Banks asked to explain sudden increase in living trust accounts

The Bangko Sentral ng Pilipinas (BSP) is asking banks to explain the sudden increase in their living trust accounts, indicating that interim measures might be taken while the harmonized rules on collective investment products were being finalized.

Following the phase-out of common trust funds, the BSP had detected a shift to other lightly-regulated trust accounts, prompting the BSP to warn that it would soon crack down on these instruments as well.

BSP Deputy Governor Nestor Espenilla Jr. said banks that have shown an unusual increase in living trust accounts were being asked to explain and the accounts were being examined to determine if they were real living trusts.

The BSP reported earlier that there had been an "unusual increase in the living trust accounts of banks" shortly before and right after the effectivity of the rule that required banks to convert to unit investment trust funds (UITFs).

"We haven’t completed our review yet but the ultimate objective here is to find out why banks are shifting and what policies can be undertaken to address disincentives, if any," Espenilla said.

Espenilla said interim measures might be needed if the sudden shift proved to be simple avoidance of the stringent UITF rules but said the BSP preferred to come up with a more comprehensive policy outline that would address collective investment products in general.

"It’s hard to deal with these issues on a piece-meal basis," Espenilla said. "It’s better to get to the bottom of the problem, if any exists, and address whatever weaknesses there are as a whole."

The BSP had begun looking into living trusts and other trust accounts to determine if banks were merely shifting to these other forms of trust accounts instead of converting to UITFs.

Before the effectivity of the new BSP rules on UITFs, the BSP reported that living trusts amounted to less then P10 billion. Since November to December 2004, however, the total living trusts have more than tripled.

Unlike UITFs, living trusts were not covered by the BSP’s mark-to-market rule.

The UITFs are supposed to be improved versions of the common trust funds or CTF and could be compared to a mutual fund that pools the investments of small investor into a larger fund under the professional management of the trust entity.

Because the pool is larger and managed by professional fund managers, it has access to investment opportunities not normally available to individual retail players.

Unlike CTFs, the UITFs are not subject to reserve requirements of the BSP and would not be considered in the calculation of a bank’s single borrower limit.

However, UITFs are covered by stricter safeguards that effectively distinguish it from deposit substitutes, particularly the mark-to-market requirement and to fully inform their prospective investors of their investment strategy including what kind of investments they plan to put the money into.

Instead of shifting their CTFs to UITFs, however, the BSP said there were indications that banks and other trust entities were instead shifting to other trust accounts, specifically living trusts.

Living trusts are trust accounts specifically for estate planning intended for assets left behind by the owner of the trust for his or her heir or heirs.

Espenilla said the BSP would have to examine if the sudden rise in living trusts really involved actual estates with estate management plans.