that RPTs “are handled in a sound and prudent manner, with integrity and in compliance with applicable laws and regulations,” the central bank said.
“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,” it added.
Banks that are part of conglomerates were ordered to create RPT committees, which will be responsible with identifying and reviewing relationships between and among businesses and counterparties, and also ensure the conduct of arms’ length transactions.
The committee should be composed of independent directors and non-executive directors, with the former comprising the majority.
Expectations from the compliance and internal audit functions were also set out to strengthen the checks and balances system. Supervised institutions have to submit annual reports containing relevant information on the governance of RPTs and specific details of exposures to related parties.
The central bank said the latest MB guidelines were patterned after the principles set out in the Basel Core Principles for Effective Banking Supervision issued by the Basel Committee on Banking Supervision and the Guide in Fighting Abusive Related Party Transactions in Asia issued by the Organization for Economic Cooperation and Development.
The guidelines were earlier approved by the Financial Sector Forum (FSF), an inter-agency body comprised of the Bangko Sentral, Securities and Exchange Commission, Insurance Commission, and Philippine Deposit Insurance Corp.
“As agreed upon by the member-agencies of the FSF, they will adopt the RPT guidelines in their respective supervisory jurisdictions,” the central bank said.