BSP to tighten up on trust licenses

The Bangko Sentral ng Pilipinas (BSP) will be very strict in the issuance of trust licenses in the future, according to BSP Gov. Rafael B. Buenaventura. He said the BSP will no longer give any trust license to companies "that do not have a bank or quasi-bank license."

He said that the BSP's current policy on the granting of trust licenses has to be reviewed "in light of the current problem."

A trust license allows a bank, a quasi-bank or a company to attract investors and pool such investments for a fund which it then invests in securities, equities, loans, real estate or other assets.

There is supposed to be a 19-lender rule which limits the number of investors which can be solicited.

In the case of banks, they are allowed to pool funds under what is called a common trust fund or CTFs.

However, CTFs, Buenaventura pointed out, are more organizes and subject to a single borrower's limit (SBL).

The problem with other trust funds is that since these are not subject to an SBL limit, the fund can invest heavily in one borrower and if that borrower defaults on his payments, the fund could suffer liquidity problems.

This is what has happened to the trust funds of Wincorp, ASB Realty and even Urbancorp Investment Corp.

Unfortunately, entities with trust licenses also violate the 19-lender rule, oftentimes soliciting more than the 19 allowed.

Similarly, as some entities are affiliated to a bank, investors are misled into thinking that the bank also has some liability for the investment fund.

The problem, Buenaventura explained, is that when an investor makes an investment into the fund, he is taking on the risk of a promissory note.

According to Mike Aguilar of Standard Chartered Bank, such promissory note or confirmation of sale are also stamped "non-recourse." This basically means that the agent or bank effecting the sale is not liable for the investment and that the only recourse or hold of the investor is the promissory note.

Most trust fund investors are not aware of the implication of "non-recourse" documents and cry foul whenever at trust fund collapses.

An investment in a CTF or a trust fund, Buenaventura explained, is not a deposit which is a liability of a bank.

Banks which sell such CTFs are required by law to explain to the investor that the investment is not a deposit liability of the bank.

The bank is also supposed to give the investor the proper disclosure information about the trust product.

Non-bank and non-quasi-bank entities are not as strictly regulated and often entice investors with high yields. In fact, Buenaventura earlier pointed out, it is the greed of some investors themselves which land them in trouble.

Aguilar and Buenaventura support a review of the 19-lender rule specifically in requiring more disclosure so that the investor is fully aware of what the fund is and where the fund would be invested.

The disclosure requirement, according to Aguilar, should also be regularly updated.