BSP issues rules on banks’ related-party deals

The central bank has added another layer of regulation on the Philippine banking industry following the approval of stricter disclosure rules covering so-called related party transactions.

Efforts promoting transparency of banks’ dealings with its shareholders, suppliers, or affiliates, among others, will also require the formation of independent committees that keep track of potential sweetheart deals.

“While transactions between and among the entities within the same group create financial, commercial and economic benefits, higher degree of standards should be applied to protect the interest of all stakeholders,” according to a Bangko Sentral ng Pilipinas (BSP) statement.

BSP Deputy Governor Nestor A. Espenilla Jr. said the new rules on related-party transactions were approved by the Monetary Board last month.

The foundation of the new rules is the principle of dealing with related parties at an “arm’s length” basis, Espenilla said in a recent interview.

The official said the goal was simple: That transactions were “processed in the regular course of business, and priced fairly.”

Arm’s length as described in the issuance refers to the process involved in handling the transaction as well as the economic terms of the transaction

According to regulators, a bank’s board of directors will bear the ultimate responsibility for management’s decisions.

The board, the BSP said, would act as an oversight body, responsible for transactions with related parties are handled in a sound and prudent manner, “with integrity and in compliance with applicable laws and regulations.”

The board is expected to approve an overarching policy on the handling these sorts of transactions. These should cover 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 deals.

Rules will be tougher on banks that are part of larger conglomerates, the BSP said. These banks will be required to form special committees responsible for the continuing identification and review of existing relations between and among businesses and counter-parties. Independent directors should hold majorities in these said committees.